Pricing is one of the four factors considered in the marketing mix. Others include the product, place, and packaging. Marketers consider pricing as one of the key factors that determine the success of their products and not because competition has brought about lower prices and a wider choice for the consumer.
More, Cachon & Swinney (2008) notes that the contemporary consumer has learned the art of anticipating price reductions and hence can opt to forego immediate purchases until a time when the prices will go down. Faced with such strategic behavior from the consumer, marketers have little choice than to adopt pricing strategies that will not only accommodate such customers but maximize earnings from the product or service both in the short and long terms.
Cachan & Swinney (2008) hold the opinion that consumers have over the years become accustomed to rigid pricing strategies by marketers. In addition, they have also learned to predict sales patterns, which initially kick-off with high prices only for the prices to be reduced significantly as retailers try to clear existing stocks and bring in new products. The authors argue that such behavior by consumers erodes retail margins, but is nevertheless fed by the retailers who stock too much of a specific product at any one given time.
According to Cachan & Swinney (2008) however, manufacturers do not have to oblige the consumers by drastically lowering prices especially as a last-minute attempt to create new stocks for new products. For starters, the manufacturers can produce small quantities that are rightly priced and which can be replenished on short notice. Secondly, Manufacturers and retailers should price their products at affordable levels to encourage as many people to purchase the product while avoiding the anticipation behavior.
Cachan & Swinney (2008) argue that producing quantities that can move fast and pricing them at the right margin will eliminate the need to mark down their merchandise. More this, even when marketers offer discounts on fairly priced products, the discounts do not have to be very deep as compared to higher-priced products. By adopting such a pricing strategy, Cachan & Swinney (2008) believes that consumers will not result in strategic behavior especially as they wait for discounts to purchase the product.
Su & Zhang (2005) share similar sentiments in their consumer behavior model. In the model, the two authors argue that consumers of a product can decide to purchase the item at full price or wait until when the retailer discounts the price. Notably, however, the availability of the product is high during the initial stages while the product is still retailing at full cost, while the high demand created by discounted prices means that a consumer may not get the product especially if the retailer has no intention of replenishing the same. With this knowledge, some consumers opt to purchase the product when it is readily available instead of waiting for the discounts since they understand that the discounts trigger scarcity of the product.
Shen & Zu (2007) notes that it is common for marketers to characterize consumers by their level of price sensitivity or by using the demand curve. Yet, the sovereign consumer has more decision-making power that allows them to engage in the intra-decision making process that determines just how much they are willing to pay for a specific product. Shen & Zu (2007) states that the pricing strategy is one of the two market mechanisms used by marketers to apportion the supply of goods and services to demand forces.
In the pricing mechanism, consumers purchase products at a specific identified price. In theory, perfectly competitive markets should allow one price to prevail among products serving the same products in the consumer market (Shen & Zu, 2007). In the real world, however, slight price differences do exist. This allows firms to set prices at different rates depending on their target consumers as well as the marketing strategy that a firm adopts. This in turn means that consumers will react to price fluctuations.
To some consumers, low prices are not just a means of acquiring products at cheaper costs but may be a reflection of the low quality of the product. This is especially true for the middle and upper-income earners who associate price with quality. To low-income earners, however, cheaper products are more affordable and are therefore more appealing to them (Chevalier et al. 2000).
Like the two authors covered earlier, Shen & Su (2007) also contends that strategic consumer behavior is something that marketers should start paying close attention to. Understanding strategic behavior by the consumers requires one to understand how they respond to prevailing retail prices. Belobaba (1989) came up with a policy dubbed the ‘expected marginal seat revenue (Anderson & Wilson, 2003). In this policy, protectionist limits are used in pricing, whereby specific units are set aside to be sold to low incomes. The remaining unsold products are then sold to high-income earners.
The authors however argue that irrespective of the pricing, consumers will want to wait until the discounted rates of the products are released. According to Shen & Su(2007) such behavior by a consumer is advantageous to the seller because even though he may fail to make the expected sales with the initial price, there is still hope that he can still clear the stocks once he discounts the prices.
Liebtag & Kaufman (2003) found out that food prices in some neighborhoods were significantly lower than the prices for the same items in other neighborhoods. This finding is shared by Hayes (2000), whose research findings indicate that prices in neighborhoods in his survey had a 6 percent price difference. In a different survey, however, Wertenbroch & Skiera (2002) found out that consumers were usually exposed to either low or high food prices depending on the competition in the market.
