Fundamentals of Pricing
8 Pages Posted: 16 Jun 2009
Abstract
This note introduces students to the concepts of a pricing ceiling, a pricing floor, and suggests principles for narrowing the range of acceptable prices.
Excerpt
UVA-M-0566
FUNDAMENTALS OF PRICING
In this note we describe a simple conceptual model for identifying the range of acceptable prices for a product or service. We begin by identifying the maximum and minimum prices that a firm could charge. We then discuss a number of factors that can help the firm narrow the range of acceptable prices.
The Price Ceiling
The maximum price that the firm can charge for a product is determined by two things: the reference value of that product and its differentiation value. The reference value of a product is simply the cost to the customer of the next best alternative. The reference value is determined by answering the following questions: If the customer did not buy this product or service, what would he or she buy? What is the cost of that “next best” alternative?
Differentiation value refers to the value to the customer of the differences between the firm's product and the product that the customer has defined as the next best alternative. Differentiation value reflects differences between products in product attributes and benefits, performance, reliability, start-up costs, maintenance costs, and repair costs. This value is not necessarily positive, so that “the maximum price a consumer is willing to pay” may be less than the cost of the next best alternative.
. . .
Keywords: marketing
Suggested Citation: Suggested Citation