Several Modifying Conditions ...
While it is always nice to have perfect conditions for setting one's prices, conditions are often less than perfect. There are at least three different sets of factors that, from a price-setting perspective, can make a situation less than perfect for a seller.
The first two come into play in situations where the product is new to a customer. The third comes into play in situations where the customer has already settled into a pattern of buying the product, and a new, higher price is likely to disrupt that pattern.
In thinking about these three types of complicating factors, it's useful to change the formula we started with from rW-1 to rW-1-X. Here X represents the additional reduction in price a seller must make to deal with these other factors. This addition reduction of X in price represents, of course, a reduction in earnings the seller will experience compared to more favorable circumstances. So the seller should want to make her X ad ustments no larger than they need to be to call for the conditions the require them.
Switching costs
There are several different ways that sellers deal with the problem of customers' switching costs.
Differential value ambiguity
Setting a price at RW-1 can work only when the seller's differential value is very clear to the customer. If the seller's promise of differential value is uncertain or vague to a potential customer, the seller has two options:
Sometimes the lower-cost option will be to educate the customer up front. Other times it will be better to let the customer educate himself through experience of the provider, and to make that experience available to the customer through a lower than normal price.
Price increases on an established product
Price increases on established products with current customers present a special problem, especially when the increases represent corrections of earlier prices that, in light of the differential value offered, were mistakenly set too low.
When a price on a product is set much lower than could be justified by the differential value offered, customers are often quite delighted with the price they get. Very quickly, however, they come to develop a sense of entitlement around the very good deal they have gotten.
When the supplier realizes that she has set her price too low and then tries to raise that price to a level more in line with the value delivered, she is likely to encounter a good deal of resentment and resistance.
When customers have become accustomed to getting an especially good deal, and they are likely to resent a supplier's trying to take that especially good deal away from them. The supplier made the mistake of leaving a lot of money on the table, but now customers feel it is rightfully theirs, and they resent the supplier's trying to take it away.
In such situations, a supplier may choose to notch her prices up only gradually and continue to leave an amount of money on the table for some time. This can be an expensive proposition in terms of lost profit opportunity and underscores the importance of getting prices right the first time.
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