Pricing HBR

8/8/2019 Pricing HBR

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PRICING AND MARKETING COMMUNICATIONS:815 THE NONECONOMIC FACTORS*arriving at a final price for the product. The purpose here is to examine thenoneconomic factors which influence the pricing decision and to discuss thecircumstances under which price becomes an importan t communications cueto quality.

E C O N O M I C V IE W O F P R IC E

Tradi tionally, price has been viewed as a rate of exchange. It is the amount aseller asks for the product and the amount a buyer is willing to give up to ownthe product. For an exchange to take place, the buyer and seller must agreeupon an amount. This interaction between buyers and sellers of a commodityis summarized by economists in their law of demand which says that as theprice of a commodity rises, the qua nti ty demanded by consumers declines, andvice versa.

Although this economic law generally is applicable to most products in themarket place (particularly for undiff erentiated products like many agriculturalcommodities), this tradi tional economic viewpoint fails to consider the impactof many modern-day marketing practices upon consumer demand. In ourcomplex market system, firms have learned how price can be used as a com-munica tions cue to differentiate product offerings and to satisfy the in forma-tional and psychological needs of consumers. When viewed in this manner,demand curves take on quite a different look from the one constructed byeconomists.

Quite often, consumers use price as an indicator of quality. [2] Under suchcircumstances, the demand curve for a product might look like the one shownin Figure 1. Note that part of the curve is positively sloped (P, to P2) and indi-cates a direct relationship between price and quantity demanded over someportion of the price range; that is, ? higher price is related to a high demandfor the product. This phenomenon often is found for luxury items such as fursand jewelry.

Under what circumstances can marketers use prices as a cue to quality? Inthe following sections, aids to answer this quest ion will be provided by lookingat product and consumer characteristics and other factors which are favorableto utilizing price as a communications cue. Moreover, other psychologicaleffects of pricing and market ing factors which desensitize consumers to priceare discussed.


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F i g u r e 1Dem and Curve W i th P os i t i ve P r i ce -Q ua n t i t y R e l a t i o ns h i p

P r i c e

P2 . . . . ~ . . . . Q . . . . .

PI

D e L O Z I E R A N D W O O D S I D E 8 1 6

DemandC H A R A C T E R I S T IC S O F T H E P R O D U C T

F o r s o m e c a t eg o r i es o f p r o d u c t s , p r ic e se r ve s a s a n i m p o r t a n t c o m m u n i c a -t i o n s c u e f o r c o n s u m e r s . S e v e r a l u s e f u l g e n e r a l i z a t i o n s c a n b e st a t e d c o n c e r n -i n g t h e r e l a t i o n s h i p b e t w e e n p r i c e a s a c u e t o q u a l i t y a n d t h e c h a r a c t e r is t i c s o fa p r o d u c t . T h r e e p r o d u c t c h a r a c t e r is t i c s a f f e c t t h e r o l e o f p r i c e a s a n i m p o r -t a nt i n f o r m a t i o n a l c u e f o r c o n s u m e r s i n e v a lu a t i n g a b r a n d a n d i n m a k i n g ab r a n d c h o i c e d e c is i o n .


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DcI.OZIER AND WOOl)SIDE 818of the recipient. In other words, the higher-priced gift affords the giver ameans of protect ing and, hopefully, enhancing his self image.Another class of gift products is one which is used for special occasions orserved to guests in the home. Consumers often will purchase "special" pro-ducts for holiday occasions, parties, or when guests are invited for dinner.Such products include expensive cheeses, wines, liquors, snack foods, and soon. By purchasing higher-priced brands, particularly those conspicious innature such as wines and liquors, a person can enhance his self image of"being a good ho st."

