Content area
Full Text
1. Introduction
Price is a key issue in marketing (Skouras et al., 2005). A review of the literature made by Indounas (2009) revealed that pricing practices fall into three large categories: cost-based, competition-based and value-based. In marketing theory, the potential profit when using a value-based pricing practice is assumed to be far greater than it would be with any other pricing approach (Monroe, 2002).
In spite of the theory, empirical research has concluded that prices have not been set based on the value offered to customers. Studies have reported that most companies set prices with costs as the basis (Hall and Hitch, 1939; Zeithaml et al., 1985; Noble and Gruca, 1999; Avlonitis and Indounas, 2005; Fabiani et al., 2005).
Empirical evidence of cost-plus predominance has been used to support the existing gap between theory and practice. Authors such as Cressman Jr. (1999), Ingenbleek (2007), Hinterhuber (2008), and Calabrese and Francesco (2014) claim that prices do not reflect value merely because a cost-plus formula has been used to set prices.
However, it is worth mentioning that marketing scholars recommend value-based pricing but do not proscribe the use of cost information. For instance, Mahapatra et al. (2019) state the need to understand the buyers’ expectations based on the articulated value proposition of the product independently of the use of cost information. In a rather practical sense, adopting a cost-plus formula does not prevent firms from using value information; consequently, it does not result in a mismatch between theory and practice. Hence, we argue that the gap between marketing theory and practice is not as wide as scholars have indicated.
Our discussion starts with the perception that gap reports assume mistakenly that all companies have price-setting power. However, some firms do not have any price-setting power and must take the prices that the market offers (Guilding et al., 2005). Pricing is the prerogative of price-makers, not price-takers. Banterle et al. (2011) found that good marketing capabilities of companies, especially in relation to the product differentiation, enhance the skill of being a price maker.
A company has some influence over price only if it offers distinctive products. As a consequence, price-makers have some discretion in fixing prices because they offer unique products while price-takers must...