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Don’t read this article if you’re the slave of cost-plus or follow-my-leader pricing. If you sincerely wish to optimise profit you will find out about the value the market puts on your product/service – and charge accordingly. We describe some of the ways research can help you establish what that value is.
CLASSIC ECONOMIC THEORY maintains that there is a causal relationship between price and demand: the higher the price the lower the demand and vice versa. This relationship is, however, only the crudest starting point to an understanding of industrial pricing today. For a start, the rules differ considerably according to whether the product is a commodity (grains, minerals, metals, etc.) or manufactured. Commodities within any one group are totally undifferentiated; they are classified according to a standard and their price depends upon supply and demand. Speculation about a shortage of the commodity or the belief that it is an investment hedge will have short term and maybe dramatic effects on the price. As the commodity becomes processed into cement, steel or rice feedstuffs, it gains value, and the sophistication of the processing method enables a premium price to be charged. As the design element of a product increases and the value of the raw material becomes less important, so pricing becomes more complex. The price for design skills is more difficult to pitch.
A product with a considerable element of design becomes “differentiated” from those with which it competes, and buyers are faced with the problems of placing a value on the various benefits on offer. Normally a differentiated product allows the seller to take advantage of the multiplicity of features and charge a higher price. This is not to say that the customer is insensitive to price – rather that he perceives differences in the choice of products available and selects one which best meets his needs.
Of course, design is only one factor which buyers evaluate when considering the price of a product. They will also attribute a value to after sales service, reliable delivery, speedy delivery, quality, longevity and the reputation of the manufacturer. The permutations of the many features and benefits within the product mix make it difficult to establish a price which accurately reflects the differences between one’s own product and the competition’s. In any case, it is not realistic to expect the customer to know all the benefits of a product when to study them may take a great deal of time, effort and therefore cost.
Commercial vehicles provide a good example of a differentiated product. They are an assembly of different components and offer a variety of features some of which are in conflict. Buyers claim that they seek reliability and economy from their trucks. They also want comfort for the driver, easily available parts, a comprehensive after sales service, high load carrying capacity, low cost servicing and an efficient engine. Combining power, good fuel economy and reliability is not easy. One would expect the buyer to be sophisticated in his approach to this expensive purchase and yet he frequently is not. He finds it impossible to weigh up individually each of the many factors so in practice he arrives at a synthesis based on the brand.
A strong brand has a halo of confidence. An own label strawberry jam sells at a few pence less than a national brand – even though a blind taste test may show consumers cannot tell the difference between them. The difference reflects the confidence in the well known brand. In industrial markets the same principles apply. A recent survey showed that a truck manufacturer’s parts were considered to be more expensive than those of’ competitors when in fact they were not. The manufacturers poor image caused respondents to malign the company – even on factors where it was demonstrably superior. Volvo’s “halo” enables it to charge more for its trucks, Raychem for its cable, IBM for its computers and so on.
THE COMPLEXITY OF PRICING DECISIONS should not cause the marketer to shy away from the subject; on the contrary it should be a spur to a greater understanding. This can be achieved in two ways. First by applying historical knowledge. For example, plot the effect of past price changes on sales. Admittedly, other factors as well as price affect volume: e.g. advertising, salesmen’s incentives, interest rates. But a graph showing one’s own and competitors’ prices against one’s own company’s sales will at least provide a guideline as to the level of price sensitivity.
Continued tomorrow…
This entry was posted
on Tuesday, November 14th, 2006 at 11:19 am and is filed under Market Assesment, Market Research, Pricing Strategy, Qualitative Research, Quantitative Research.
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