Pricing practices that corporations and marketers use to promote their products to clients such as 3 of $6, and 30% off, and others are common within the contemporary society, which means that they are useful for companies and businesses. In fact, there are price consultants that advise retailers concerning the manner in which they should price their products as well as brands. Founded on the behavioral decision model, the novel psychology of pricing informs the design of bundle offers, cell phone plans, sale adverts, rebates, price tags, and others. While the producers of products, as well as retailers invest a significant amount of their money and time in opportunities that would differentiate their products, set strategic prices, leverage brands, and others, there has only been little attention devoted to this issue from the perspective of consumers. Therefore, this work bases on the perspective of consumers using important questions. Particularly, the paper reports on the types of pricing practices, how they affect consumer choices, and the circumstances under which they would be more influential to the consumer choices. In addition to this, the paper addresses how demand and supply affect fluctuating market prices, the manner in which fluctuating prices affect individuals. The paper also reports research findings on the manner in which the structure of the labor market affect pricing, the effect on advertising on consumer choices and the challenges that small business encounter while competing with larger ones.
Prices and Consumer Choices
Do prices have any effect on the decisions that consumers make in the marketplace? Before answering this question, there is a need to comprehend fundamental processes of human decision-making. Classical economic models indicate that people act in a rational way, using the cost benefit analysis to make their conclusions and decisions (Wolf, 2002). According to this model, individuals will often choose alternatives that are objectively the best for them. However, after tens of years of scientific research by behavioral psychologists as well as marketers and behavioral economists, it has been established that such a notion is untrue (Wolf, 2002). For instance, a normal hypermarket offers close to 50000 units of stock keeping, which means that an evaluation of the total costs and benefits of the options might be too long to be real and practical.
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Such a choice scenario might appear extreme, but practically, it is not too deviant from the volumes of information that individuals must analyze in daily living. People live in an environment that is extraordinarily complicated, which means that it might be impossible to identify and evaluate each aspect of an individual, a situation, an event, or a product that they meet daily. People do not have the capacity, motivation, and time for such an analysis. Resultantly, people come up with mechanisms that help them to deal with such complications, which includes the use of mental shortcuts (Ahmetoglu et al., 2010). For example, people often use unlit shops as an indication that they are closed, identify suits with professionals, and identify expensive products with superior quality. Individuals classify things in relation to only a few characteristics and respond almost automatically without much thought when a few of such cues are present (Ahmetoglu et al., 2010).
Such automatic, unconscious decisions are present in much of the action of humans as consumers of products. In most of the case, the automatic decisions are beneficial while they are necessary in others. While such mental shortcuts could be useful in guiding the behavior of humans and allow them to function within the world, literature reports that they are not perfect assumptions and could be subject to occasional and costly errors that might come out of judgment (Ahmetoglu et al., 2010). For example, it might be agreeable that cheap in not always an indication of superior quality. Most importantly, it is notable that such mental shortcuts leave people to open conflicts from the external environment. For instance, it is reported in literature that restaurants have a history of using background manipulations using aspects such as music and interior design to influence the choices of consumers in preference for their products. Similarly, stores have been able to affect the choices of their consumers to purchase more expensive microwaves through the addition a second (Wolf, 2002).
Therefore, it is reasonable and plausible to expect that at least one aspect of pricing will produce and effect on the choices that consumers make since they serve as cues that simplify consumer decisions. For instance, extant literature on sales promotions report that sales in the short-term are influenced positively through offering promotions (Özer, Ozer, and Phillips, 2012). Therefore, investigations on the different practices of pricing utilized in such promotions are needed. A review of literature on the subject of psychology marketing indicate that reference pricing, drip pricing, and complex pricing have received the largest level of attention and the evidence given is consistent concerning the effect they produce. Specifically, partitioned pricing, according to Özer, Ozer, and Phillips (2012), affects the consumers in a significant and probably harmful way. The different components of the partitioned pricing practices need to be seen and calculated in an easy manner. As much as this could fail to completely counterbalance the psychological mechanisms used to make partitioning effective, the consumers need to be informed fully of overall price. Concerning the opt-in/opt-out pricing mechanism, it is reported that individuals tend to opt for default decisions even if such choices mean that they might suffer long-term consequences (Wolf, 2002). Therefore, the default decisions might be detrimental to the consumers if the opt-out policy is utilized in getting consumers to purchase additional products that they might not need at that time. it is also reported that reference pricing heightens the perception of consumers about value (Özer, Ozer, and Phillips, 2012). However, it should be noted that in most cases, they legitimate methods of the businesses to raise the attention to price reductions of products. This mechanism poses danger in that the reference prices being promoted might be inaccurate or misleading.
