I clearly remember the first time I bought something on my own. I was four. As I held out the coin at the school tuck shop, I was told gently that it wasn’t enough. I must have looked really sad. The kind lady let me have the treat anyway.
Ever since, price has been more of a suggestion than an absolute, final number for me. And, I’ve known that it does evoke a deeply emotional reaction.
Here’s the point that often trips marketers - we humans aren’t always rational. We react almost viscerally to price signals.
If something is too expensive for us, we don’t just shrug it away. It makes us feel small, awe-stuck, jealous, angry or perhaps inspired.
And then, if this something special goes on sale, our inner hunter comes crawling out. This scene in Friends where Monica goes to a sale for her bridal dress shows how charged consumers can get in pursuit of the perfect bargain.
Take the latest cause celebre - surge pricing. Of course, there is a good explanation for it – too many people chasing too few cars. But that doesn’t prevent heartburn and righteous protest among the users of Uber and Ola. And while Indians are not unique in disliking the concept, we hate it enough to have it banned in certain states. It evokes memories of the dark days of black marketeering. Of the common man vs the exploitative Goliaths.
Pricing is the least glamourous part of marketing. Few marketers discuss it in conferences. It is also scary -they know it can be messy to play around with. So, they approach changes with careful calculations and projections. Or worse, ask the consumer for direction.
I am fascinated by the subject. Over my career I've found the fortunes of brands I've worked on impacted hugely by pricing decisions. Peers have hit big wins with right pricing choices. And also left money on the table with coy ones. And almost always, asking consumers what they will pay for a product has not helped. Marketers therefore need to control consumer behaviour by sending the right signals.
So what can they do? If pricing needs to be checked, running small real life experiments gives a much better read than consumer research. Why? Well, consumers will almost certainly not be able to assess the value of the concept and will quote a low number. And will rely on surrogate shortcuts to reach an answer. Finally, their real behaviour later will probably be different. So, test and learn is the better approach.
Also, there are category specific oddities in behaviour. Here, studying the experience of other players or historical data will often be more helpful.
Here’s how marketers can control how consumers react to their cues.
Penetration pricing: The marketer wants the maximum number of consumers possible, so prices are set low. Think of ecommerce retailers today . Price discounts have become so central to their promise that little else matters. How they move the discourse beyond price as the category matures, is a separate billion dollar question.
Let’s look at another category -chocolates. Till a few years back all chocolates in India were priced at either Rs. 5/- or Rs. 10/-. Kids and shopkeepers found it easy to trade in coins and these became the default “magic price points”. Every time inflation hit, reducing the size of the bar seemed easier than crossing the Rubicon. Soon, the entire category boxed itself into these coin slots. Someone with no context to this Indian quirk would probably find the situation bizarre but consumers had been taught to expect these prices. It took radical innovation and new brand launches for consumers to accept change. And the category evolved to allow premium, niche offerings.
From Free to Paid: One of the bravest pricing examples is that of The Times in UK starting to charge readers for their digital edition by installing a paywall. Consumers had come to expect free digital content so it was a rude shock. The move was criticised by them, advertisers and politicians. But it paid off in the end. According to Tom Whitwell, who was part of the team that implemented the decision, “When the Times introduced a paywall, the number of people looking at their digital service dropped by 98.7% (from 22m to around 300,000), yet the switch was a huge financial success.” That’s such a staggering drop – clearly a lot of emotional angst was at play.
Much has been written about the consumer need for online privacy and freedom from pesky ads. Ad blocker downloads are up. This begs the question, who pays for the content consumers like to consume online? How should a digital publication make money? The Times example proves that a different model could exist. Consumers could be taught a new behaviour over time.
Skimming the market: Then there are brands like Apple and Tesla – unique, prestigious and with cutting edge technology that competition can’t copy in the medium run. Tesla’s India launch had a tremendous response in spite of very long wait times and high prices. Affluent first movers loved talking about their purchase on social media. This brand can easily skim the market by starting at a very high price and reducing it over time to win newer consumers.
The rule of three: Or Good, Better and Best pricing. It’s a thing in pricing strategy because we love choice. Hence it’s better to have a price band instead of a single price point on a brand. But we can handle only so much before we are overwhelmed. What’s the ideal number of choices then? Evidence points to three as the optimum number. And one of these could be the decoy price with the sole purpose of nudging consumers towards the desired behaviour. Prof. Dan Ariely’s experiment with the pricing of The Economist’s subscription illustrates this. Think about the three models of iPhones at any point. The Gold, Silver and Platinum airline loyalty programs. Yes, price bands exist and they seem to work.
Of all the elements in the mix, pricing is the one that converts intangible brand value into currency for the business. Storytelling, product development and distribution width create value for the brand. Pricing decides how much of it is unlocked by the marketer.