The more competition available in a specific consumer market, the more varied the prices were bound to be. Leibtag & Kaufman (2003) further finds out that though pricing is among the key considerations that all consumers regardless of their income levels, tastes or preferences have to factor while making purchase decisions, other factors like quantity and quality also comes into play. They were also trade-off specific product qualities for lower-priced commodities.
To shed more light on how pricing strategies affect consumer behavior, Leibtag & Kaufman (2003) observed that consumers with a wider choice of products are bound to spend more especially on perishable food items. The four identified behaviors that lead to less spending include purchasing discounted products in larger quantities; purchasing store brands or generic products as opposed to branded products which oftentimes costs more; taking advantage of volume discounts; and purchasing less expensive products. Through these purchasing behaviors, the consumers may have to forego product qualities such as freshness, taste, and convenience, something that Leibtag & Kaufman (2003) attribute to price differences in food items.
Hayes (2000) shares similar opinions and argues that the general consumer would like to get more value for less money and thus he or she tries to spend less money by choosing their purchases wisely. This includes selecting less expensive products, going for random-weighted products, and taking advantage of discounts. Overall, this means that the average consumer makes engages in a deliberate decision-making process before making the actual purchase.
Away from ordinary consumer products, Fudenberg & Villas-Boas (2005) hold the opinion that firms can offer custom prices to consumers based on existing records on their purchase behavior. According to the authors, firms that have records about past purchases by a specific customer may use the information to offer different prices for products or services to the consumer. They refer to such pricing tendencies as “behaviour-based price discrimination” (p.2). Markets, where such pricing strategies are successfully used, include telephone service, the telecommunications sector, banking services, and credit card services, newspaper or magazine subscriptions, and e-commerce.
Fudenberg & Villas-Boas (2005) however observe that should consumers know that their records are used to price-discriminate them, firms may have to face commitment problems from such consumers. This, therefore, means that the pricing strategy can successfully work in complete secrecy where the consumer does not know that her/his records are used as a basis for future pricing or firms may opt to avoid such pricing strategies.
Notably, such a pricing strategy would only work where a firm has dominance over consumers in a specific market. However, in a free competitive market, all firms cannot successfully practice such a pricing strategy without consumers practicing caution. Some analysts believe that sellers should avoid using consumer past purchase behavior to set prices as this jeopardizes the ability of a consumer to bargain for good deals (Baron & Bensako, 1984; Bulow, 1982; Fudenberg & Tirore, 1983; Stokey, 1981).
Levin et al (2008) argue that pricing is just one factor that consumers consider when purchasing products. Overall, the conditions have to be right for the consumer to make the purchase. This means that he or she needs to find the right product, at the right place, and at the right time. More this, the consumer needs to have the money necessary to complete the purchase process. In conclusion, Levin et al (2008) argue that in the presence of rational consumers, firms have no option other than to adopt pricing strategies that ensure that consumers will want to purchase the products. More to this, and in agreement with Besanko & Winston (1990), a high supply of products in the consumer market should be met with decreasing prices as the forces of demand and supply indicate.
The impact of pricing strategy on consumers’ willingness to pay or willingness to make trade-offs between price and quality.
Having established that the consumer would like as much value for his or her money, it is obvious that pricing strategy does affect the consumer’s willingness to pay. According to Morariu (2008), a consumer will rely on the perceived fairness of the price as a guide to making the purchase decision. This means that the consumer generally has an idea about how much a product of a specific value should cost him or her. The higher the perceived product value, the more the consumer would be willing to pay.
According to Silverstein & Fiske (2003), the pricing strategy used on the product thus needs to consider the value that a consumer would attach to a product before pricing the same. For example, a product’s value may be high on production, but this value may steadily decrease as the product stays on the retail shelves. Once such a product nears the expiry date, the consumer willingness to pay declines significantly. However, if the product’s price was to be discounted, more consumers would be willing to make tradeoffs between value and cost.
