The Role of Value in Pricing

Many business writers use the term benefi t or value to describe buyer profi t, and those are useful ways to consider buyers’ gains in a buyer/seller transaction. Similarly, for sellers, the prices they charge less the costs they incur equal their profi ts. In a service industry, a buyer’s profi t—or value received less price paid—most often results in an intangible benefit.

A business’s profi t is a very tangible benefi t, and it is easily measured monetarily. The difference between a seller and a buyer’s view of a sales transaction can be expressed by the two following formulas:

Seller’s view of a sale: Selling price - Costs = Organizational profit (a tangible benefit)

Buyer’s view of a purchase: Perceived value (an intangible benefit) - Selling price = Personal profit

It is very important for sellers to recognize that neither their costs nor their desire for the tangible benefi t of a profi t are considerations in their buyers’ view of a successful sales transaction. Rational buyers are concerned only with theirown perceptions (an intangible factor) and the price they pay, as these two factors directly determine the personal profi t they receive.

Prices should be based on a buyer’s view of value delivered. Because the specifi c intangible benefi ts perceived by a purchaser of goods and services are diffi cult to quantify, however, sellers often revert to an assessment of their own costs and profi t needs as a justification for their prices. Effective RMs must resist this tendency and instead focus on betterunderstanding buyer behavior. This is so they can better apply data and insight to effectively match the prices they charge with their buyers’ perceptions of value. When they do so, they quickly discover that different customers often perceive different values for the same products and services. Reasonable or not, the perspectives of these customers are all important because they will determine the ultimate success of a business.

 

The Relationship Between Quality and Price

Much has been written about delivering quality in the hospitality industry. As a result, articles about how to best provide “quality foods” and “quality service” are commonplace. For RMs who are responsible for strategic pricing, it is important to recognize that from their customers’ perspectives, the terms quality and value are not synonymous.

In the hospitality industry, the relationship between quality, price, and value is complex. High quality does not necessarily represent good value, nor does a low price necessarily represent good value.

Quality: The degree of excellence of something as measured against other similar things. Examples include the USDA grade assigned to a cut of meat or the thread count of bed sheets.

Service: Intangible activities or benefi ts provided to buyers either alone or in conjunction with the purchase of a product. An example is the concierge services that are provided to registered hotel guests.

In the hospitality industry, it might not be either the highest quality or the lowest price that represents greatestvalue. For hospitality industry RMs, it is the relative quality of products and services sold that must be well understoodif the strategic pricing goal of matching prices charged with buyer’s perceptions of value is to be achieved. Whilesome exceptions are certainly possible, as a general rule, variation in quality levels, service levels, and price affectbuyer perceptions of value.

 

The Relationship Between Service and Price

Communicating variations in service levels is more diffi cult than in product levels, and that makes strategically pricing them more diffi cult as well. You have learned that services provide intangible benefi ts to buyers. They are intangiblebecause they cannot be held, touched, or even seen before they are purchased. In most cases, a service is a performance rather than a product. As a result, RMs face unique challenges in communicating the benefi ts of services offered to those who buy them. Intangibility, however, is only one of four service-related challenges commonly known as the Four I’s of Service.

Four Is of Service:

Four unique characteristics of services.

These are:

(1) intangibility;

(2) inconsistency;

(3) inseparability; and

(4) inventory.

 

Inconsistency refers to the fact that the quality of service often depends on the individual who supplies it.

Inseparability refers to the tendency of consumers to equate the quality of service provided with the actual person who provides it.

Inventory is one of the Four Is of Service because of two diffi culties it creates for service providers. The fi rst of these is inventory perishability; the second relates to providing services during periods of little demand.