Novel Method of Price Determination based on Reference Price
Keywords:price determination, reference price, customer perception, willingness to pay, utility function
This paper deals with the issue of optimal price determination. Price determination is a matter of high importance in both the academic community and managerial practices. The aim of the paper is to present a novel method of price determination based on reference price. The method presented is inspired by a fuzzy sets graphical interpretation and provides an alternative approach to the standard product price determination problem. It uses the satisfaction of customers as well as product sellers to find the optimal price for particular market. The method is based on two fundamental steps. First the method of product perception for a single customer is developed and then the method for the whole market is derived. The individual changing trend of customers` willingness to pay at each price level constitutes the essence of the method presented. The application of the suggested method is presented via empirical data obtained from the snowboard market. The results have a direct impact on managerial decision-making of the seller in terms of pricing. The resultant price given by the analysis conducted through the suggested method allows sellers to maximize the revenues related to a particular product. Moreover if the seller’s goal is not to maximize revenues, but to achieve maximal market share, the price should be the same as the optimal willingness to pay price. These conclusions are explicitly mentioned in order to demonstrate that the suggested approach allows the definition of custom objectives by the seller.