Customer-oriented or perceived value pricing

There is an increasing trend to price the product on the basis of customer’s perception of its value. This method takes into account all other elements of marketing mix and the positioning strategy of the firm. For, the value of the product is a function of all these variables. This method helps the firm in reducing the threat of price wars. In fact, it can help the firm steer out of the ugliest of price wars. But the key to this method is to correctly understand customer’s perception of product value and not to overestimate the firm’s product value. Marketing research can play an important role here.

It is important for the marketer to understand the constituents of perceived value. Perceived value of a product is based on:

1. Acquisition value and
2. Transaction value

Acquisition value refers to the perceived benefits and the sacrifice made by the customers to get it. The marketer needs to research how the customer perceives this sacrifice.

Accordingly,

Acquisition value = Perceived / Perceived
of a Product sacrifice Benefits

The perceived benefits in a product seen by a buyer, sacrifice a function of the buyer’s judgment about the product quality and performance. This is based on the buyer’s experience, or experience of his or her reference groups and the publicity or news items appearing about the product. For example, Air India has a low perceived value when compared to other airlines. This is contributed by an image of unreliability and indifferent and discourteous cabin crew. So, when the customer decides to buy an Air India ticket, though it may be the lowest priced, he or she is paying much more.

The transaction value is determined by comparing buyer’s reference price to the actual price that he or she pays, or in other words it is:

(Pref — Pactual ) that constitutes transaction value.

So, in the Air India example if the passenger is comparing it to Singapore Airlines and the latter is charging Rs 65,000 for a round ticket India-US with a complimentary stay at Singapore on return from the US and Air India costs Rs 62,000 then the transaction value is favorable to Air India by Rs 3,000. But when this is combined to the acquisition value, it turns out to be negative as illustrated below:

Pv = V1 (AV) + V2 (TV) or

V1 (Pmax — P) + V 2 (Pref – P)

Where V1 and V2 = Subjective weights placed by buyers.

Now, suppose acquisition value for Air India is 40,000 / 62,000

Or 0.65 and for Singapore Airlines is 80,000/ 65,000 i.e 1.23

Further if the buyer attaches 60% importance to the acquisition value and 40% importance to the transaction value, putting these facts together we find that:

Perceived value of Air India = (0.6 x 0.65) + (0.4 x 3000 ) = 3.90 + 1200 = 1203.90.

Since perceived value of Air India’s flight is low compared to its price, the customer will always resist paying for it.

To measure perceived value, a marketer may use any of the following methods.

1.Direct Price Rating Method Here, the customers are asked to estimate the price of each brand or model of the product which are demonstrated to them.
2.Direct Perceived Value Rating Here, the buyers are asked to allot a point scale from 0 to 100 points to all the competing brands. The brand having the highest points has the highest perceived value.
3.Diagnostic Method Here, the buyers are asked to evaluate competing brands on different attributes, which they first prioritize. By multiplying the important weights against each company’s ratings, we can find the brand that has the highest perceived value.
4.Economic Value to the Customer This is calculated by comparing the company’s product’s total costs against the benefits of the product that the customer is currently using, also called the reference product. This method can be used by a firm to decide which market segments need to be targeted for its products.