Perceived value, intrinsic value and price

Why are some products so desirable that price has little connection to the cost of the item?

In consumer markets people will cheerfully pay premium prices for a clothing item not because of the functionality, not because of what benefits the product offers, but because of what it says about the person who owns it. A discrete logo on an item of clothing (remember when labels were discretely inside a coat?), the type of car you drive, the watch you wear, even the supermarket you shop at for groceries. All these reflect on how the lifestyle of the owner is perceived by others. 

Apple has created huge loyalty amongst its 'early adopters' not by traditional reward schemes, loyalty cards, discounts and the like. No, Apple raises the desirability to fever pitch, getting the hard core afficianados to queue half the night outside their stores, helped by rumours of shortage to ensure a good crowd who are themselves the marketing campaign! 

Unlike the fashion industry, Apple actually market serious technical products, but at a level of high margins that most engineering b-2-b companies would love to reach. Pricing of b-2-b industrial products is another matter and generally is related to cost. Marketing theory says price is what the market is prepared to pay. Great - so just how much is that? As a product manager for lighting fixtures for commercial and industrial applications I spent a lot of time focussing on the cost of a new product. Generally this involved a lot of work with the factory that was to build it. Buyers, engineers, production management, tool makers and planners. Cost was a function of quantity, not just in negotiating component costs, but the type of tooling and it's amortisation as well as factory overhead contribution. So product managers put a lot of effort into forecasting sales volumes and negotiating unit costs - cost to sales - with the factory. At this point a formula took over which inserted the CTS and target Gross Margin, discount for stocking wholesaler and cover for them to sell on to installing contractors. Yes and this was before calculators. The end result was a 'List Price'. Or a 'Trade Price' or a 'Contract Price'. Once committed to a published price, scope for change was limited - either up or down. Computer sheets of sales volumes and gross margins were avidly scanned to see how well the forecasts stood up in the real market and was the product out performing or under performing. Of course there would be competing products out there which is where brand differentiators and product benefits came into play.

But while lighting fixtures had scope for differentiation, due to the need for comparability and standardisation lamps were all really the same product. As a young apprentice I spent 6 months working in a lamp factory in North London in a plant manufacturing fluorescent tubes of various lengths.My role was in Quality Control and one small job was to change the brand. How did that work then? Well the gold looking label on tubes and indeed ordinary light bulbs started off with something like a John Bull printing outfit (if anyone remembers those) which comprised a rubber stamp and an ink pad. It started black, but turn golden during the baking progress. I never really figured out the brand strategy, but as a company we had several brands; I think I counted over 20. Some brands I had heard of, some were for premium markets, others for trade or export, but the ones that surprised me most were for our competitors! Price in the market place was all about discounting - everyone had the same list price. Keeping the lines running at capacity was vital. During discount wars the production team scrutinised marginal costs. And sales managers stepped up discount, even 90 per cent at times. So generic product pricing was a game well distanced from the premium driven markets where necessity not desire drove the purchase decision.

Pricing sets a benchmark for the market, but is rarely the price paid. The relationship between realised price and cost is gross margin which in turn relates to net margin and profit. And at the end of the day that is what the marketing is all for - not just selling a smart product, but making the best profit that can be achieved. That is what product managers work on, a great product helps, but a great product well priced is the goal.