The concept of commodity value and determining factors
Pricing with regard to the value of goods refers to market pricing methods. This approach means that the producer, setting the price, should pay the main attention to the relationship between price and product value, which reflects the value of its utility for a particular consumer. In turn, utility serves as a basis for determining the demand for goods.
If we assume that price is an economic sacrifice that a buyer brings to purchase an item, then the perceived value of this commodity allows the consumer to conclude that the victim is justified. In other words, a consumer makes a purchase only if the value of a product or service exceeds the price of the product. Choosing from several possible options, the buyer prefers the one for which the excess value over the price is maximum.
Hence, the importance that in the theory of price (microeconomics) is paid to the study of utility as the ability of goods and services to satisfy the consumer's desires becomes clear.
In accordance with the hypothesis of rational behavior for maximizing utility, the consumer should be able to compare, compare and measure its value obtained from the consumption of various goods and their collections.
The approach to the formation of prices based on the value of the goods means using the following algorithm of actions:
Buyers → Value → Price → Costs → Product.
And the goal of pricing based on value from the producer's point of view is not just satisfaction of customers, but in setting a price that brings higher profits, by providing greater value for this product, and not increasing sales. The price and value from this point of view is the foundation of any economic transaction.
In order for consumers to adequately compare price and value and make an informed decision, it is necessary to provide them with the required information, the analysis of which will allow them to make a rational decision from their point of view. And, as already noted, the value of the product in the eyes of the buyer should be higher than its price under any conditions, and, most interestingly, it is virtually unrelated to the manufacturer's costs. Thus, the task of the manufacturer here is reduced to ensuring the correlation of the price and value of the goods, which can force the consumer to purchase this product. At the same time, it should be borne in mind that when deciding a person does not always pay high priority to the price - he can be guided by other reasons, including his emotions.
Let's consider the scheme of the process of forming a representation about the value of a product and taking it into account in pricing.
The initial value analysis consists of: analysis of competition, the purpose of which is to identify opportunities for expanding and deepening product differentiation, and consumer analysis for more in-depth study and identification of their requests and market segments.
With this in mind, the decision is made to form ideas about the value of the firm's products: the target market is chosen, i.e. the positioning of goods or services is carried out, and marketing elements that form an idea of value are the product itself, the methods of communication for its support, sales channels, etc. The elements listed in combination with the analysis of competitors' products determine the value that a particular consumer sees in the product and is ready to pay for.
However, the price set for this product can affect the behavior of competitors, including the development of a model that characterizes the economic value of products.
Obviously, taking into account the needs of customers, not only the competitive goods offered by the firm, but also the prices for them, create value. Thus, the economic value of a product depends both on the set of qualitative characteristics of the product, and the price level for it.
From this it follows that the primary task of the enterprise is to achieve a competitive advantage. And different authors interpret this concept differently.
So, Robin Cooper believes that the main sources of competitive advantage are the price, quality and functionality they call the "triple lifebuoy". At the same time, the approaches to the definition of functionality can be different: for someone, a wristwatch is a symbol of social status, for someone it is just a way to find out the time, for someone it is a means of self-expression. Based on this concept, we can conclude that the company must differentiate its product, trying to take as much of the market share as possible through various combinations of these factors. Michael Porter argues that only two sources have a competitive advantage - low costs and a differentiated product. With him agree Thomas Nagle and Read Holden , according to which, there are two types of competitive advantages:
- allowing to produce the product at a lower cost;
- associated with the proposal of differentiated products.
Reducing costs allows the firm to achieve competitiveness at a price, i.e. make the price more attractive to consumers. There are three main directions, acting in accordance with which, the company can reduce the cost of producing a unit of production: savings from the assortment (selection of such products, the joint production of which will minimize additional costs for their production), economies of costs due to the scale of production and savings resulting from the use of experience. All these costs are related to the production activities of the enterprise and are internal.
In addition to the savings on internal costs the company may also reduce the external costs due to the proper management of their contacts with customers and suppliers. In this case, the company can get the savings from restricting the marketing research and reduce advertising costs due to the concentration of their efforts on one or two products or market segments (for example, only on the soft drinks market segment for people who care about their health). A big role in saving costs and logistics can play to optimize your communication with suppliers, and with the trade.
Competitive advantages of the goods primarily consist in its differentiation. In the event that this product does not possess any additional properties in comparison with others, the buyer is guided to a considerable extent by the price. But if there are significant differences between products, then the buyer's attention is focused on them.
The key to offering a differentiated product is a clear understanding of the wishes of customers, their requirements for certain quality characteristics. Each product can be improved from the point of view of an individual buyer, since the subject of purchase is not just a tangible product, but some "package", including ease of purchase, reliability of delivery, lack of time to purchase it and pleasure from communicating with the seller or the master .
Therefore, the constant improvement of the goods carried out in the right direction can significantly increase its value, which will lead to an increase in the number of purchases made at a higher price. The economic value of the goods for the buyer can be represented as the sum of two components: the relative and differential value of the goods.
The relative value of a commodity is usually understood as the price at which any competitive product can be purchased, which is the best substitute for the estimated product from the point of view of the customer. Differential value determines the value of the characteristic properties of the product, which distinguish it from the competitive one both in the positive and in the negative direction.
