Prices should reflect the value that consumers are willing to pay versus prices should primarily just reflect the cost involved in making a product or service.
Kotler and Keller (2009, 416) state that “pricing decisions are clearly complex and difficult” and that “holistic marketers must take into account many factors in making pricing decisions”. Price is affected by several factors including cost of supplying the product or service, the amount that consumers are willing to pay, prices of competitors, method of price setting, and marketing strategy.
The cost of producing the product or service establishes the floor price. Generally prices below this floor price cannot be sustained for any period. On the other hand, what consumers are willing to pay sets a ceiling. Beyond that price the product or service would not be bought or used. Cost and consumers willingness to pay are therefore the two boundaries. The influences of other factors would decide where prices fall between these boundaries.
Consumers willingness to pay is influenced by the elasticity of demand (Kotler & Keller, 2009, 425-428). The greater the elasticity of demand the less leeway the supplier has in setting price. Elasticity of demand for a product is in turn influenced by several factors: nature of the product; availability of substitutes; and psychological attitude of consumers to a product. The psychological attitude of consumers is very important. Carmon & Arley (2000) description of the process of price setting is like psychological negotiations.
Marketers seek to manipulate psychological factors to make products more attractive, to be perceived as unique, and to generate customer loyalty. These factors reduce the elasticity of products allowing suppliers to charge premium prices without reducing demand. The experience of the Lexus IS250 (Laureate Online Education) is an example of this. The possible ethical concern of false advertising can arise in the effort to position a...