.Price value: Are prices really relative?

Written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells

A classic tenant in pricing literature is that humans are not great at discerning value regarding prices. As Oscar Wilde paraphrased once “I do not care which shoes are cheaper, but I want the more expensive ones”.

In a B2B industrial environment, we can see the relativity of prices (price value) also – I want to give a real-world example below which I think highlights a couple of issues in this price value regard (I have changed a few details to protect a certain regional business model!).

We have a B2B industrial market selling services by a unit. The cost base (external) is different in each geography but the cost to serve is the same. All businesses claim to follow a cost-plus approach and complain about extremely intelligent procurement professionals bashing them every day. The example is as below:

 

StateExternal costCost to serveSell priceActual profit per unit
New York186262
California146222
Washington DC66164
Idaho36145
Note: price in USD$

 

It is important to note that regional buying differences should not make much of a difference as the product was procured on a national basis.

It was clear that when the unit price cost base was lower, the profit margin tended to be higher.

Price value takeaways?

I have to be honest and say I am not fully certain why this should be so but am interested whether any of my readers have experienced similar?

  1. I assume that as the price is lower in Idaho and DC, the buyer spends less time looking at it.
  2. They are unaware as to the cost base and so spend most time pushing down the higher rates
  3. Is there an element of “free-riding” by the cheaper states – i.e. pushing through higher rates as their state is smaller – less attention paid to Idaho and DC.

Many businesses are springing up in different fields, such as Waster.com.au offering pricing transparency and flexible contracts in waste management.

 

What Does The Research Say about Price Value?

 

Research theorises that by the way, we structure the price of services or products with its attributes, we put in the mind of the consumers that we have chosen solutions that are right for them in the long run.

 

In other words, when a consumer purchases a simple service or product on an immediate impulse, they tend to regret it as it lacks some the functionalities they might want in the future. Hence, this is called buyer’s remorse. Whether for convenience’s sake and lack of time, we buy simple products but soon regret it for not having more features.

 

Decision-Makers Takeaways

 

If the product is in the same price bracket as that of the competitor. The consumer will look at the other attributes of your product if it is better. But the way of presenting your product’s price could be the factor that could make the customer want to buy your product.

 

  • “Same price, more functions”. Your product is the same price as the competitor but with more functions. Thus, this makes your product more attractive than the other one.

 

  • ‍“Same functions, cheaper price”. Therefore, your product has the same functions as the competitor but priced lower. Thus, the consumer will choose the lower-priced.

 

  • “Better features, higher price, but superior design”. The product is more expensive than its competitor but has functions that are user-friendly and easier to use.

 

Price is communication 

 

Price value to the businesses depends on the profit to be made and the cost value of the product. However, pricing is not just about the money that is set for the product. But as a way to communicate to the consumer that the product deserves that price. For example, a Rolex watch would not cheapen their products to compete with a Seiko watch. The expensive price of the Rolex signifies elegance and luxury. Thus, making it cheap would deter the public in buying it.

Quotes about price and value do not mean the same thing. To enumerate, the price is an indicator if the customer is willing to buy whereas the value is the benefits the consumer gets from the item.

To define value pricing in its literal sense implies basing pricing on the product benefits perceived by the customer instead of on the exact cost of developing the product. 

 

Traits in pricing products for the Price value

 

When a customer purchases a product, there are five traits he uses to determine which brand to buy. Brand has five attached traits which are price, style, colour, fit, and type of material. Therefore, the buyer has a choice from the five traits to buy that product. In essence, the choice is based on the traits the buyer places on each of them. It will then be compared to the competitor’s product traits and final decision is on which has better traits.

 

Another is customer value pricing definition is it uses buyers’ perceptions of value (not the seller’s cost!) as the key to pricing. Hence, customer value-based pricing is setting price based on buyers’ perceptions of value. 

 

Using the value pricing method, it looks at the factors consumers use in its value judgment, the company gains of what the consumer sees as most important and the motivations for purchase the consumer has. Thus, it allows marketing teams to formulate more effective sales strategies and use very specific marketing tactics.

 

Implications for the price value

  1. Even when the business thinks it operates a cost-plus – does it really. What else is at play in the pricing structure?
  2. Clear implications for optimisation i.e. making the profit on the tail of services
  3. Are we presenting prices correctly to the customer – would more or less info on the cost base help or hinder a price rise?
  4. I suppose people compensated for living in Idaho!

 

Conclusions

 

  • Price value is not only about money. Therefore, it is how the consumer perceives the product as having more value than just the dollar sign.

 

  • It shows the buyer is willing to pay more if the additional features can further boost its usefulness.

 

  • Buyers influenced by the brand. Hence, the brand name reflects the reliability and satisfaction of the buyer using the product.

 

  • A price value comparison used by the consumers. Finding out the better priced or quality. The extra features are the added bonus.

 

 

Are prices really relative is written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells

Check out our blogs on price leadership and pricing options.

Taylor Wells is a specialist advisory firm that has developed a search, evaluation and recruitment process in the field of pricing recruiters, commercial and analytics.  Our business was started after identifying weaknesses in the traditional agency recruitment model.  Our purpose is to support management and HR to eliminate the risk of a bad hire. Workshops and diagnostics ensure pricing or commercial teams are deeply engaged with the sales and marketing teams to achieve greater levels of margin and earnings growth.  We have developed our own digital platform to identify and evaluate talent and we partner with subject matter experts to help us operate efficiently.

 

Joanna Wells

Director

BA/ MA Psych. CANTAB, Msc Org. Psych, Dip.Couns Psych

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