Customer cost refers to the price of a product and also includes purchase costs, use costs, and post-use costs. Purchase costs involve the expenses associated with searching for a product, gathering information about it, and acquiring that information. Typically, the highest use costs are associated with durable goods that have a high demand for resources, such as energy or water, or those with significant maintenance costs. Post-use costs include the expenses related to collecting, storing, and disposing of the product after it has been discarded.
Total consumer cost in contrast to price
The term price usually refers to the amount of money charged for a product or service.Kotler, P. and Armstrong, G. (2004), The Principles of Marketing, 10th edn, Upper Saddle River, NJ: Prentice Hall, p. 345 It represents the payment made by the consumer and received by the producer when the ownership of the product or service is transferred from the seller to the buyer. The price of a product has different functions: for the producer, the most important one is to produce revenues and to cover the costs of production, distribution and sale of a product.Belz, F-M. and Peattie, K. (2009) Sustainability Marketing: A global perspective, West Sussex: John Wiley & Sons Ltd, p. 203 Price also signals quality and reflects existing supply and demand. It can promote competitive advantages by helping to achieve various marketing objectives and allowing for market segmentation.Peattie, K. (1995), Environmental Marketing Management: Meeting the green challenge, London: Pitman Publishing, p. 280
For the consumer, price is only one part of total cost of a product. The consumer has the additional costs of transportation, usage and eventually, disposal of the product. Together, these costs are referred to as the total customer cost (TCC). In contrast to price, which is a producer-oriented concept, TCC focuses on the consumer and includes all of the steps of the consumption process.
Conventional marketing and microeconomic theories assume that consumers intend to maximize their benefits and minimize their costs. Consequently, consumers choose the product with the highest difference between the expected benefits and the costs of obtaining the product.Turner, R.K. & Pearce, D. & Bateman, I. (1993), Environmental Economics-An Elementary Introduction, Baltimore: The Johns Hopkins University Press, p. 93
Price is of special importance in the cost assessment process, since it is expressed in monetary terms and known to the consumer before the purchase. Price is also a part of the upfront costs, and consumers have a tendency to focus more on present costs than on future loses or gains.Kuusela, H. & Spence, M. (1999) `Factors affecting the Acquisition of Energy Efficient Durable Goods´ in Charter, M. & Polonsky, M.J. (eds), Greener Marketing. A global Perspective on Greening Marketing Practice, Sheffield: Greenleaf Publishing, p. 230
Cost assessment differs between individuals, and depend on various personal and situational factors, such as socio-ecological awareness and knowledge, income, peer group and the purchasing situation. Like other products, sustainable products will only be bought if their perceived net benefit is higher than the one of conventional products.
Elements of total customer cost
Purchase costs
Purchase costs include the cost of searching for a product, gathering information about it and transporting it, collectively also referred to as transaction costs.Transaction cost approach created by: Coase, R.H. (1937) `The nature of the firm´, Economica, 4(16): 386-405
The initial purchase of a product has the highest search and information costs. The consumer might also perceive additional risks in comparison to purchasing familiar products: financial risks: fear of the product being financially negative performance risks: fear of the product not performing as anticipated physical risks: fear of the product being harmful to user time risks: fear of the product being time-consuming in its adoption or use social risks: fear of the reaction of their personal social network to the product psychological risks: fear of the negative post-purchase emotions such as disappointment, regret or frustration of the purchaseHirunyawipada, T. & Paswa, A.K. (2006) `Consumer innovativeness and perceived risk: Implications for high technology product adoption´, Journal of Consumer Marketing, 23(4): 182-198, p.187
In Information Economics, product qualities are differentiated into three types: Search qualities: which can be fully evaluated before a purchase (e.g. design). Experience qualities: can be evaluated after the purchase (e.g. durability). Credence qualities: which can't be fully evaluated by the consumer (e.g. social conditions of production workers), since they stem from the production or post-use processes. Consumers rely on the information provided by the producer, or by third-party organizations Ford, G.T. & Smith, D.B. & Swasy, J.L. (1988), `An empirical test of the search, experience and credence attributes framework´, Advances in Consumer Research, 15: 239-244
The purchase costs of sustainable products are often higher when compared to the costs of more conventional products. The reason for the higher cost is that the features which differentiate these products are often determined by either personal experience or credence qualities, which have the highest search and information costs.
