Dr. Cutthroat is a plastic surgeon specealizing in turning ugly, old people into

Question

Dr. Cutthroat is a plastic surgeon specealizing in turning ugly, old people into young and beautiful/handsome creatures, for a fee, of course. He has just started a practice in an island far away from civilization, inhabited by ric h and ugly people. The only prpoblem is that at the moment the ATC lies above the D at all P and Q. Thus, making money is out of the question, since to make profits, P>ATC. Yet he thinks profits can be made under the circumstances WITHOUT shifting the D out and/or the ATC down, which may be possible only in the long run. Explain how Cutthroat plans on making money using the right pricing strategy.

Explanation / Answer

In this highly competitive online marketplace, it can be difficult to persuade customers to buy from you when you offer a similar product to your opposition but with a higher price tag. And trying to beat competitors on price alone is a cut-throat business, very risky and not recommended. It attracts bargain hunters ready to defect to competitors for a better deal. Using a value-pricing strategy is a better proposition because it attracts loyal customers. Why do customers buy designer-labelled clothes and luxury cars? Why are those items more expensive when they don’t cost so much more to make? The answer lies in the perceived value. Value is not an inherent attribute of the product but it commands a higher price. Value is subjective. Value is a benefit but a benefit is not necessarily of value to all customers. For example, a vendor offers free installation and free updates for his software. Customer-A considers "free installation" as "value"’ because he has no technical knowledge and this will save him time and effort. Customer-B rates the free installation as "nice to have" but the drawcard or "value" is the free updates that will save him money in the long run. Customers do not assign value to the same benefits. Behind value-pricing strategies there are a few important concepts: Customers are value conscious rather than price conscious e.g. some customers will pay extra for prompt delivery. Customers assign a personal value to a product or service e.g. a teenager is willing to pay a premium price for a concert performed by his idol. The selling price is based on customers’ perceived value rather than on the vendor’s costs e.g. an ebook costs less to produce than a paperback but readers will pay more for it because of the value placed on format and instant delivery. When customers evaluate competing products, they are usually comparing value. To increase the value of your products, you can either add benefits or reduce the perceived risk factors rather than resorting to reducing your price.

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