Notes 1 Price and perceived quality: Perceived quality is customers’ perceptions of the quality of a product or service. Remember that product quality was defined in Chapter 9 of the textbook as “the characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs” (p. 286). The scope of this definition indicates that for many product categories, ordinary customers may have a hard time assessing a product’s quality or differentiating among the levels of quality of very similar products. In marketing, perceptions matter more than anything else. Customers often use various indicators to form their perceptions of quality. Price is one of these indicators, with high prices suggesting high quality, while low prices are usually associated with low quality. Take time to think about your own assessment of the quality of products or services about which you have little previous knowledge. Is price an element that you often consider? 2 Customer value and price: Customer value can be defined as "the difference between the benefits a customer sees in a market offering and the costs of obtaining those benefits." The benefits are linked to the offering and may be its intrinsic features or the image associated with its use, while the costs include the time and effort required to make the purchase and, most importantly, the price charged by the seller. Basically, this means that if the benefits that a customer receives from the use of a product remain the same and the price asked is increased, the customer value for that product or service decreases. Conversely, if the benefits are unchanged and the price is lowered, customer value is increased. In the same way, the customer value may become zero when both the benefits and costs are at the same level. At this specific point, the customer receives no value from the purchase of the product. 3 Understanding the general pricing approaches: Figure 11.1 on page 355 of the textbook shows two major considerations that are critical in pricing: the costs of the product and customer value. If the objective of the firm is to at least break even, the price of the product should not be lower than the unit cost of production. This is common sense because setting the price lower than the unit cost will mean giving subsidies to customers. (Note, however, that for strategic reasons, an external entity such as a government may ask a firm to set a price lower than unit cost for consumers and then provide subsidies to the firm to overcome the loss.) On the other hand, the price should not be so high that customer value is zero, because then there will be no demand for the product or service. In a free market economy, neither of these two extreme cases (the break-even price or the price at which customer value is zero) is realistic for an organization that aims to make
a profit. The marketer should choose a price between these extremes, taking into account internal and external factors that affect prices.