It Cost How Much?
February 13, 2012 Leave a comment
“So how much is that going to cost me?”
That is exactly the conversation I had last week when talking to an auto mechanic last week to get my EGR valve replaced (along with some basic maintenance) on my vehicle last week.
Prices on products and services tend to be established on a number of factors: cost, margin, competitive pricing, among others. Pricing can also be established on qualitative and quantitative research. However, doing research on pricing tend to be overlooked or minimized.
A recent study by Shane Fredrick, associate professor of marketing at the Yale School of Management, documents a common bias by businesses and consumers alike to overestimate how much others will pay for goods. The effect may inﬂuence pricing and negotiations, which depend on accurate assessments of others’ valuations.
Although the study is very academic, as to be expected. It’s insight into overestimating others’ willingness to pay could be attributed to two very different beliefs. The first is a belief that others will enjoy the good more. The other is a belief that others are less averse to spending money.
Fredrick reports, “In general, businesses and individuals need to accurately predict the economic valuations of others. Firms must decide how to price new products, the host of a yard sale must determine how much to mark down a used product, parties negotiating the terms of an offer must guess the other side’s reservation price, and so on. Thus, whatever its basis, the bias explored here may be pertinent to real-world decision making.” The tendency to overestimate others’ willingness to pay implies an exaggeration of demand, and in turn, pricing being set too high.
Let me know how you have overestimated pricing and what you did to fix it.
–J. Nolfo helps companies understand their market and customers though a variety of market research strategies. He has over ten years of experience of market research for strategic planning purposes. He is the Director of Research at Rhino Market Research. He shares his thoughts about market research and business concepts with his blog “Pensare…Understanding Market Research in Business“. If you would like to discuss this blog or how J. can help you understand your market and customer needs, email him at firstname.lastname@example.org.