• Understand what pricing means to the customer
• Understand how product pricing can help businesses achieve goals
• Understand how businesses use discounts and allowances

The Customer’s View of Price

Customers seek to satisfy a need through the purchase of a particular product. Customers use several criteria to decide how much they are willing to spend in order to satisfy their needs. Their preference is to pay as little as possible.

Price-Valuation Equation

Value = Perceived Benefits – Perceived Costs

In order to increase value, the business can either increase the perceived benefits or reduce the perceived costs. Both are important aspects of price. Someone living in an isolated mountain community might prefer to pay a lot more for groceries at a small, local store than drive sixty miles to the nearest Walmart. That person is willing to sacrifice the benefit of choice for the benefit of greater convenience. When you spend $180 on Nike Air Jordan basketball sneakers instead of $30 for a private label brand at Target, the perceived benefits include brand status, quality, and appearance. The perceived benefits are directly related to the price-value equation.

Adding Value to Perceived Benefits

When we talk about increasing perceived benefits, we refer to this as increasing the value-added. Identifying and increasing the value-added elements of a product are an important marketing strategy. Many apps use the value-added of additional useful features to convince you to transition from using a free app to paying to unlock premium features or pay for a subscription.

Perceived Costs

Perceived costs include the actual dollar amount printed on the price tag, plus a host of additional factors. If you learn that a gas station is selling gas for 25 cents less per gallon 5 miles away compared to the gas station a block from where you live, will you automatically buy from the lower-priced gas station? That depends. You will consider a range of other issues. How far do you have to drive to get there? Is it an easy drive or a drive through traffic? Are there long lines that will increase the time it takes to fill your tank? Is the low-cost fuel the grade or brand that you prefer? Inconvenience, poor service, and limited choice are all possible perceived costs. Other common perceived costs are the risk of making a mistake, related costs, lost opportunity, and unexpected consequences, to name but a few.