Explain the relationship between customer value-based pricing orientation and the design-to-value product design concept we discussed in Module 5. How do both concepts inform marketing strat

It might seem that buyers are rational in their assessment of value as the sum of consequences associated with a purchase. But it’s worth remembering that people often times behave irrationally. Behavioral economics and consumer psychology shed insight on the phenomenon of irrationality in buyer behavior. For the most part, people really don’t know how much things are worth. They want a fair price, but they have to use cues to guess what a fair price might be. Contrary to economic theory, we don’t really decide between A and B by consulting our invisible price tags and purchasing the one that yields the higher utility. We make do with guesstimates and a vague recollection of what things are supposed to cost.  Consumers use reference prices as a heuristic in these situations. Reference prices are prices the buyer has knowledge of and uses as a point of comparison in evaluating the price of the product under consideration. There are two sources of reference prices: internal and external. Internal reference prices are prices held in memory or perceived by the buyer. Internal reference prices could be based on the last price the buyer paid for a similar product, a price cap the buyer has set for him or herself (also known as a reservation price), recall of prices seen or advertising in the past, knowledge of what others paid for a similar product, and beliefs as to what a fair price might be. External reference prices are supplied by other sources including the marketer or store setting. For example, if you are shopping for a new pair of shoes, you can use the prices of the shoe assortment in the store as reference prices. Marketers can use advertising and in-store signage, or on-page copy for e-commerce, to provide external reference price cues. In this digital age, external reference prices are easily available. The availability of price information is called price transparency. Neil Davidson, author of Don’t Just Roll the Dice , put it this way: “People base their perceived values on reference points. If you’re selling a to-do list application, then people will look around and find another to-do list application. If they search the Internet and discover that your competitors sell to-do list applications at $100 then this will set their perception of the right price for all to-do list applications.” People may also be prone to loss aversion or splurging depending upon the payment mode being used. Research suggests that people spend more when using debit and credit cards and less when using cash. Cash spenders will spend more if they have small bills and change than if they have large bills. They will hesitate to break a $100 bill but wouldn’t hesitate to use a mix of smaller bills. It’s thought that loss aversion is to blame. We may perceive more sense of loss when exchanging physical currency versus digital currency, like Bitcoin. Buyers also fall prey to beliefs and perceptions that harm their ability to make optimized purchase decisions. For example, many consumers believe that Amazon offers at or near the lowest prices on a broad range of goods, even when that’s not the case. You can start to see puzzling behaviors. In some ways, consumers are empowered by price transparency, but also overlook opportunities to save money. Mental costs are a possible explanation. Mental costs are soft costs incurred in times of choice overload, friction, and anxiety and whose debt we pay with intangible resources like time, effort, and worry. In contrast, product prices represent hard costs we pay with monetary resources. The marketer must remember cost is not just a mathematical calculation; it is especially a psychological calculation.

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Types of price optimization modelS