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It is important for a firm to get its pricing strategy right because the potential impact on its net revenue is enormous. Traditional pricing models contain tenets that, when used appropriately, support an economic approach that involves computing the firm’s cost of goods sold (COGS) and a required profit margin that is added on top of the costs to determine the price of the product.
Recently, there has been an abundance of journal articles that advocate a perceived value approach, whereby the value of the product to the consumer is quantified and then a profit margin is added on top of this quantified value to determine the price of the product. For example, if the cost to make a gallon of a radically new biocide product is $5 and the required profit margin is 100% of cost, then, using the economic approach, the suggested price per gallon would be $10.
On the other hand, if consumers perceive that the biocide is valued at $100 because of cost savings to the consumers, and a margin, say $10, is added on top of it, this perceived value approach would suggest pricing the biocide at $110. Five-dollar cups of coffee or three-dollar bottles of water are prime examples of this perceived value approach. The assumption with the perceived value approach is that the consumers are not likely to know the cost structure of the product.
To prepare for this Discussion, review this week’s Learning Resources and consider the perceived value approach and associated assumptions.
By Day 3
Post an evaluation of marketers’ use of perceived value approach in pricing models. In your evaluation, address the following:
- Should prices reflect the cost of making the product, as suggested by the economic value approach, or should prices reflect the perceived value of the product?
- What are some advantages and risks of each approach, and what implications do they have when constructing marketing strategy?
- How does the approach differ if you are marketing a service rather than a product?
- Be sure to give specific examples to illustrate your answers.
Support your work with a minimum of two specific citations from this week’s Learning Resources and one or more additional scholarly sources.