Finding the right price management strategy is an important element in running a successful business. Naturally, as markets change, so do the strategies required for price management. The price of a product or service is often difficult to describe objectively and does depend on many factors, such as price perception or communication, customers' willingness to pay, and price modelling - but it is vital to have a systematic approach to optimizing both sales and pricing.
To be a successful pricing manager it is critical that you develop an adeptness for identifying consumer contexts & reference points, as these factors strongly influence consumer perception, behaviour, and price sensitivity. Of course, identification alone is not enough – you must use such insights as key inputs into an overall marketing strategy. Dynamic price management will undoubtedly have a powerful influence on profits but optimising prices is impossible unless you understand and master their various subjective elements.
1. Start applying the right concepts
If you leverage your insights around consumer context & reference points it can turbo-charge the performance of your business by providing you with the means to significantly improve your marketing & pricing strategy.
2. Gain insights into customer context
What are the most common contexts in which your target customers develop a need for/search for/ compare & purchase/install/use & maintain/ repurchase/your product or service – and what is meant by "context"? Context refers to those attributes that describe the environments of your target customers, such as: where they are located, time & place, who they associate with, what they are doing, what is on their minds, their current objectives & aspirations etc.
3. Gain insights around reference points
What reference points are your consumers using when they are interested in purchasing your product or service? How do these reference points impact on their receptivity and their openness to the price of your offering? Also, what is their experience when using your offering?
What is meant by “reference points”?
These are the points of comparison or anchors a consumer uses when assessing or experiencing your product. To use an extreme illustration, imagine two people who are given a used 2005 Toyota Corolla for free. One is a first-generation immigrant who earns £12,000 a year, whose only mode of transport is a bicycle. The other is a multi-millionaire who already owns 4 luxury cars. Given the two people’s vastly different reference points for the free Toyota, their responses to the news about the free car will differ dramatically.
After generating insights around your target customers’ contexts & reference points, you will want to explore how you can use these insights across critical aspects of your marketing strategy. In some cases how to leverage the insights will be obvious but in other cases you will have to stretch those little grey cells.
The Jelly Bean Example
In the U.S.A., 'Jelly Belly', a leader in the jellybean industry, provides us with a good example of a company that leveraged its knowledge of consumer reference points to develop a strategy that enabled it to charge premium prices for its jellybeans.
Instead of selling its jellybeans through traditional outlets, 'Jelly Belly' made the decision to sell them at speciality and gift stores, where alternative sweets included higher-priced items such as luxury chocolates.
Since the reference points of people shopping at gift stores were these higher-priced chocolates and not other jellybeans, 'Jelly Belly' could price its beans at a substantial premium to other beans and still provide a cheaper sweets alternative for the gift-store shoppers.
Have you tried a Product-Sandwich?!
When was the last time you bought the most expensive wine on the shelf at the supermarket? Most customers play it safe and usually buy a wine priced “somewhere in the middle”.
Perhaps you didn't realise that the supermarket was employing a product-sandwich strategy, drawing you helplessly towards that mid-priced bottle of wine! The supermarket was (unknown to you) controlling your purchasing habits.
In a nutshell, the strategy involves creating/selling a (very) high-priced version of your product so that the next price down appears more moderate in comparison. Often this “next price down” would be considered expensive by the customer but in relative terms (i.e.next to the luxury-priced model) it appears reasonably priced. If implemented successfully, the net impact on your business is a boost in sales of the mid-priced version.
Why does the Product-Sandwich Strategy work?
The Product-Sandwich strategy is based on the principle that when buying an unfamiliar product or service people tend to purchase a mid-priced version of it. Why? It all comes down to risk aversion – fear of making a bad purchase and throwing money away. Most of us automatically shy away from the priciest version.
Can I use a Product-Sandwich Strategy in my business?
Businesses that sell hard-to-value goods or whose target customers tend to be product novices are generally best suited for a Product-Sandwich strategy – e.g. selling perfume to people who don’t know the difference between eau de toilette and the water in their toilets! Apologies for that analogy!!
Make sure customers are made aware of the range of price points
One critical success factor for any product sandwich strategy is to ensure that your customers are aware of the different price points of your products, most notably your high-priced version. It is this awareness that leads your customers to view the mid-priced products as the safe, yet reasonable choice.
4. Dynamic Pricing
Dynamic pricing is the process of determining a product's value in commercial transactions in a fluid manner depending on current market conditions. Dynamic pricing is gaining ground amongst business owners compared to the more traditional fixed pricing method. Also called real-time pricing. This is a flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet-based companies.
By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so successfully that most of the passengers on any given flight have paid different ticket prices for their seats.
5. Pricing Software
Finding the optimal price is no easy feat in this brave new world, especially in light of a saturated market, increasing price awareness and intense competition. Spreadsheets are no longer suitable when you're looking to apply advanced pricing methods. In order to meet these challenges – and tackle them head-on, many companies are turning to pricing software to smooth the way to bigger profits. Take a tour of BlackCurve's pricing software here.
Sources
- So Why Do I Care? Management, marketing & innovation insights for a changing world, Tom Coughlan, 2006
- http://www.mindofmarketing.net/2008/10/your-pricing-should-be-influenced-by-your-customers-reference-point/, Doug Goldstein
- Andrew Gregson: Pricing Strategies for Small Business 2008
- http://www.mindofmarketing.net/2010/03/would-you-like-a-coke-with-your-product-sandwich/
- http://www.wisegeek.com/what-is-price-optimization.htm
- http://www.answers.com/Q/What_is_price_erosion
- Pricing with Confidence: 10 ways to stop leaving money on the table by Reed K Holden and Mark Burton, 2014