Overview:
- Small changes in price can have an enormous impact on income
- Before changing the price, a firm must understand and predict a
consumer’s response to this change
- Many firms are not well-informed about consumer’s WTP and their response
to price changes
Purpose of this article:
- To highlight the impact of some behavioural variables on a consumer’s WTP
- WTP is influenced by “psychological” or “behavioural” variables that are often
not considered
Value Price and the Economic Perspective
The traditional economic approach is the “thermometer“
- Objective value
Measurement of the benefit delivered to customers, regardless of whether
customers recognize benefits
- Perceived value (PV)
- The value that consumers understand the products to deliver
- Topline for pricing
- Influenced by objective value, substitutes, and marketing efforts
- Price
- PV-P= consumer’s incentive to purchase
- P-COGS= firm’s incentive to sell
- COGS
- Bottom line for pricing
In value pricing terminology the firm creates values by offering a product that
the customers value at a price > COGS. In turn, by pricing between PV and
COGS, the firm has captured some value for itself and allowed consumers to
capture the remainder
The economic perspective: consumers buy when PV > P
- People’s prices differ due to different expectations they have
(pay $2.5 for a bottle of beer at a fancy hotel seems reasonable but it is
impossible in a grocery store)
- WTP is not only driven by the “economic utility” of the transaction but
also by “psychological utility” - “fairness”
- Economy utility = PV - P (类似consumer surplus)
Behavioural updates to the economic perspective - Fairness of Transaction
1. relative vs absolute value of money
- Relative incentive to enter the transaction = (PV-P)/P
= Economy utility/ actual price
(consumer surplus在商品总价中的占比，如果占比大，消费者更容易决定
购买)
- “psychological utility” of a fixed amount of money is relative
2. The impact of a salient reference price 显著的参考价格
- WTP is impacted by Salient Reference Price
- In determining consumer’s WTP, they are considering “economic
utility” and consistency between the actual price and a salience
reference price
- Salience reference price= actual price - reference price
- Reference price (“fair price”): previous price paid for a product
3. The impact of a firm’s COGS
- Consumers will think a price increase is unfair when the price change
is coupled with little or no change in COGS
- Consumers don’t want themselves to be taken advantage of by
retailers
- WTP is impacted by COGS:
In determining consumer’s WTP, they are considering “economic
utility” from the transaction and firm’ “economic utility” (actual
price - COGS)
4. The nature of the Product Being Sold
- In determining a consumer’s WTP, the degree to which a consumer will
reply upon their “economic utility” will vary across product
category (discretionary vs necessity; luxury vs utilitarian)
- The playoff game is viewed as a discretionary expense (因为是不是必
需品，所以被视为正当的提价), but the purchase of a snow shovel after
a large snowstorm is vired as a necessary expense （因为是必需品，所
以被视为恶意抬价，剥削）
Consumer’s WTP= Economic utility of the transaction + fairness of the transaction (3
个公式)
- In reality, consumers 包含 psychological (or behaviour) factors into their
decision-making.
- Factors - tend to reduce WTP compared with a purely economic perspective
- The relative size of incentive to purchase
- Consistency between the actual price and expected price
- Firm’s COGS
How can a firm manage the perception of transaction fairness and anticipate
customers’ WTP? (2 strategies)
➔ Strategy 1: Actively manage price expectations
- Establish credible reference prices 参考价
（为产品设立一个benchmark price）
- Manage product price trends
（基于高一些的reference price——之前的价格，降价比抬价更加容易）
- Encourage favourable comparisons
（鼓励消费者比较替代品的价格，对比突出产品的优势）
- Avoid unfavourable comparison through product differentiation
（避免不好的对比）
➔ Strategy 2: Actively manage perceptions of COGS
- Focus attention on fully-loaded COGS
（communicate the high cost of the development and support to customers）
- Bundle products to obscure 掩藏 COGS
- Focus the attention on consumer value
(focus on customer’s incentive to purchase)