However, in most cases, especially in the consumer goods market, buyers are not sufficiently informed about available alternatives, therefore they are not always rational. In this regard, the calculation of economic value is considered incomplete without taking into account factors that affect the perception of prices by buyers and, consequently, their sensitivity to its level. The main purpose of this analysis is to adjust the calculations of the economic value of the goods.
There are ten most significant factors of price sensitivity of the consumer.
1. The effect of known substitute products - buyers are all the more sensitive to the price, the higher the price of a given product in relation to a known buyer substitute products. If the buyer does not know about the availability of substitute goods, he will be guided when deciding whether to purchase the level of the chain, which seems to him the most reasonable (approximate price).
2. Unique value effect - the presence in this product of any unique properties reduces the sensitivity of the buyer to its price. Therefore, sellers try not only to emphasize the presence of such characteristics, but also to prove their value.
3. Cost Effect on Switching - the more significant the costs associated with using this type of product, the less buyers will be sensitive to prices when choosing from several alternative brands. This effect is especially well seen in the markets of complex equipment, the use of which requires a long training of personnel. Accordingly, companies that offer a new type of products in order to win in a competitive struggle with the usual suppliers for a given consumer, it is necessary to offer significant discounts, additional services, free training, etc.
4. The effect of the difficulty of comparisons - buyers are less sensitive to the price levels of well-known products (or products of well-known companies, brands, brands) if comparison of different goods at prices or qualitative characteristics is difficult. It is clear that in real life to evaluate the purchased goods, and especially the service, is possible only in the process of use, In such cases, the buyer prefers to purchase a well-known product even at a higher price, being confident of its quality properties.
5. The effect of "prices as a measure of quality" - the more the buyer perceives the price in such a hypostasis, the less sensitive it is to its absolute level. On the contrary, too low, in his opinion, the price, frightens off, doubting the quality of the product. From the point of view of price as an indicator of quality, it is possible to allocate goods: prestigious, luxury and ordinary (mass production). Here, price serves as a direct indicator of the economic value of the goods for the consumer, since the possession of goods belonging to the first or second type emphasizes its high position, wealth, belonging to a particular social circle.
6. The expense effect - occurs if buyers are all the more sensitive to the price of the goods, the more they spend money on it in absolute or relative terms. When buying a product for which a significant portion of the budget is spent, an individual consumer or firm will try to minimize the cost of acquiring it.
7. The final benefit effect, - its occurrence is due to two factors:
• a product can be a part of the total set of goods needed to achieve a specific goal (for the repair of an apartment different building materials, glass, parquet etc.) are required, therefore, the costs are considered as part of the total costs;
• the degree of sensitivity of the buyer to the total amount of costs to achieve a given goal may be different.
Hence the effect of the ultimate benefit is that the greater the price sensitivity of the buyer to the total costs necessary to achieve a specific goal, and the more the share of the costs of acquiring this intermediate product in them, the higher is its sensitivity to the price of such goods. The significance of this effect is especially great in industrial production.
8. Cost-sharing effect - the more part of the purchase costs are covered by third parties, the less the buyer's sensitivity to the price of this product. Good examples are the attitude of the buyer to the price of insurance in voluntary medical insurance, paid in part at the expense of the employer. In such a situation, the insured will most likely buy a more expensive medical policy than if he paid it himself.
9. The fair price effect - the buyer is all the more sensitive to the price, the more significantly it differs from the level recognized as "fair", or "justified". And the buyer's idea of the degree of "fairness" prices are formed under the influence of three factors: the ratio of the current price to the previous price, the ratio of the price of this product to the prices of goods of the same group, the purpose of the purchase. Representation of the buyer about whether this price is fair or not, can be controlled by setting the price initially at the highest level, and then providing a variety of discounts. It should be borne in mind that as the absolute level of the price rises, there is a decrease in the estimate of its relative change (an increase of 1,000 rubles in the price of a commodity previously worth 2,000 rubles is perceived by the consumer as more significant compared to the same increase in the price of the commodity with an initial price of 100 thousand rubles.)
10. The effect of creating stocks, - the more suitable the product for long-term storage, the higher the chain sensitivity of the buyer to fluctuations in the price of it. For example, a reduction in the prices of products such as vegetable oil, canned food, can cause a much larger increase in purchases than a similar reduction in the price of fruits and vegetables.
When forming prices, it is necessary to assess the sensitivity of the buyer to the price in order to identify the directions and methods of influence on it. A well-known researcher of this problem In. Tromsdorf noted: "Shopping is a complex social process in which feelings and experiences play an extremely important role." By changing the level of price sensitivity, you can increase the perceived economic value of the product and thereby ensure an increase in the volume of demand for it. Price sensitivity can be reduced if the company takes the following measures:
• focuses the buyer's attention on the unique features of their products;
• positions its products with a relatively more expensive substitute;
• increases the costs associated with switching to the consumption of another product;
• convinces consumers that a comparison with another brand is incorrect and can lead to erroneous results;
• sets a high price for products to give it the status of a prestigious product;
• links the high price of the product with the final benefit, in relation to which the buyer is less sensitive;
• Manages consumer expectations to minimize price perception as "unfair".
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