Guest post by Prof. Michael Polonsky, Deakin University (Australia)
Life cycle pricing involves the inclusion of all costs across the purchase, use and disposable of goods. In many ways it is not new in the marketing of goods and for some products consumers do think about other costs associated with ownership. This includes white goods reporting on energy usage or cars reporting on fuel efficiency and lower maintenance costs, i.e. costs of using the goods. While marketers may be able to communicate the full life cycle of costs, the question is how do we get consumers to change their thinking from the out of pocket expense to include the life time costs? It may be that this will be easier for more expensive goods or durable goods that are consumed over longer periods, but do consumers want to consider purchase over their life, even if we can communicate this information effectively? Given the role price plays in shaping consumer decision making, having a redefined approach to pricing may be one way to allow consumers to make better decisions and change behavior. This is not to suggest there are not a number of innovative ways to try and make consumers better consider the real pricing of less harmful goods, or to get them to adopt lifecycle pricing issues. Take, for example, marketing solar hot water heaters in Australia which are actively being marketed using a range of cost based strategies.
Solar hot water heaters generally have higher initial prices than traditional gas or electric hot water heaters, even though they are cheaper over their lifecycle. Thus the question is how have firms (with governmental support) have been able to motivate consumers to purchase these more expensive goods. A number of approaches have been undertaken to integrate a various pricing issues.
1. The Australian Federal government has offered a $1600 rebate for people installing Solar Hot Water heaters, when these replace electric hot water heaters (Department of the Environment, Water, Heritage and the Arts 2009). Marketers have taken two approaches to deal with this. In some cases they simply promote the rebate as a savings to the customer (i.e. it costs 4000, but after the rebate you only pay $2400). Others have been more innovative and in fact marketed Solar Hot Water heaters at $2400, where they advertise the out of pocket price as $2400 and they then apply for the rebate on behalf of the customers (where the money goes directly to the firm).
2. A number of suppliers of hot water heaters actively promote the savings that consumers can receive. This communicates the lifecycle costs, at least the savings in terms of energy usage. What they do not do, is discuss this in terms of a payback period (i.e. how long does it take to recoup the extra savings. Although there are some independent organizations’ suggesting that the payback period is around 5 years. While this may seem a long time, there is no “payback” in regards to existing systems. Although, if people are making a decision on which type of system to apply, there would need to also be a ‘break even’ in regards to their existing system. In fact converting from an electric to a solar how water system in Australia is a money making activity, although I have not seen anyone promoting it this way.
3. A third approach is that some providers offer interest free loans to allow people to pay for solar water heaters and in fact the Federal government has instated a scheme where it backs such loans. These do allow the costs to be spread over time and thus potentially reduce the burden of out of pocket expenses. From a financial evaluation this reduces the cost of the good using a net present value perspective, as future payment (i.e. paying off the loans) are using ‘less expensive’ money than current expenditures (because of the discounting by the interest rate).
Of course firms can choose to a combination of all three strategies. The question therefore is ensuring that we can make the costs today as comparable as possible. While lifecycle pricing looks at costs over the life of the good consumers traditionally will be less willing to consider such costs, unless we can somehow make these more 'real'. Thus while lifecycle pricing is one option, it will possibly not solve the issue alone and certainly will fail if government intervention does not integrate the costs of pollution into the price of goods and their usage.