How Do Buyers Calculate Value?

How Do Buyers Calculate Value?

What are They Prepared to Pay?

Rather than relying on traditional cost focused pricing the value exchange model looks more closely at the buyer’s overall Purchase/Payment investment and not just the marketing mix element – Price.  What buyers invest or pay is a much more complex concept than just the concept of Price.

The decision to sacrifice or invest is dependent upon some assessment of what will occur as a result of value exchange. This can be thought of as a bundle of desired benefits and outcomes. The precise complexion of this set will depend upon a range of factors which relate to the type of product being offered as well as to the way in which the product is delivered.

There are a number of customer activities that comprise the customer’s total payment or investment in a market exchange.

Acquisition costs

Investment at this stage includes the psychological cost of thinking, selecting and comparing, the physical costs of searching (often referred to as “shopping around”) travelling and the time and cost associated with acquiring information. To this must be added the transaction cost, i.e. the actual payment cost plus add on costs (delivery cost, taxes, waiting time etc).  Finally acquisition costs will always include risk – i.e. risk of making the wrong decision.

Use/Consumption costs

Once the product has been selected there are many sacrifices or costs that the customer makes which are added to their initial investment. These include any physical and mental effort involved in consuming the product, as well as the required financial and physical inputs to make a product usable such as petrol and oil for a car, or service provider costs for a mobile phone.

Change over/Disposal costs

The cost of changing from one product to another and the costs of disposal are often forgotten but can be a significant concern for the prospective buyer. For instance, changing a bank account or changing a phone account can involve considerable time and a complex series of activities.

Buyer evaluations of costs (investment or sacrifice) when considering changing products or suppliers includes the loss of the existing value exchange relationship and the anxiety of trying something new. Such a relationship may have existed over a long period of time, over many transactions.   Maintaining a good, well understood relationships often has strong value for both buyer and supplier.  Over time, a buyer-seller relationship results in interdependencies and benefits for both parties.

There is also the psychological cost of potential risk and uncertainty. Any assessment by the buyer of a future exchange has risk attached to it.  Either the outcomes desired won’t be achieved or possible unanticipated outcomes may emerge. Risk describes a situation where there is a degree of probability attached to the full range of outcomes. Through buyer-seller interaction, the buyer develops expectations about the seller’s future behaviour

 

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