Further literature reports the use of the word ‘free’ has little literature to support its influence on the consumer decisions towards products (Ahmetoglu et al., 2010). Bait-and-switch pricing mechanism, on the other hand, is likely to affect consumer behavior strongly and has the potential of causing consumer detriment while complex pricing has the ability to induce consumer purchases because the clients consider that the bundle is a representation of extra value even while it may not (Wolf, 2002). It is also reported within extant literature that there is little to support that time-limit pricing strategies affect consumer choices, but the little that exists such as Ahmetoglu et al. (2010) suggest that time-limits could heighten demand from consumers. Therefore, there is evidence that the pricing strategies work, and it is clear that a range of variables moderate their effects. For example, multi-component products, those that have frequent purchases or have high ticket prices, new and novel ones, as well as offers that are highly customized might lead to consumer detriment.
There are also groups of individuals that are likely to be affected by some of the strategies of pricing that have been highlighted. For instance, people who are over 50 years will most probably value consistency within their decisions compared to the younger ones, which means that they are more susceptible to bait pricing. In addition, people that have a high demand for understanding and information (cognition) might be influenced more by drip pricing. It is also reported that the pricing practices could have less effects on the consumer choices of products in circumstances where the consumers are able to have memory based price comparisons and have a ready access to information, which might include the internet. In addition, the pricing cues that sellers put forward on the online platforms could still affect the behavior of consumers, which is an indication that learning or an easy access to information does not remove the effect of the pricing practices (Ahmetoglu et al., 2010). Therefore, literature on psychology and marketing practices report that under some circumstances, the practices of pricing that has been reviewed suggest that they could have substantial effect on the valuations and behaviors of consumers. The effect could be detrimental in some of the situations.
The Effect of Demand and Supply on Fluctuating Market Prices
Demand and supply is an economic theory used in the determination of prices in a market. This theory postulates that within a competitive market, the unit prices of given products will keep on fluctuating until it stabilizes at a point where the demanded quantity by consumers at the prevailing prices will be equal to the supplied quantity at prevailing price, which results in an equilibrium of the quantity and price (Stretton, 1999). Under this model of price determination, it follows that an increase in the levels of demand while the supply remains constant will cause an increase in the equilibrium prices and higher quantity. In addition, a decrease in demand while the supply remains stagnant results in a lower equilibrium price as well as lower quantity. The third situation under the same model indicates that an increase in supply and a stagnation in the levels of demand will cause a decrease in the equilibrium prices and higher quantity. Lastly, a reduction in the levels of demand at constant demand will cause a rise in the equilibrium price and lower quantity (Stretton, 1999). Economists assume, under this model of price determination, that consumers are rational decision makers and have perfect information. In this case, if the prices of a given product increases and the consumers are aware of all the related information, there will be a reduction in the demand of that product. In the event that prices decline, demand will be raised.
It is apparent, therefore, that the forces of demand and supply create a push and pull dynamics on the prices of products, which leads to fluctuations in the prices. Such price fluctuations could have significant effects on individuals and households. For example, if the prices rise, or if the consumers speculate that prices will increase, consumers will be compelled in searching the market for the lowest prices possible. Specifically, a rise in the prices of commodities at consumer’s fixed disposable income will reduce the purchasing power of individuals, which means that they will plan to look for alternatives to the products. In addition, a speculation of price increase will cause consumers to panic-buy with the idea that they will benefit during times when they will not be able to buy them, when the prices will be high (Brux, 2015). On the other hand, the sellers of the products might decide to hoard the products so that they could benefit from the increased prices, which might lead to product scarcity and inflation in the long run.
The demand and supply model of price determination draws relevance from different factors such as the costs of manufacturing and others. The costs of production incurred by manufacturers are one of the biggest factors that determine the prices of products under this model. For instance, the fact that the objective of businesses is to make profit means that they have to sell their products at prices higher than the production costs (Brux, 2015). This technically implies that costs of production has an influence on the supply of products into the market; it reduces with a rise in the costs of production and increases in with a reduction in the costs of production. Under the laws of demand and supply, the two circumstances create an effect on the market prices in which an increase in the production costs will raise the market prices and vice versa. The labor market and its dynamics are also related to the demand and supply of products in the market. First, an increase in demand for products raises the need to produce more products into the economy, which culminates in the need for more employees and vice versa. Low demand for products such as during recession and recession means that the labor market will have little motivation to hire more laborers, which results in widespread unemployment (Brux, 2015). These factors correlate with seasonal changes in which peak seasons attract more employment to counter the high demand for products and vice versa. Overall, the labor market affects the prices of products in the market since it has a significant impact on the supply of products and services into such markets.
