Branding Strategy Insider helps marketing oriented leaders and professionals like you define and grow brand value. BSI readers know, we regularly answer questions from marketers everywhere. Today we hear from Simon, a Startup CEO in London, England who has this question about pricing strategies.
We are exploring pricing strategies for our new line of consumer products. What should we be considering?
Thanks for your question Simon. There is much to consider. As we have shared in the past, brands send powerful messages through how they price. Price can be influential in portraying a brand as affordable and ‘on the side of the customer’, or exclusive and just for the few. It can generate responses ranging from the thrill of a bargain to the indignation of a price tag that seems far too steep. Pricing strategy helps shape the reputations and fortunes of brands. Use the following guide to help make an informed decision about your pricing strategy.
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. Six factors affect reference prices:
1. Memory of Past Prices.
2. Frame of Reference. That is, the price as compared to competitive prices, pre-sale prices, manufacturer’s suggested prices, channel-specific prices, marked prices before discounts, and substitute product prices, etc. Creating the most advantageous (and believable) competitive frame of reference is essential to achieving a price premium.
3. 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.
4. The Way the Price Is Presented. For instance:
- Absolute number vs. per quart, per pound, per hour of use, per application
- Four simple payments of $69.95 vs. $279.80
- Total purchase price vs. monthly loan payment vs. monthly lease payment (e.g., for automobiles)
5. The Order in Which People See a Range of Prices. Realtors, for instance, use the trick of showing the lowest value house first.
6. “Rule of 100.” Percentage discounts seem larger if the total amount is less than $100. If it is more than $100, the absolute discount amount in dollars seems larger.
The Decoy Effect
- The decoy effect, also called the asymmetrical dominance effect, is a phenomenon where people tend to have a change in preference between two options when presented with a third option that is asymmetrically dominated.
Add On Pricing
- Additional automobile features: leather seats, heated seats, moon roof, satellite radio, built-in GPS, custom colors.
- Airlines: checked luggage, upgraded seat, purchased alcoholic beverage or meal, purchased in-flight wi-fi.
Product Bundle Pricing
Bundling products, services, attributes, features, packaging, delivery mechanisms and quantities in different ways to create a unique incomparable offering or to achieve a certain price point.
Captive Product Pricing
Captive products are strategically used to maximize revenue.
- Razor & razor blade
- Printer & ink
- Camera & film
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.
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 believe that a price increase is the most cost-effective revenue-generating marketing tactic. This is not so. 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.
Factors That 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. (For example, if I wear sports apparel featuring Nike’s swoosh logo, it implies I have the “Just do it” attitude of Nike’s “authentic athletic performance” essence. If I carry a Gucci handbag or wear a Rolex watch or drive a Mercedes-Benz, it says I have social status.)
- 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.
- When the item does not significantly contribute to the cost of the products and services that a business sells.
- When the price falls within the expected price range for products in the category.
- When offering “value-added services” vs. “price discounts” to motivate purchases.
- New markets.
Factors That Increase Price Sensitivity
- Price promotions, especially when people are able to stock up on the price-discounted items.
- Mature and declining markets.
Pricing Strategy Guidelines
- Once an item is sold at a lower price, it is very difficult to sell it later at a significantly higher price.
- Premium brands lose some of their cache when some of their products are offered at much lower price points.
- It is somewhat easier to eventually move a more mainstream brand up into premium categories.
- 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.
- Price your products and services to reward brand-loyal (vs. brand-switching) behavior.
Other Price/Value Considerations
In your pricing strategy you should consider these five factors:
- Perceived customer value
- Competitive response
- Channels of distribution
- Cost parameters
- Congruence with the brand position
Whatever pricing strategy your choose Simon, do everything in your power to maintain the integrity of your price. Price integrity reinforces the value claims you are making.
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