by J David Childs

Created on: March 25, 2009

In a market economy, the value of a product is based upon two primary functions. One function is that of the consumers' perceptions of a product's utility. Defined in broad terms, utility is a commodity at one extreme end of the spectrum and a status symbol at the other end of the spectrum. Using this model, all products fall somewhere on the axis, defining each product's utility.

The second function defining the value of a product is whether the effort made by the consumers to acquire the necessary resources in exchange for a product is something consumers wish to do. For purposes of this debate, effort may include cash accumulated from payment for labor/services (income) or leveraging credit.

Together, utility and level of effort, the value of a product may be measured. It is only the manufacturer that gauges each function to determine the suggested retail price, the value of a product.

A manufacturer is typically producing a product for the sum total of targeted markets. No matter how markets are segmented, the suggested retail price is set at a standard price across all targeted markets and where the value of the product is maximized (based on the two primary functions that determine value). The suggested retail price set by the manufacturer reflects what the manufacturer believes to be the value of a product across all targeted markets. The markets will determine whether the manufacturer is correct in establishing this price point.

Some will debate that manufacturers determine price on a cost-plus basis to ensure adequate margins. Margin consideration is a factor in sustaining a financially healthy business. However, the suggested retail price reflects the value of a product, regardless the amount of margin that may be required or hoped to receive. Pricing should be based on market, i.e., product value, not cost-plus. If the manufacturer cannot meet margin or contribution objectives using product value analyses, then the manufacturer should seek opportunities to lower costs for meeting the margin objectives or stop manufacturing the product.

Many may argue that the suggested retail price is a means to inflate a product's price. Actually, an inflated price is more accurately defined through the deceptive practice of setting minimum pricing. Such pricing practices do not reflect a product's value, they are unlawful, and they are not of the spirit in competitive market economies.

Through the suggested retail price, resellers of a product have the ability to respond

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