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What’s a fair price to pay?

June 16, 2010
Image of a damaged speedo drive from an LE Velocette

Mechanical disaster - what price would you pay for that unobtainable gearbox component? Would you consider it fair?

 

“Fairness” is one of the key factors of pricing – particularly when buyers move into volume purchase – but what is a fair price and how can you avoid profit leakage? 

The first thing to point out is that the price someone pays for a product or service relates to the value they themselves perceive they are receiving. Implicit in this is that what might be a fair price for one person is not fair to the next. 

Proof of this is consumer use of the Ebay auction site. If you have an old motorcycle, like I do, you will pay the price you think is acceptable for that wonderful piece of “unobtanium” which is no longer being manufactured but which is crucial to the successful running of your machine. Someone eventually wins the auction because they paid the winning bid at a price acceptable to them. 

Of course, with available products and services, things are different. We have said before that price is the economic sacrifice made by the consumer in exchange for the value delivered. But let’s look at bags of salt. Would you pay £2.50 for a bag of salt and £25.00 for ten bags? Well, you might – but in all likelihood you would expect a discount because of the quantity. And if you ordered 50 bags of salt, you would expect that discount to be larger. So, with volume sales, a fair price is seen to be one which offers volume discount. 

Other factors come into play with fairness. What if the customer is an old age pensioner? Or disabled? What if they are super rich? Does the price include VAT – or is the VAT added later? Should price increase if the demand for a product is high or if costs go up? Should you pay more in a shop or go online and get it cheaper? 

The answer to these, and other, fairness questions lies in consumer norms. What would be deemed to be fair, all things being equal? Pensioners and disabled people should pay less. The super rich will be expected to pay more. It’s better to see an inclusive price (unless you are in business and you need to see a separate VAT amount). Consumers would accept paying more based on cost increases than being penalised because the product is popular. Buying from a shop implies tradeoffs – immediate satisfaction against waiting in the post. 

So social convention plays a part in price perception. But ultimately, price perception is based on price messages – communication; packaging; brand. For businesses, any price must be a profitable price. And price is easier to defend if value is communicated. 

As we have said before on A Brand Day Out, if you can convince your customers of the inherent value of your services than your starting price becomes accepted. From that point, any savings or discounts are given only if their is a reciprocal consumer action (e.g. buy within 14 days; buy 10 units) or if there is a condition (e.g. are you disabled/blind). 

So the key to fairness in pricing is the development of a position which logically links value received to price surrendered. Provided this results in useable profit, you can then provide price points of conditional fairness which are both fair to the customer and profitable to you. Fail to establish and communicate your value and you are likely to have a value/price disconnect – and no amount of glossing up your prices as “fair” will be effective.

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