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.), one needs 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.
Reference Prices
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.)
- 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
- 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.
Price Sensitivity
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
- Brand advertising
- 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
- New markets
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
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. The
table below illustrates how much more revenue you can generate
by offering three prices -- $3, $5 and $8 – instead of
just one -- $5.
Segment |
Number of people in segment |
Maximum price people in that segment are willing to pay |
Maximum possible revenues from that segment if you only
offer one item at $5 |
Maximum possible revenues from that segment if you offer
three items – one at $3, one at $5 and one at $8 |
A |
10 |
$3 |
$0 |
$30 |
B |
10 |
$5 |
$50 |
$50 |
C |
10 |
$8 |
$50 |
$80 |
Total |
30 |
|
$100 |
$160 |
While this is a simplified example, it illustrates the financial
advantages of price segmentation.
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:
- selling software in product suites vs. by the program
- selling e-Learning by library vs. the individual course
- fixed price versus a la cart menus
- “fully-loaded” models versus “basic”
models with additional options available
- 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)
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