On Consumer Surplus and Pricing Strategy - Essay Example

25 March 2007 On Consumer Surplus and Pricing Strategy It is irrefutable that a business organizations'pricing decision is often based on the cost incurred in the production of the commodity. Companies often account all their expenditures and simply put a mark-up as their profits. However, what they fail to recognize in their pricing decisions is the value that customers attribute to their products. For each commodity marketed, customers assign a certain amount that they are willing to pay. Some business organizations are able to price according to the customers' perceived value of their offering.

However, some may be pricing less than what the customers would want to pay for them, thereby robbing the companies of profit potential. Consumer surplus is defined as "the amount that customers benefit by being able to purchase a product for a price that they would be willing to pay" (Economic Surplus 2007). When a company prices less than the amount that buyers are willing to pay for the product, customers will enjoy the consumer surplus in purchasing the product. Thus, companies should be adept in their pricing strategy.

They should be able to determine individual consumer surplus and fully expropriate it for their advantage. Identifying the exact value attributed by buyers to a product is a great challenge for a business organization. As individuals are unique, they often have different perceptions of the monetary value of an offering. Some price sensitive customers may find a product too expensive but some may even find it a bargain. One of the things that company can do is to conduct a survey before releasing the product in order to get an average price that the target market is likely willing to pay.

The company can also experiment by raising and lowering the price in the market and monitor the customers' response through product sales and demand. However, all these can be very tedious and can erode the identity and image of the product in the market. It can even bring confusion to the customers. I believe that companies have a huge portion in creating or expropriating consumer surplus. It should be noted that the company's pricing strategy is often just a complement to its other efforts.

For example, price should be consistent with the target market, product image, and positioning. If a company serves the upscale market, it should offer a product whose quality or value is superior than its competitors in order for it to charge a premium. A company cannot charge a higher price if it is not able to differentiate its product and market its unique features. Thus, I believe that if companies want to expropriate consumer surplus, it should deliver a product with higher perceived value through efficient marketing.

This way, the customers will be willing to pay a higher price. Think of Starbucks as a good example. Why do people willingly pay $3.00 for a cup of coffee which are sold for only $0.50 in McDonalds or Dunkin Donuts The answer is apparently due to the efforts of the company of raising the perceived value through excellent service, nice ambiance, relaxing music, and good coffee which is not present in the aforementioned competitors. Works Cited "Economic Surplus." Wikipedia: The Free Encyclopedia.

12 March 2007. 25 March 2007 Suranovic, Steven. "Consumer Surplus." 8 September 2004. 25 March 2007