This section starts with a general rule for setting a premium product's price under what might be called "perfect conditions" for a seller. It then identifies several situational factors that often make conditions less than perfect for the seller, in the sense that they usually call for setting prices lower than would have been necessary under perfect conditions.
A General Rule
For a seller, perfect conditions for setting prices are those that allow the seller to set her product's price just under its relative worth to the customer. We will designate this "perfect" price as "rW- l," where rW stands for "relative worth" and - 1 stands for "just a little less."
As you recall, a product's relative worth to a customer is the price at which the customer should be no better and no worse off buying that product than they would be from buying the next best alternative. By setting her price just under the product's relative worth, the supplier has made her offering the customer's best choice. The customer will be better off buying her product by that amount (the "- 1 ") that the supplier set her price below its product's relative worth.
When conditions are perfect, sellers should give serious thought to setting their prices as close as they can to rW- 1. Any price they set lower than that represents money unnecessarily left on the table. It is lost contribution to profit.
How large the "- 1 " - the just a little less - needs to be to ensure that the customer sees that he is better off with the supplier's offering will often depend on how many units of product the customer needs. If the customer's need is, say, for 100,000 units, then a "- I " of just one cent may be enough to offer the customer a clear purchase advantage over the next best alternative. Multiply $.01 by 100,000 and you get $1,000. In many cases, that should be enough to get a buyer's attention and to provide him the incentive needed to pick one purchase offering over another.
What if the situation is quite different, however, and the customer's need is only for 1 unit? Then a "1 " of just one cent is not at all likely to be enough to cause the customer to see much advantage in selecting one offering over another. In such situations, the seller's "- 1 " may need to be $10, $5 0, or maybe even $ 100 before it is large enough to get a buyer's attention and offer enough incentive to select one offering over another.
© 2001 CustomerValueCenter