B r a nd N a m eAnother variable which affects the importance of the price cue is the

familiarity and strength of the brand name. Where brands of a product arephysically homogeneous and brand names are unfamiliar to consumers, pricebecomes a powerful cue for consumers in evaluat ing the quality of a brand. [5]However, a familiar brand often is as important as the price cue in communi-cating product quality. This observation is particularly true for most groceryproducts and beverages. [6] Basically, then, price becomes a strong communi -cations cue in the absence of other product cues, such as brand name.N e w P r o d u c ts

A new product offers the marketer an opportunity to use price as a commu-nications cue for his product' s quality. Since the product is new, it has no tra-dit ional price and is likely, therefore, to be assessed by the market primarily onthe basis of its initial price.

Marketers often use a pricing strategy known as "skimming" in theint roductory stage of a pro duct's life cycle. Skimming refers to the strategy ofsetting a sufficiently high price to catch the upper por tion of the demandcurve. This strategy can be effective particularly in the product's introductorystage when demand tends to be fairly inelastic. If the strategy is successfulduring this period, the firm can gain a quick payback on its initial investment.Furthermore, if consumers perceive the high price as an indicator of productquality, the firm can continue to use this strategy to reinforce consumer'sbeliefs about its quality. If the market rejects the product because of its highprice, the firm still is in a position to lower its price and stress the " va lu e" ofits product offering.

At the other end o f the cont inuum is a pricing strategy referred to as "pene-tration pricing." in this case, the firm introduces the product at a low price


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PRICING AND MARKETING COMMUNICATIONS:819 THE NONECONOMIC FACTORS*

because its management believes that demand is fairly elastic. The communi-cations value of price in this case is quite low except to tell the consumer thatthe product is either a "popu larly -pric ed" brand or a "value" brand.

C H A R A C T E R I S T I C S O F T H E C O N S U M E RAs with product characteristics, several generalizations regarding consumer

characteristics are important in price communications. This section discussesthose generalizations.

E x p e r i e n c e W i th P ro d uc tsConsumers have varying degrees of experience with products. For con-

sumers who lack experience and information about a product, price becomesan importan t informational cue for evaluating the product.

A wife who wants to buy her husband a fishing rod and reel for his birthdaymay not have the slightest idea why one rod and reel is better than another . Ifshe is shopping in a store where there is no personal selling assistance, the pricebecomes important to her in evaluating the quality of the product. Even instores where she receives help from a sales representative, the price may serveto reinforce this advice.

Products which are affected by rapid changes in technology or productswhich are subject to changes in style and fashion are ones which confront theconsumer with a new learning situation. Major changes in product features,functions, or style place the consumer in a less-informed position than beforeand, thus, make him more sensitive to other informational cues (such as price)in order to evaluate product quality.

S n o b A p p e a lSome consumers use the price of a produc t as a means of exhibiting "sn ob-

bishness. " The price cue may express the purchaser's desire for status or pres-tige. "A person may know that the more expensive model is no better than thecheaper one and yet prefer it for the mere fact that it is more expensive. Hemay want his friends and neighbors to know that he can afford spending allthat money, or he may feel that his prestige and social position require that heshould always buy the most expensive of everything." [7] Products which areconspicuous in nature are more likely to be purchased because of their status,prestige, or snob appeal. The Ford Motor Company, for example, made a


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DeLOZIER AND WOODSIDI:- 820decision to price its Cont inenta l Mark III above Cadillac in order to appeal tohigh-income consumers who want to exhibit these characteristics.C o n f id e n c e in O n e ' s J u d g m e n t

A consumer who has little confidence in his or her ability to make a goodproduct choice decision will rely on price and other cues to a greater extentthan a more confident person. In purchasing a component stereo system, theconfident and knowledgeable consumer will not rely on price as an indicationof qual ity, whereas consumers who are unsure of themselves will tend to relymore on price in making an evaluation of the stereo system's quality.Those who tend to be the least confident in their ability to evaluate productsare the poor and the uneducated consumer. "Unfo rtunat ely , it seems that thepoor and the uneducated are highly susceptible to price connotations. Theywould be the least capable of analyzing most products, and they would bestrongly risk-averse." [8]

P S Y C H O L O G I C A L E F F E C T S I N P R I C IN GThere are a number of observable, yet unsatisfactorily explained, phenom-

ena of price effects on demand. They run contrary to the traditional econ-omist's explanation of the price-demand relationship. Furthermore, they donot fall into the price-quality category discussed earlier. These effects aredescribed here.