Morariu (2008) argues that the contemporary consumer is more knowledgeable and is hence able to assess the price appropriateness and the benefits of a product before paying for the same. This means that the consumer relies on their evaluation of value attained against the price before paying for the same. Breidert (2006) holds the opinion that for the pricing strategy to affect the consumer’s willingness to pay affirmatively, the strategists need to know the values that consumers attach to the product
Fournier (1998) suggests that price levels are extrapolated outside a specific interval meaning that high price levels lead to regression in consumer purchasing tendencies. Regarding trading off price and quality, Steenkamp et al (2009) citing the Financial time’s newspapers and the Wall Street Journal note that producers of fast-moving consumer products were increasing their prices amid the recession in an attempt to compensate for decreasing sales volumes.
As a result, more consumers were willing to purchase little-known brands which had not hiked their prices, with some opting to purchase private-label goods. Accordingly, the increased prices only served to drive consumers away, thereby squeezing the profit margins of companies that hiked prices even further downwards (Axarloglou 2003).
Branded products have a distinct advantage over private-labeled products because they are not only leaders in product innovation; they also invest in distinctive packaging, advertising, and price promotions (Steenkamp, 1989; Steenkamp et al, 2009). Through these activities, the branded products can create an impression of quality to the consumer market. However, as Baron & Kenny (1986) found out, dire times like depression or recession force many consumers to avoid spending as much as they would in normal economic times. As such, recessionary times are not a perfect time for price strategists to consider hiking their prices as this can only drive people away.
If this is indeed true, advertising, which Klein & Leffler (1981) observe has a positive impact on consumers’ perception of the brand does not achieve as much worth as would be the case. In lean economic times, consumers (especially in the middle and low income earning groups) are concerned more about survival than quality (Graham & Bansal, 2007; Lichtenstein & Burton, 1989). As such, they will easily trade off branded products, which are associated with quality, and instead, opt to purchase cheaper products manufactured by private labels.
Consumer’s perception about brand quality is also significantly eroded by the news that the same manufacturers of brand names also engage in the manufacturing of private labeled products ostensibly in an attempt to capture the average income earning markets (Kumar & Steenkamp, 2007; Silvestein & Fiske, 2003). More this, consumers are now more aware that private-branded products have improved their qualities considerably in the past decades to compete favorably with other private labels as well as the big brands.
Not all consumers however abandon a branded product because of its high price. According to Lichtenstein et al (1988)”people who are highly involved in a product associate important functional, social and psychological outcomes with the product. Therefore, highly involved consumers care more about product quality” (p. 246). This means that highly-involved consumers treasure quality and would therefore be more willing to pay for quality irrespective of pricing differences.
Lichtenstein & Burton(1989) states that consumers have over the years developed ‘schemas’, which they use to process abstract information delivered to them by marketers. One such schema is identified by Peterson & Wilson (1985) as a price-quality schema, where the consumer associate high prices with quality. This means that consumers in this category are less willing to purchase low-priced products because they associate such with low quality. The willingness of people who rely on the price-quality schema to purchase declines with prices, and increases as prices go up. According to Mitra & Godner (2006) however, people in the price-quality schema may be converted over time as their perception of the quality of private labeled products changes. This however is a gradual process that can take many years before actualization.
According to Zhou et al (2002), consumer reports affect price-quality schemas especially when such reports seek to educate consumers on cost-cutting measures. By doing this, they enlighten the public that cheap groceries could be equally good and that the private labels could be equivalent in quality to the national brands (Sethuraman & Cole, 1999). When such reports are released, most consumers who relied on pricing as their mark of quality feel the need to test some of the lower-priced products if only to verify the truth of consumer reports. If they like the quality of the cheaper product, then their price-quality schema is eroded.
For perishable products, the pricing strategy has to consider the short shelf-life of the products since consumer purchasing behavior depends on perception about quality and value (Hoch 1996). This then means that prices tend to be lower as the end of the season nears. This is done to encourage more consumers to purchase the products. Subsequently, consumers are willing to trade off the depreciated quality of the perishable products with price. The same applies to consumer products that are nearing the expiry date. The retailers often reduce the prices to clear the stocks before they surpass their “sell-by” dates.
Overall, the pricing strategies adopted by different firms affect the willingness of the consumer to pay based on the perceived value and the consumer’s purchasing power. In markets where the consumer’s purchasing power is low, the pricing strategy has to consider the affordability of the products. In more affluent markets, the pricing strategy may want to take advantage of the price-quality schema as discussed herein. Notably, however, pricing strategies must also take into account the prevailing economic situations before adjusting their prices.
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