Senior marketers are more likely familiar with the price strategy of the 4Ps in marketing. After all, this concept came much earlier than customer cost strategy of the 4Cs.
However, with business landscapes moving toward better customer relationships, it is imperative for companies to see their products from the angle of current and prospective customers to be able to craft and execute more effective pricing strategies.
Customer cost concept and its importance
Cost in the new marketing mix considers the total amount a customer needs to shell-out to own a product or avail of a service.
This is evaluated against (1) that of owning directly competing products and substitutes, and also (2) the budget of the customer (i.e. how much the customer can afford).
Implicitly, the price charged by the company is just a portion of this total amount to a customer. This concept shifts the focus on profit and the cost of producing the product to the customer’s willingness and capacity to pay.
For instance, McDonald’s may be offering a burger for $4 but if it takes one hour for the order to be processed, a customer might arrive late at work and hence there is a cost of time on top of $4 product price.
A manufacturing firm like Unilever may find a cheaper raw material for its detergent but if additional transportation costs offset the savings, it will continue sourcing its materials from its current supplier.
Similarly, another manufacturing firm may opt not to change raw materials if its production facility can only process the existing more expensive materials; this represents the cost of switching.
Aside from transportation, waiting and switching costs, the price of ownership may include psychological and environmental costs, taxes, maintenance, storage, interest and disposal.
With the foregoing illustrations it should be clearer now why the cost of ownership, rather than just the price tag, is important.
Especially in this age when information can be easily sourced from the internet and processed through various software applications, consumers and company buyers base their purchase on total costs rather than just the cost of the main product or service being acquired.
A seller who knows a customer’s total price of ownership and capacity to pay can effectively price his or her products to generate sales and increase profit.
A busy person would rather grab a Wendy’s burger that is priced a little more expensive if this means he or she won’t be penalized for tardiness (e.g. called-off promotion or a record leading to termination).
While McDonald’s should obviously improve its operations (an operational issue rather than a marketing one), it can temporarily decrease the price of its products or offer free meal vouchers for the next visit to decrease the total cost of buying its product.
Likewise, the purchaser of a manufacturing firm will only switch to a supplier if the latter can bring down its price in such a way that additional transportation or investment costs can be offset.
In both cases, failure of the sellers to adjust their prices accordingly would render the low price advantage useless, which means lost sales or no sales at all. On the other hand, a seller who is not aware of a customer’s switching cost to another product may inadvertently give in to a customer’s tricky threat on the price renegotiation table.
What could have been a trump card for the seller to counter the customer became useless.
Similarly, a seller might be able to charge a Class A individual more than initially intended for a luxury car because of this person’s stretchable willingness to pay and the psychological cost of not buying an expensive brand (i.e. not being able to show-off richness or maintain a particular lifestyle).
Clearly, not knowing customers’ total cost of ownership can be disastrous or disadvantageous (at the very least) to a company’s profitability.
Special case: commodity products
Quick service restaurants like McDonalds and household items manufacturers like Unilever can rely on other factors like packaging, advertising and taste (or fragrance) to manage the perceived value of their products.
However, for commodity products like metals and food staples like potatoes and broccoli that cannot be effectively differentiated from the same items sold by another vendor, competition is largely based on pricing.
Hence, a commodity seller should be keener to other costs related to shipping, insurance and processing to appropriately price the product.
Quick questions in assessing customer cost
- What are the other costs of owning my product during acquisition, usage or storage and disposal?
- How much do these expenses add to the price I charge?
- How much can the customer pay and how much is the customer willing to pay? How sensitive are buyers to cost? (It helps to assess the industry structure, e.g. monopoly, oligopoly, perfect competition)
- How much do competitors charge for the same or similar product?