Hedonic pricing is the term used in the context of marketing, this pricing model has a very interesting concept according to which the price of a product is not only determined by the features of the product but also by the various external factors which have a direct or indirect impact on the price of the product. It can be better understood with the help of an example suppose in a trade fair you have prepared ice creams and looking to sell ice creams for $10 but on the day of trade fair there is snowfall and extreme cold now although your ice cream is good and deserves good pricing but due to external factors which is snowfall you may have to reduce the price of ice cream to sell as demand for ice cream will be low due to snowfall and cold weather. In order to get a better understanding of this term, one should look at some of the advantages and disadvantages of hedonic pricing –
Advantages of Hedonic Pricing
Internal and External Factors Consideration
The first and foremost advantage of hedonic pricing is that it considers both internal as well as external factors for determining the price of goods under consideration and hence in a way it is a more comprehensive way of determining the price for any product. In simple words just like a good trailer of a movie is not enough to make a movie blockbuster rather it requires other things like a good story, direction, action, and dialogues to make a movie blockbuster in the same way only internal characteristics are not enough to justify the pricing of good rather it requires external factors analysis to justify the price of the product.
Flexibility
Another benefit of hedonic pricing is that it has flexibility in the sense that any change in external factor can be quickly added to the analysis and its effect on the price of the product can be determined thus making sure that the price of the product is reflected after taking into account the changes which have happened in the external environment in which the company is operating.
Practical Approach
Hedonic pricing is more practical in nature because it takes into account not only the internal characteristics of the product but also external factors into account while arriving at the price of the product. In simple words, this approach goes beyond the textbook theories and formulas by applying a practical approach which can be of great help if this approach is applied in real life by the companies for pricing the products.
Disadvantages of Hedonic Pricing
Complexity of Hedonic Pricing
The biggest disadvantage of hedonic pricing is that it is very complex because the external factors which impact the price of the products are dynamic and anyone examining the external factors will need to have extensive knowledge and requires in-depth analysis to decide the price of the product based on both internal as well as external factors. In simple words, there is no set formula following which anyone can decide the price of the product as in this method of pricing external factors make this pricing model a complex model which only a few people can understand and implement.
Subjectivity
In the case of hedonic pricing, there is a lot of subjectivity is involved because people will interpret external factors according to their perception and hence chances are one external factor may lead to a fall in the perceived value by one individual and the same external factor may lead to a rise in the perceived value by another individual.
Not Suitable for All Products
Another problem with hedonic pricing is that it is not suitable for all products as one cannot determine the price of the product which are low priced as consumers seldom look at internal as well external factors while buying lower-priced items. In simple words, products that are priced higher like real estate properties are good candidates for hedonic pricing but for products like soaps, perishable items, clothes this pricing method is not suitable.
As one can see from the above that hedonic pricing has some pros as well as cons and that is the reason why any company looking for using this method of pricing should carefully read the above points and then only should decide whether it wants to adopt hedonic pricing for its products or use some other pricing method.