Thursday, May 05, 2016

Satisfaction Cost

“How much?”
“Combien?” (French)
“Cuánto” (Spanish)
“Quanto” (Italian)
“いくらですか” (ikura desu ka?) (Japanese)

No matter which language you use this is one expression that is universally important!

How to ask the price of something is an essential phrase whether you are out visiting the market or “agora” in Greek or shopping in the neighbourhood market for melons.

The significance of this question is twofold - to find out if you can afford it and to judge whether it’s worth that price. The order of these considerations changes based on various factors.

And then there’s the whole economics of price vs. supply vs. demand. There are already many books written on this topic so I won’t go into that. However, I do want to discuss the price vs. perception of quality phenomenon.

In Hindi we have a saying, “Mehnga roye ek baar, sasta roye baar baar” meaning the one who buys expensive cries once (for having to pay a high price) but the one who buys cheap cries again and again (when the thing breaks down or lets him down).

Generally, that’s the idea, something that’s more expensive is better in quality. This was based on certain factors that were true in the industrial age. The price of the item depended on the materials used, the workmanship, the machines and other manufacturer-oriented factors.

And then entered advertising into the field. If you could make the consumer want the item, the actual quality of the item could be made secondary. Readers of my blog, and my friends (and strangers) know that I don’t like iPhones and I have commented more than once that they would be alright if they were priced at about £100-£200. It’s advertising and clever marketing that allows Apple to sell them at the exorbitant price that they don’t deserve.

So, what is the real driver for the cost here? It’s Satisfaction. Companies are able to set the prices of their products based on how much a given product will satisfy the customer. You would be more satisfied carrying the likes of Samsung, LG or Sony mobile in your pocket than some unknown brand that originated in a nameless factory in a far east Asian country. The factory maybe situated down the road from the Samsung factory but the product would not give you the same pride, same assurance, same Satisfaction if you will...

Given that it’s not simple enough in these times to compare two products and judge their intrinsic quality from holding them in your hands like you could compare two earthen pitchers, it becomes necessary to take things at face value or Brand Value.

This phenomenon causes the disconnect between cost and price. Companies no longer set the prices  of items based on their cost price and overhead but based on Satisfaction Cost, what the consumer can be made to pay for that item.

[Credit to my brother Anil Goswami, for the term: Satisfaction Cost]

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