Pricing is an essential tool of business. It dictates the trajectory of the business profitability. Understanding the dynamics and how to play is pivotal to success.
Businesses trade in goods and services and prices are tagged to convey the value a seller is willing to accept for parting away with his merchandise. Prior to the introduction of money, goods are the currencies being exchanged. The worth of the goods or services available for the exchange becomes the price. In same vein, the currencies and money charged now for similar goods or service is the price.
Note that, although the seller sets the price, there must be a willingness by the buyer to accept. What are the forces that makes a buyer accepts a price without hesitation?
Perceived Worth of the Product
No buyer will want to pay a kobo above what he deemed the product is worth. Here, the onus is on the seller to have effectively communicated the value proposition of his product- the extra features and benefits a user/buyer will enjoy from the use or purchase of his product amidst several other options. The value might be real or perceived; a psychological factor where an impression about a product is developed either from advertising or word of mouth feedbacks. This is the reason most companies spend hugely on advertising, to influence the image of their product in the minds of consumers.
Type of Product
The uniqueness and scarcity of a product determines the price a buyer is willing to accept for it. In a commodity market where there are no special features between products from seller A and seller B, price differential is needless. A buyer can easily switch to the cheapest within a blink of an eye when both are accessible. The commodity from seller A does not add any improved benefit to his life than product B does. Nevertheless, where products are branded and uniquely identified, a buyer’s purchase decision will be impacted by his taste, lifestyle and social class. Some buyers might lean towards luxury items due to the perception it creates for them. For example, a Rolls Royce car will appeal to an upper-class persona with a luxury lifestyle, thereby inclined to pay the price.
Buyers Purchasing Power
Price can easily be ignored where the value of item referenced is insignificant. Hastier buying decisions are taken where a buyer’s purchasing power for the product is high. Take for example, a middle class with an option of buying bottled water at shop A or shop B where price differential is NGN 100. There will be little or no resistance by the buyer compared to purchasing his first car.
The presence of numerous choices available to a buyer will give him higher bargaining power. Where there are substitute products offering similar features, say a Milo and Ovaltine, a buyer has a higher capacity to resist an increased price of Ovaltine by settling for the former.
In Part 2, we will elaborate on how the dynamics play out from the seller’s point of view to establish an optimal pricing decision.
Till then, stay tuned.