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The Effect of Advertising Has on How Much Individuals Are Willing To Pay For an Item
Literature on the manner in which advertising affects the level of prices that the consumers are willing to pay for a given product indicates that non-price advertising gives information concerning the existence of brands and their quality (Ampofo, 2014). The cited study further reports that the trend results in increased consumer awareness concerning brand attributes, reduced costs of searching for the products as well as an expanded consideration sets. Accordingly, this effect culminates in a more elastic demand for the products being advertised. According to this view, advertising leads to an increase in the levels of consumer welfare through a reduction in markups of prices in relation to the marginal costs and the generation of better matches between the consumer tastes and chosen product attributes (Ampofo, 2014).
The perception of market power created through advertising considers that adverts create and argument the perceived levels of product differentiation in the market (Erdem, Keane, and Sun, 2008). Such a perception implies that advertising raises brand loyalty among the consumers and affects price elasticity of demand. First, advertising could influence the demand parameters functions of a consumer in ways that cause them to be price sensitive. In addition, advertising could influence the composition of groups of consumers that buy a given product (Erdem, Keane, and Sun, 2008). Either way, advertising could have an impact on the levels of prices that consumers are willing to pay for a given product or service. The reason is that advertising creates an impression of brand quality, the levels of available stock from the sellers and manufacturers. Literature is consistent in reporting that brand reputation has a strong relationship with the perceived quality that comes along with the price. For instance, consumers are willing to pay high prices for high quality products, which mean that strong marketing campaigns are relevant in influencing the levels of prices that consumers will be willing to pay for their products.
Challenges Faced by Small Businesses While Competing With Larger Ones
The attraction and retention of customers should be the biggest problem that small businesses face in the wake of stiff competition from larger corporations (Schenkel, 2006). This issue spans across a series of related issues that establish a company firmly within the market. First, the small businesses, which are often starters in their specific industries, do not have sufficient financial resources that would enable them to market their products with as much vigor as the larger and established ones (Schenkel, 2006). This means that it takes time for the small companies to establish strong brand reputations among their clients because the larger companies overwhelm their market existence. In some cases, where companies have formed cartels, it is not easy for the small companies to enter respective industries since the cartels control the sources of factor inputs such as raw material and distribution channels.
This factor also means that the small companies will often find difficult to match the prices offered by the larger companies for similar products. For instance, large corporations are able to experience advantages of large scale operation such as reduced costs of acquisition of factors of production, the attraction of the most skilled employees, trade discounts among others (Deakins and Freel, 2009). In such scenarios, it means that the larger firms will mostly likely produce products at reduced costs of production than the smaller ones. According to the model of demand of supply in price determination, the smaller companies will struggle to meet the equilibrium price in the short-run that might result in them operating just at break-even points. Some businesses might find the competition unfavorable and quit the market because of a lack of profits from their operations. In most cases, consumers, according to the effect of advertising on consumer choices, might consider the products from small firms as being inferior to those of their competitors, the large ones. This perception might result in low volumes of sales that might affect their ability to match the rates of production by other companies. In such a case, it is possible to find products from larger companies dominating the market since they produce them at a faster cycle than the smaller ones, maintaining a steady supply within the market (Deakins and Freel, 2009).
In conclusion, this paper has reported the existence of a relationship between the pricing strategies on the decisions made by consumers in the market place. However, different mechanisms of pricing have different effects on the consumers that might mean that some might not be as effective as others. The paper has also found that as much as the strategies of pricing affect the decisions to purchase some products, other factors moderate the decisions since literature reports that people make automatic unconscious decisions because the environments in which they live is complex with information. It is also reported that the laws of demand and supply affect the levels of prices within the market. Specifically, at fixed demand, an increase in supply will lower the prices of products and vice versa. Such price fluctuations affect the labor market, the purchasing abilities of individuals, and others. During recession and depressions, the labor market has little incentive to employ more individuals since there is always low demand for products. The factors of demand such as the costs of production also have an effect on the prices of products in the market since firms will want to sell at prices that offset the costs of production and create profits. Price fluctuations force companies to advertise their products, which influences the decisions by consumers to purchase products through communicating perceived brand quality. Lastly, as reported in this paper, the attraction and retention of clients is the biggest problem faced by small businesses while competing with the larger ones.
References
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Erdem, T., Keane, M. P., & Sun, B. (2008). The impact of advertising on consumer price sensitivity in experience goods markets. Quantitative Marketing and Economics , 6 (2), 139-176.
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