When setting price we need to look beyond costs and positioning and look at the marketing mix as a whole. Managers need to consider both price and non price factors, and elements of consumer behavior. In this post I will be summarizing some areas to consider when setting price strategy and tactics.
Does customer perception match my price offering?
Hamilton and Chernev explain consumers often wrongly believe some brands are cheaper than others. To prevent such misunderstandings, brands need to manage ‘price related and non price drivers of price’. Large warehouse style buildings with large lots and sparse interiors signal lower prices and a price match guarantee signals that prices are competitive. On the other side, if a brand chooses to focus on certain quality factors they can wrongly be placed in a higher price perception category. For instance, local or artisanal products and community outreach signal higher prices. These non price factors influence customer perceptions and must be part of overall price strategy and communication. This idea goes both ways, and sometimes consumers ask….
Is it fair?
In managing pricing communications, Xia et al say managers need to make sure prices seem fair. This means communicating the parts of your business model that affect prices. For instance, a company that uses high quality, local, and ethical materials will have a higher cost structure; as would a company choosing to hire local labor rather than outsourcing overseas. Communicating these factors increases the quality perception of products and justifies pricing levels. Consumers can see that the price reflects added quality or ethics in the values of the business. This also works in reverse: if you keep prices too low, people will start to question product quality. When prices have to go up, regular customers may seem angry or betrayed. To alleviate feelings of betrayal, Xia et al suggest offering coupons/specials or loyalty schemes to repeat customers so they don’t get put off by price increases!
It’s a trap! The downside of price promotions
Alvi, Bornemann and Wieseke, and others, suggest consumers become accustomed to price discounts. This will happen one of two ways, both of which will have a negative effect on promotional efforts. Firstly, if consumers expect regular low prices they may choose not to buy when the price goes back up or will wait for the next sale. Secondly, consumers may start to question the quality of the products if they are often on sale. Academics also suggest that you can alleviate the post promotion effect on sales by using infrequent deep discounts. If you have a discount on most products every month, the customer will think the deal is superficial or that you’re just selling cheap products and being dishonest about the discount. Hold off on the discounts! Consider “Black Friday”. By itself, this event is evidence that a big sale, every now and then, is better than constant sales. Make your sales an occasional thing, but when you do discount – discount well! Experts also suggest that displaying promotions in percentage-off terms rather than cents-off terms alleviates the negative effect of the promotion.
Small decisions, Big effects!
Small decisions, like determining how prices are presented and framed in store, have a far greater impact than you’d imagine. Suk and others tell us that presentation order matters. If you list prices in descending order consumers have a positive price feeling, and expect to pay more. But if you arrange prices in ascending order, consumers have a negative price response and expect to pay less. Any increase in price seems tied to a minor increase in value. Therefore, your pricing strategy should always default to descending order.
Did someone say math?
Consumers really do hate math. Biswas et. al point out that when the discounted price is displayed on the left of the original price, consumers are less likely to subtract the total to find the actual discount amount. This is because the higher number is displayed second – organized opposite to the way we are taught to subtract in the West. If you have a shallow price discount and wish to prevent calculation, displaying prices in this manner will achieve the effect. But if you have a really good deal on an old stock product, you should show discounted price on the right of the original price to encourage calculation…. or just dislay the amount off to show the large discounted value!
When it comes to percentage deals, consumers are REALLY bad. Chen, Marmorstein, Tsiros and Rao explain that Base value neglect has a large impact on price perceptions. Consumers fail to comprehend or calculate the base value of percentages. For instance, 10oz of coffee costs 10 dollars. A store offers a 50% bonus pack and a 33% off deal, both deals work out to about .67c per oz of coffee but consumers will go the higher percentage and feel like they are getting more for their money when a ‘bonus’ is offered. The truth is, in the previous circumstance, the effect becomes nullified when percentages come closer to 100. For this reason, Chen et al suggest offering products in bonus packs/amounts in most situations where logistical costs do not exceed the benefit gained. Price discounts are still recommended for new/higher priced products where consumers are more aware of possible risk.
Do Price Comparisons work?
Price comparisons definitely have the potential to boost sales by improving brand perceptions within a product category. According to Miniard and some other guys there are several traps. If a store chooses to compare one or two product categories but not others, consumers will often think that other categories are actually higher than those of the compared store. If you’re going to take a comparison strategy, be consistent across product categories!
Also, comparing multiple brands can dilute the effect of the perception of low prices. This can also damage certain brands by altering the perception of how that brand is typically priced (e.g. damage their quality reputation or make non compared brands seem overpriced)
References for the super smart guys’ papers (thanks guys!):
Chen, Haipeng (Allan), Howard Marmorstein, Michael Tsiros, and Akshay R. Rao (2012), “When More Is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts,” Journal of Marketing, 76 (July), 64–77.
Hamilton, Ryan and Alexander Chernev (2013), “Low Prices Are Just the Beginning: Price Image in Retail Management,” Journal of Marketing, 77 (November), 1–20.
Miniard, Paul W., Shazad Mustapha Mohammed, Michael J. Barone, and Cecilia M.O. Alvarez (2013), “Retailers’ Use of Partially Comparative Pricing: From Across-Category to Within-Category Effects,” Journal of Marketing, 77 (July), 33–48.