Special report - Pricing
This quarter's report deals with the practical aspects of pricing strategy, from market positioning of new products to through to those at the end of their life cycle.
A cynic is the man who knows the price of everything and the value of nothing’ according to Lord Darlington in Lady Windermere’s Fan, and whilst clever and witty, the implication is that non-cynics fully understand the value of everything – an unlikely scenario. Value (utility) is so subjective and dependent on the financial and emotional circumstances of the individual and the market that any set price paid for goods and services will be seen as a bargain by some and terribly expensive by others.
The price of a good should equate to the value that individuals ascribe to it in a perfect market. This would necessitate individual pricing for goods and services, creating a chaotic market. Airlines have been operating this kind of system for a while with success, but thanks to internet shopping, any company is able to work with individualised pricing based on the customers’ post codes and the buying patterns and other data gathered.
One big downside of this system is that customers do not like to discover that they have paid much more than someone else for the same product. Airlines and train companies, with time-sensitive products can operate this kind of pricing system without too much trouble. Businesses like Uber operate a transparent pricing system which they believe consumers welcome, with surge pricing being brought in to reflect peak demand (see article on page 19). Customers don’t mind paying more if they understand the reasons behind the price rise. This model has proven so successful that in London, the number of Uber drivers exceeded 25,000 in 2015, after only three years of operation, overtaking the 22,500 black cab drivers.
Certainly Andreas Hinterhuber has argued in favour of pricing on perceived value in preference to the historic pricing methods, eg, cost plus and competitor pricing. He and Todd Snelgrove (both of whom have articles in this report – see pages 8 and 10) are both strong advocates of adding value and explaining this to the customer and to the sales force of your business. Components used in production that are initially cheaper may well end up being more expensive to your business in the long term.
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Robert Russell, Technical Manager, Finance and Management Faculty