APRIL 22ND, 2013
One of the five drivers of customer brand insistence is “value.” While value is comprised of more than just price (benefit bundle, perceived quality, etc.), it’s important to understand pricing to deliver a strong brand value. Following are some concepts that you may find useful as you determine pricing for your brand’s products and services.
People often compare a product’s price to a “reference price” that they maintain in their minds for the product or product category in question. A “reference price” is the price that people expect or deem to be reasonable for a certain type of product. Several factors affect reference prices:
•Memory of past prices
•Frame of reference (compared to competitive prices, pre-sale prices, manufacturer’s suggested prices, channel-specific prices, marked prices before discounts, substitute product prices, etc.)
o Creating the most advantageous (and believable) competitive frame of reference is essential to achieving a price premium
•Prices of other products on the same shelf, in the same catalog, or in the same product line
o The addition of a more premium priced product typically increases sales of other lower-priced products in the same product line
•The way the price is presented – for instance, absolute number versus per quart, per pound, per hour of use, per application, for the result achieved, etc.; also four simple payments of $69.95 versus $279.80; for automobiles: total purchase price versus monthly loan payment versus monthly lease payment
•The order in which people see a range of prices – like when a realtor uses the trick of showing the poorest value house first.
It is extremely important to be able to estimate the impact of price changes on sales and profits. That is, it is important to know how a price change will impact consumer response, competitive response, and unit volume. Many business people erroneously believe that a price increase is the most cost-effective revenue generating marketing tactic. I have heard generally intelligent business people share their excitement about how a price increase will drop to the “bottom line” dollar-for-dollar. Most of the time, this is simply not true.
People display different price sensitivities to different products in different situations. Often people are relatively price insensitive, but only within a relevant price range. Once a price exceeds that range, people become very sensitive. Raising the price across that threshold is akin to walking off of a cliff.
The following factors decrease price sensitivity:
•Relevant brand/product differentiation
•Marketing and selling on factors other than price
•Convincing consumers that quality differs significantly among products and brands in the category
•Self-expressive or “image” products or brands
•Situations in which price is a signal to quality – usually for relatively new or unknown products or brands
•When it is difficult to ascertain a “reference price” within the category
•When there are significant switching costs – in dollars, time, effort, risk or emotional impact
•Product categories for which the risk of failure is an important issue
•When the price is insignificant relative to the total budget or discretionary income
•For businesses, when the item’s price does not significantly contribute to the price of the products and services that they sell
•When the price falls within the expected price range for products in the category
•Offering “value added services” versus “price discounts” to motivate purchases
The following factors increase price sensitivity:
•Price promotions, especially when people are able to stock up on the price-discounted items
•Mature and declining markets
Price segmentation (offering different prices to different market segments) increases overall revenues and profits, and it is particularly beneficial to industries that have high fixed cost structures. Obviously, price segmentation works better to the extent to which there are real customer need segments and to which you can effectively isolate those segments.
As an example, imagine that your business only offers one product priced at $5. But some consumers are willing to pay up to $8. You are leaving $3 on the table for each of them. Other consumers are more price-sensitive and only willing to pay $3. You do not get any of their business. By offering three prices — $3, $5 and $8 – instead of just one — $5, one can generate significant incremental revenue.
Prices can be segmented in the following ways:
•By time (higher hotel room rates for holidays and other peak tourist seasons)
•By location (higher prices in locations with less competition or in which less price-sensitive shoppers shop, orchestra versus balcony seats in a theater)
•By volume (volume discounts for large orders)
•By product attribute (first class vs. coach section on airplanes; solid brass vs. plastic faucets)
•By product bundling – examples:
o selling software in product suites vs. by the program
o selling e-Learning by library vs. the individual course
o fixed price versus a la cart menus
o “fully-loaded” models versus “basic” models with additional options available
o single admission ticket at theme parks versus charging per ride
•By customer segment (brand-loyal vs. price-sensitive vs. convenience-oriented or image-conscious vs. economy-oriented)
Other price/value considerations
•Pricing strategy should consider these factors: (1) perceived customer value, (2) competitive response, (3) channels of distribution, (4) cost parameters and (5) congruence with the brand position
•Constantly explore new ways to uniquely add customer value to your products and services
•In creating greater customer value, always ask, “How can we make it quicker, easier, less risky, or more pleasant to do business with us?” Ask, “What could we do that would favorably surprise and delight our customers?”
•Communicate the value of services that you provide for free
•Providing value-added products and services at “no charge” is superior to price discounting as a short-term purchase incentive because it preserves the value of the brand
•Be careful to price your products and services to reward brand-loyal (versus brand-switching) behavior
Pricing is a sophisticated discipline. These three topics (reference prices, price sensitivity, and price segmentation) are just a few of the important considerations when developing brand pricing strategies and tactics.