Professional Selling - Assignment Example

Executive Summary Attempting to determine how best to price one’s products with the consumer in mind is often stressful and must take into account a number of factors regarding how the consumer views products. How people determine which products to buy when faced with a great variety of competition can depend upon a number of things including price, the use or non-use of price points and perceived value. A product’s price as it relates to other similar products available in the marketplace can often cause a consumer to rank it as low or high quality and make their purchase decisions based on this assessment. Price points are scientifically identified points at which consumers are more or less likely to purchase. Two popular price points are the ‘under $20’ category because this is the most common denomination of money in the average shopper’s wallet, and the ‘under $100’ category as meaning the difference between a major and a minor purchase. Perceived value is the consumer’s idea of what a product is worth based on the social status it conveys to its owner. This tends to reinforce the concept that a product has a high quality but also serves to lock the price at a high rate. To help move product on these items, companies have turned to the concept of value bundling, which protects the price value of the original product while adding consumer incentive to purchase. These are only a few of the psychological strategies companies use to help influence consumer spending decisions yet they play an important role in how consumers perceive and determine which products to buy. The question of pricing products and services must take into account the psychological elements of consumer spending if a business is to find true success. When making their decisions about what to purchase, buyers are frequently irrational and ill-informed. Assuming consumers are acting in perfect rationality suggests that they are making decisions with perfect information and spending so as to maximize value for every expense. However, this kind of careful consideration rarely happens. Consumers are often forced to make numerous purchasing decisions on a daily basis at the same time that they must weigh in several other considerations – time spent shopping, time available between other activities, other daily stresses and concerns. They are constantly bombarded with sales pitches, variety of benefits, differing terms, fluctuating prices and persuasive promotional messages. To help them deal with the confusion, research suggests that consumers have adopted a specific logic to help them quickly weed through their options and reach a conclusion. As a result, it is possible to identify patterns of behavior in the way buyers go about satisfying their needs (Morris, Morris, 1990). Points for businesses to consider in their pricing strategy include product positioning, price points and the concept of fair pricing. By studying these psychological elements of consumer purchasing behavior, it becomes possible to price products and services to be of maximum appeal to the target market. The element of price alone can be used in several ways as a means of attracting customers. Generally speaking, there are two major strategies that can be used in pricing of a product. When the business is setting itself up to be the low-cost leader, it is necessary for them to price their products lower than the competition, positioning themselves as the better bargain. However, if the goal is to establish the high quality of their products, the business should price their products higher than most of the competition. Not all manufacturers and retailers use price as a signal of quality, though, so it is confusing to consumers who use price as their only measure of quality to discover the brand that will best serve their needs. Consumers often develop internal reference prices, or expectations about what something should cost, based mostly on their experience and prior research. For example, early Coca Cola advertising made specific reference to the price of its product as being only a dime. This made it difficult for the company to change the price of its product later when the cost of production and distribution had increased. While a business can price its product to simply cover its costs or to target a specific status-conscious clientele, it can also price structure to get deeper into the psychological mind of the average customer. It is financially advantageous for a business owner to have an understanding of human nature when determining how best to market their goods. Price points are another strategic means by which companies can get into the psychology of consumer purchasing decisions. There are certain specific prices (price-points) at which people become more willing to buy a certain type of product. ‘Under $100’ is a popular price point as is an amount below $20 including sales tax. This works because the $20 bill is the most popular denomination of money that people typically carry with them and anything under triple digits automatically seems less expensive. Dropping the price to a popular price point might mean a lower profit margin, but the increase in sales volume offsets the loss (Teton, Allan, 2005). What this research tells us is that people buy on emotion first and rational thought second. It is because of this basic way of thinking and buying on emotional rather than intellectual thought that has many products priced with peculiar endings. Rather than selling something at $10, it is sold at $9.99. Another theory of why this works is that consumers will conceive the $9.99 price as nine dollars plus change rather than the more realistic $10. Regardless of why it works, recent research has shown that odd price endings appear to have some modest effects under some circumstances. Discount stores use these odd endings more frequently than upscale department stores, which often use whole dollar amounts as a sign of quality. Perceived value is another important aspect to take into account when pricing products with the consumer in mind. Taking an opposing approach from that of the low cost brands, the concept of perceived value is essentially the process of reverse discounting. The underlying concept behind perceived value is the recognition that assessment of quality rests within the eye of the beholder. In many cases, the idea of quality is contained in the consumer’s perception of the product rather than its reality. This perception is introduced and maintained through the application of a high price tag and sometimes restricted markets. Prestige pricing refers to high markups and/or pricing above the market over and above the actual quality or cost of production. In many cases, consumers will pay more for a product or service because they feel it is of higher quality or possesses brand or manufacturer prestige that will help them elevate their status as members of society (Passewitz, 2005). A problem occurs, though, when perceived value must be protected but product must be moved quickly. To accomplish greater sales without affecting perception, many companies have turned to the concept of value bundles. Value-bundling involves grouping several products and setting one price for the arrangement. Customers tend to assign value to a bundle based upon the probable cost of individual pieces rather than considering the wholesale or actual cost to the producer. Value-bundling is a powerful method if the price of the bundle equals the price of the most expensive component (Evoy, 1999). The customer gains a "something for nothing" feeling with the purchase while still associating their goods with the higher end pricing originally developed. Despite the research conducted, or perhaps because of it, psychological pricing theories are controversial as to their effectiveness. Consumers are increasingly aware of pricing strategies designed to lure the uninitiated and are so accustomed to psychological means of setting prices that variant prices stand out as peculiar. Some studies indicate that buyers, even young children, have an advanced understanding of the true cost of an item and that they act judiciously in their buying decisions. This does not take into account the non-rational nature of people within the marketplace or that acceptance of psychological pricing requires understanding the human mind on a subconscious level of thought processes. Some economic models tend to deny or ignore the subconscious mind. More than simply the buying behavior of the target market, there are many other psychological factors that can influence a business’ pricing decisions. Prices are set based on an image the business wants to project for the product. The answer for which is the most effective retail price for a product can be as diverse as all products themselves. Factors that influence pricing decisions are seemingly endless therefore a sound strategy that works for one may not work for another even within the same market. An understanding of the product and of the people that product will attract is essential. Prestige pricing, reference pricing, odd-even pricing and traditional pricing are all in the psychological arsenal of businesses setting their pricing structures. In addition, pricing strategies must be forward-thinking to include attracting new users to the market as well as increasing the usage rates among existing customers. It also should take into consideration the market pursuit of winning customers from competitors and discouraging current customers from switching to competitors and develop a technique for discriminating among different types of buyers to most effectively market a given product or service. With this knowledge, it is possible to develop a means of using the low price of one product to help sell other products in the line regardless of the level of consumer (Morris, Morris, 1990). Whether they are accustomed to or too sophisticated for such pricing strategies, consumers continue to be influenced by them at the subconscious level. While impossible to establish the needs for every consumer, identifying buying behavior and psychological tendencies could be the key to the success or failure of a product. References Evoy, Ken. (1999). Make Your Site Sell: The Psychology of Pricing. Hudson Heights, Quebec, Canada: Goodbytes Information Products. Morris, Gene and Michael H. Morris. (1990). Market-Oriented Pricing: Strategies for Management. Westport, CT: Quorum Books. Passewitz, Gregory R. (2005). Ohio University Fact Sheet Small Business Series. Retrieved April 20, 2010 from Teten, David and Scott Allen. (2005). The Virtual Handshake: Opening Doors and Closing Deals Online. New York: Amacon Books. Read More