Transportation costs may be dependent on the availability of the product. This might pose another difficulty to new sustainable products entering the market: if the distribution intensity is low, the probable traveling distance for the customer is high, resulting in higher costs for the product purchase.
Use costs
Long-lasting products, such as cars or houses, require energy and maintenance, resulting in considerable operating costs when in use. These use related costs are often neglected or underestimated when the consumer purchases a product. Use costs also include the costs of switching to a new product. The consumer faces the costs of change if the product requires a different way of use. An extreme example for this would be the new behavioral patterns necessary for switching from owning a car to car-sharing or using public transportation systems.Meyer, A. (2001) `What’s in it for the Customer? Successfully marketing green clothes´, Business Strategy and the Environment, 10(5): 320
This perceived cost can prevent consumers from switching to newly introduced sustainable products, that are designed to be resource efficient, thus having lower use costs than conventional products. Products such as washing machines and refrigerators are examples that save water and energy in significant amounts, at the cost of complicated controls.
Post-use costs
Post-use costs comprise the costs, which occur after the product is at the end of its life: the costs include the collection, storage and disposal of the item. These costs are strongly affiliated to the type and amount of packaging, design and durability of the product, the use of recycled materials and the possible resale, recycle and deposition possibilities.
Consumers are generally not very aware of post-use costs. Since developed countries usually include the disposal costs in property or public service taxes, these costs are not explicitly related to the product, except when those extra costs are billed directly to the consumer.
In order to dispose waste, it either has to be dropped off at a collection point or collected at the curbside. In the first case the consumer has transportation costs; in the second case the consumer faces storage costs. In addition, there are the hidden costs for separating the waste, for the time consumed by it, and the time cost of learning how the disposal system works.
Resale can be a way to reduce the post-use costs, and has become more attractive through low cost electronic selling platforms such as eBay. Recycling a product also extends the lifespan and enhances the material value of the product.
Marketer perspective
Sustainability marketing should consider the total customer cost for the entire consumption process, which is equal to the sum of all costs related to a product. This includes the price, purchase costs, use costs and post-use costs. Marketers integrate this perspective into a marketing strategy in order to promote sustainable products. Two important purposes of sustainability marketing are the reduction of the total customer cost and making customers aware of it.
Reducing total customer cost
Price
In economics, demand curve theory demonstrates that the demand of a good is a function of first, its price and second, that the demand generally moves in the opposite direction of price change.Common, M. & Stagl, S. (2005) Ecological Economics An introduction. Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK This doesn’t apply when consumers interpret high prices as an indicator of quality or exclusivity. For instance LOHAS (Lifestyles of Health and Sustainability) are consumers who value sustainable products and esteem quality. Indeed, the price elasticity of demand varies between types of purchase and among consumer segments. This is the process that companies use to adjust demand by setting prices.Kotler, P. & Armstrong, G. (2004a) The principles of Marketing, 10th edn, Upper Saddle River, NJ: Prentice Hall, p.11. Three price-setting strategies are generally employed: value-based pricing, cost-based pricing and rent/lease pricing.
Value-Based Pricing
Value-based pricing strategy is founded on a differentiation strategy, and uses buyer’s perceptions of value, which are based on experience. It is customer-driven, and is expressed in terms of setting the highest price possible to the greatest extent that the market will bear. Since sustainable products are expected to be more expensive than the conventional ones, this strategy is particularly suitable for them. Indeed, suppliers increase the price because a price increase adds value to the product by adding sustainability benefits, regardless of the underlying cost structure. The application of premium pricing for sustainable products and the amount that the customer would be willing to pay for that product are just two of the questions that need to be answered by marketers, and taking into account: The nature of the product and the level of differentiation in the market The profile of the sustainability issues to which the product is linked The credibility level that the company and the product enjoy in the market The perceived value of sustainable products versus conventional products The price sensitivity of customers: socio-ecological actives vs. passives, and their awareness of and interest in sustainability issues related to the product The existence and use of reference pricing in the product category
Cost-based pricing