The first effect is the quantum effect in pricing, which is observed whenincreases in price up to some point do not result in a loss of sales volume, but aprice beyond that point produces a rapid drop in sales. The point at which thisquick change in sales occurs is called the quantum point. Consumers are insen-sitive to prices up to the quantum point , but are highly sensitive to prices evenslightly above this point. For example, a product can be priced at $9.55, $9.65,$9.75, or up to $9.95 without a drop in retail volume. However, a price of$10.05 results in a drast ic drop in sales volume. In this case ten dollars is thequa ntum point. [9]

Another effect of price on demand is observed in the clothing industry--reverse direction price perception. As the name implies, consumers reverse thenumerical price scale and perceive lower prices as being higher than higherprices. For instance, a price set at $1.95 may appear lower than a price set at$1.45. This phenomenon can be explained in terms of reference points.Rounded dollar figures serve as reference points and tall the consumer that


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PRICING AND MARKETING COMMUNICATIONS:821 THE NONECONOMIC FACTORS*$1.95 price is 5r below $2.00. On the other hand, the $1.45 price is 45r above$1.00. Thus, one price may appear higher and the other lower because of theirrelationship to their reference points.

Anothe r psychological effect in pricing deals with what consumers perceiveas a fair price for a product. Consumers develop in their minds a "fair price"for a product which serves as a fair price standard; and even for new products,consumers use similar products to judge what a fair price range should be. Aprice above the market's conception of the fair price standard will result inlower sales. A price below the fair price standard is considered to reflect poorquality and also results in a low sales volume. The most acceptable price is theone which falls within the consumer' s fair price range, closest to the fair pricestandard.

Finally, another psychological aspect of price is the cost price standard.When a consumer believes he can judge the producer's cost of a product, hedevelops a fair-price estimate based on his judgment of the producer's costplus a " reasonable pro fit ." For many industrial products, buyers have knowl-edge of the approximate costs in producing the product and refuse to pay aprice above their estimate of the cost plus a reasonable profit. This also is truefor some consumer products such as automobiles. Well-informed consumerscan determine the cost of the automobile to the dealer and offer, say, $150above dealer cost for the car they want. Publications such as ConsumerReports often assist buyers in their evaluation of a "f a i r price."

D E S E N S I T I Z IN G T H E C O N S U M E R T O P R I C E

Many conventional economic notions about pricing are not appropriate to atotal unde rstand ing of a consumer's response to price in our complex market-ing system. In many cases, consumers seem to be insensitive to variat ions inprices for brands of the same product category. Under various circumstances,consumers use price as an indicator of quality, particularly in the absence ofother meaningful cues. However, there are other conditions which affectconsumer response to price. These conditions are the result of marketing acti-vities which desensitize consumers to price. In these instances, consumers tendto ignore price to some degree in arriving at a purchase decision. This behavioraccoun ts for the less-than-perfect elasticity of demand for a product.

