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Prices should reflect the value that consumers are willing to pay. Prices are often set to satisfy demand or to reflect the premium that consumers are willing to pay for a product or service.
The pricing strategy of firms is influenced by the type and lifecycle of the product. Consumers behavior is the basic factor that determines the pricing of the product. The demand for the product is also important in the pricing of monopoly goods. In the case of products, which are in high demand higher prices would be charged by the producer. Cost of production is not much of a significant factor in product pricing. The demand and quality of the product are more significant in product pricing.
A fair price of a product is the price that covers the cost of sustainable production incurred by the producer. It is not the highest price payable by the consumers. It means a price that can be reasonably charged by the seller within a range of fair value. (Lipton et al 1978, p.54).
In the competitive market environment, the cost of production of the same product by different firms may be different. The cost of production for large-scale firms would be comparatively less than that of small-scale firms due to the economy in large-scale production. Thus fair price, covering production cost, is not favorable in a competitive market environment.
Premium pricing is followed based on the quality products because many consumers use price as an indicator of quality. In the case of ego-sensitive products such as perfumes and expensive cars, premium pricing can be applied. Consumers have the concept that price should reflect the quality of the product. Thus by following an adequate advertising strategy, concentrating on the quality of the product, premium pricing can be charged to products to gain market advantage. The scarcity of products is also an indicator of quality. It is a prominent strategy followed by the automobile industry where production of the different brands is limited by the company to employ scarcity. Product features also play a role in determining product pricing. Products with peculiar features can be charged premium prices.
Premium pricing is based on the identification of valuation tools used by customers on different types of products and services through market research. Customers value the product based on comparison with similar products. Thus competitors prices and product features influence product pricing strategy (npE FAQ: Pricing).
Consumers criteria for purchase decisions also have on product pricing. Products where there are no unique features and whose substitutes are available in the market; pricing strategy of fair price may be followed. In the case of some products, consumers would undertake a potential exchange rate of products for calculating the actual value of the product. Thus buying and selling price comparison would also influence the actual price valuation of products and it would further influence the purchase decision. The pricing strategy is affected by variables such as benefits from possessing the item (Carmon and Ariely, 2000).
For example:
The market research for finding out the demand for the made- in -Alaska secondary wood products reveals that the consumers are ready to pay a premium price. By comparing two superficially identical end tables made in China and made in Alaska, respondents to the market research indicated that most of them were ready to pay an additional $82 for the made-in-Alaska table, for which the base price is $50 only. The 95 percent confidence bounds on this estimate of mean WTP are $68.10 and $96.10. It shows that the place of manufacturing is a significant factor for purchasing trend of customers (Donovan and Nicholls, 2003).
It indicates that the factors such as quality coupled with the affinity towards a place of production have an influence on demand for the product. With the increasing demand, the price charged for the product also will increase as the customers are ready to pay even more price for the product. When considering business ethics the premium pricing can be employed in the case of ego-sensitive and premium quality products. In the case of other products, this will not be favorable.
Bibliography
CARMON, Ziv., and ARIELY, Dan. (2000). Focusing on the Forgone: How Value can Appear so Different to Buyers and Sellers. [online]. Journal of Consumer Research, 27.
DONOVAN, Geoffrey., and NICHOLLS, David L. (2003). Estimating Consumer Willingness to Pay a Price Premium for Wood Products. [online]. United States Department of Agriculture. Web.
LIPTON, Martin., et al. (1978). Takeovers and Freezeouts. [online]. 54.
npE FAQ: Pricing. [online]. The npEnterprise Forum: Where Nonprofits Earned Income.
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