One marketing activity which desensitizes consumers to price is point-of-sale effectiveness. An effective sales representative often can sell a productwhether it is priced at $24.95 or $29.95. The price difference is overcome bythe persuasiveness of the sales representative. [10]


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DeLOZIER AND WOODSIDE 822Another desensitizing factor is the effectiveness of local promotion and ser-

vices. Although the product is supported by a standardized advertising andsales promot ion, local variations and supplements often can provide the addi-tional impact necessary to make the sale, even though the brand may have ahigher price than those of competitors. The same kind of influence on the levelof price sensitivity can result from variations in local service. Many consumersare willing to pay the higher price because a firm is willing to provide localservice for the product. For example, a consumer may be trying to decidebetween Sansui and Pioneer stereo receivers of comparable quality. Althoughthe Pioneer is priced $30 higher, the consumer decides to purchase it afterlearning that it can be serviced locally whereas the Sansui would have to b.eshipped back to the factory. [1 l] Similarly, the r eputation of serviceability ofone local firm versus another is a desensitizing factor. If one automobiledealership has a much better reputa tion than others in town, a higher price forthe car will become a less impor tant factor in the buyer' s purchase decision.

Certainly, variations in product design, styling, and perceived benefits de-sensitize consumers to price, as do variations in advertising appeals. Further -more, a manufacturer's reputation can effectively desensitize consumers tohigher- than-competitive prices. These factors cont ribute to the developmentof consumer loyalties which desensitizes consumers to price. For example,consumers purchase Del Monte food products even though they are fullyaware of the lower prices of store brands for the same products.

In many cases, there are identifiable desensitizing factors which should beconsidered in arriving at a pricing decision; the estimation of price-demandelasticities is only one step in pricing decisions.

T H E P R I C IN G D E C I S IO N : S O M E C O N S I D E R A T I O N S

Mechanical pricing approaches and formula for determining the "corr ect "price for products are common today. Such methods provide decision makersa certain sense of security, psychological comfort, and confidence in this dif-ficult task. However, these methods often are quite naive and usually do nottake into account the behavioral and, specifically, the communications dimen-sions of price.

Certainly costs of production, packaging, advertising, personal selling, andother product -related costs and expenses are important in the pricing decision.Breakeven analysis, incremental analysis, and other financial and economictools are useful inputs in arriving at a pricing decision. However, even thesetechniques are ones which rest upon a quali tative and subjective assessment of


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PRICING AND MARKETING COMMUNICATIONS:823 THE NONECONOMIC FACTORS*both economic and noneconomic sets of information. The chief concern hereis with the noneconomic kinds of information that are useful in the pricingdecision. A thorough evaluation of the market target should be made toanswer questions such as the following:

1. To what extent do consumers perceive brand- to-bra nd variation inquality within the product category?

2. Is the product an impor tant ingredient or component of another product?3. Is the product purchased as a gift? If so, how frequently and when?4. Is the product perceived by our consumers as a new product? If so, how

new?5. Is our product purchased for special occasions? If so, for what occasionsand when?6. How strong is our brand' s image within our market?7. How knowledgeable and experienced are our consumers with the product?8. Does our brand have snob appeal and status possibilities for our con-

sumers?9. How complex do our consumers perceive the product to be?

10. What price does our market expect to pay for a product like ours?These questions represent the kinds of information a firm should seek andconsider in determining its br and' s price.The marketing manager also must consider what role price is to play in thetotal communications effort as well as the effects of other communicationsvariables on price. For example, what price will be supportive of the intendedbrand image? And, on the other hand, what marketing activities can or will beused to desensitize consumers to a price differential? The marketer mustremain aware of the potential psychological effects in pricing, such as thequan tu m effect and reverse direction price perceptions.

The pricing decision is considerably more complex than manipulating costand profit figures. The questions and behavior insights offered here shouldprovide some useful guidelines in developing a pricing strategy as well as speci-fic prices. Each pricing decision must be considered according to the commu-nications intended for the consumer as well as the return on investment in-tended for the firm.

REFERENCES1. To review these basic approaches to pricing, see Ben Enis, Marketing Principles(Pacific Palisades, CA: Goodyear Publishing Company, Inc., 1974), pp. 367-379.2. See Harold J. Lewin, "A Note on Some Experimental Findings About the Meaningof Price," The Journal of Business, 22 (July 1974), pp. 205-210; D. S. Tull, R. A.


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D e L O Z I E R A N D W O O D S I D E 8 2 4

B o r i n g , a n d M . H . G o n s i o r , " A N o t e o n t h e R e l at i o ns h i p o f P r i c e a n d I m p u t e dQua l i ty , " The Jou rna l o f Bus iness , 37 (Apr i l 1964) , pp . 186 -191 ; and Arch G.W o o d s i d e a n d J . T a y l o r Si m s, " R e t a i l E x p e r im e n t i n P r ic i n g a N e w P r o d u c t , "Jou rna l o f Reta i l ing , 50 (Fal l 1974), pp . 56-65 .

3 . Benson Shap i ro , " T he Psycho logy o f Pr ic in g ," H arva r d Bus iness R ev iew ( Ju ly -Au gust 1968), p . 25 .

4. Ibid.5 . D o u g l a s Mc C o n n e l , " A n E x p e r i m e n t a l E x a m i n a t i o n o f t h e P r ic e - Q u a l it y R e l at i o n -

sh ip , " The Jou rna l o f Bus iness , 41 ,4 (Oc tob e r 1968), p . 442 .6 . K e n t B . M o n r o e , " B u y e r s ' S u b j e c ti v e Pe r c e p ti o n s o f P r i c e , " J o u r n a l o f Ma r k e t i n g

Research , X (February 1973), p . 73 .7 . T i b o r Sc i t o vs k y , " S o m e C o n s e q u e n ce s o f t h e H a b i t o f J u d g i n g Q u a l i t y by P r i c e , "

The R eview of Ec ono m ic Studies , Vol . Xi l (2) , No . 32 , (1944-45) , p . 103 .8 . Shapiro , op . c i t . , p . 25 .9 . C h e st e r R . W a s s o n , " T h e Ps y c h o lo g i c al A s p e c ts o f P r i c e , " in T h e E c o n o m i c s o f

Manageria l Decis ion: Prof i t Opportuni ty Analysis (New York: Apple ton-Century-Cro fts , 1965), pp . 130-133.

10. Richa rd T . Sam pson , "Sen se and Sens i tiv i ty in Pr ic ing ," Ha rva rd Bus iness Rev iew(Nov emb er -Decem ber 1964) , pp . 101-103 .

11. Ibid., p. 103.

A B O U T T H E A U T H O R S

M . W A Y N E D e L O Z I E R i s A s s o c ia t e P r o f e s s o r o f M a r k e t i n g at t h e U n i v e r -s it y o f S o u t h C a r o l i n a . H e ha s p u b l i s h e d T h e M a r k e t i n g C o m m u n i c a t i o n sP r o c e s s an d C o n s u m e r B e h a v i o r D y n a m i c s : A C a s e b o o k . A r t i c le s b y P r o f e s -s o r D e L o z i e r h a v e a p p e a r e d i n J o u r n a l o f A d v e r t is i n g , B u s i ne s s H o r i z o n s ,a n d o t h e r jo u r n a l s .

A R C H G . W O O D S I D E i s P r o fe s so r a n d P r o g ra m D i r ec t o r o f M a r k e t in g att h e U n i v e r s i t y o f S o u t h C a r o l i n a a n d e d i t o r o f t h e J o u r n a l o f B u s i n es s R e -s e a r c h . H e h a s s e r v e d a s s e n i o r l e c t u r e r a t t h e H e l s i n k i S c h o o l o f E c o n o m i c sa n d t h e U n i v e r s i ty o f O s i j ek , Y u g o s l a v i a . A r t i c le s b y P r o f e s s o r W o o d s i d eh a v e a p p e a r e d i n t h e J o u r n a l o f M a r k e t i n g R e s e a r ch a n d t h e J o u r n a l o f A p -p l ie d P s y c h o l o g y . H e c o - e d it e d C o n s u m e r a n d I n d u s t ri a l B u y i n g B e h a v i o r i n1977.

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