The Price is Wrong

by | Oct 7, 2012 | Marketing Advice | 3 comments

How do you set prices for your products? Do you try and determine what the market will allow, do you base it off of your cost or do you use pricing as part of our branding and positioning strategy?

 

The price of stuff is all over the place. At times pricing is so illogical and often not well-reasoned or consistent with a brand’s position. 

Take water for example, you could purchase 50 gallons of water (from a tap) for about $1.00  or you can pay $3.99 for 12 oz. of water from Fiji.  How can you avoid getting yourself underwater when you price your product or service?  

Irrational Behavior
Consumers and businesses buy for irrational reasons that often have little to do with price. I try to always buy my gas from Exxon.  I drive past cheaper stations but I have a totally irrational connection to Exxon because my Dad gave me my first credit card in the 1970’s from Exxon. Some agencies or B2B suppliers are successful because we like the salesperson and are swayed by the person not the offering. Consumers can sometimes behave like sheep following what others do. Features and logic don’t always make the cash register ring. 

 
Pricing has three zip codes where your brand can live.
Zippity Doo Dah
One territory is below market. One is at market pricing. One is above market pricing. If you are at market or below, you are heading into a territory that makes brand differentiation very difficult.  In fact, if your focus is on pricing in your marketing efforts, you are fighting against differentiation and brand building. Everyone can lower the price.
 
Value or bargain based pricing that is less than the market tends to give you a cheap experience. Cheap quality, cheap service and nothing extra as the brand becomes a commodity. It is very difficult to make money in this segment unless you have excess capacity that is idle and underutilized or you have some incredible added leverage that is unique in your marketplace. 
 
The Dollar Store has a different approach to purchasing as they buy closeout goods. These products are bought way below market value so they can resell them at way below market pricing.  But most brands don’t have this opportunity. If you want to build secondary meaning for your brand you must distance yourself from commodity pricing. Undercutting the competition is often the wrong place to be. Everybody can lower price so it never offers a competitive advantage. This is true for the butcher, the baker and yes even that woman who makes candles.

Swimming with the fishes

Market pricing allows you to swim with the herd…or fishes to stick with the liquid metaphor. In the land of market pricing, you are swimming with all your competitors crowded together in the same part of the pond and you have to earn business based on something besides price.

But will you have enough gross margin to do this? Can you differentiate yourself in a meaningful way without the margin to support your added features or benefits? This too is a very difficult place to be and with little or no pricing power, you may be up a creek. Few brands are built sitting on this fence. You aren’t cheap enough and you don’t offer enough added benefits. Dull. Boring. Dangerous.
 
Going for the Gold
Above market pricing is where the gold is. But it comes with an important challenge that requires you to prove that you offer something worthy of that extra price. If I am a $4.00 muffin in a world of $3.00 muffins, what possible reason (real or emotional) can cause a consumer to dig into their pocket for that extra money? What if $1.00 of every muffin went to feed children in an orphanage? You might say that buying that muffin makes you feel better about indulging or you might say, “if I want to donate to an orphanage, I’ll do that on my own.” But at least you are offering consumers a compelling reason to pay more. The market will tell you if it is a good idea.
 
I expect a product or service that is more expensive to offer more benefit or value to me. If I buy a more expensive item and don’t get added benefits, I’m not paying you more. When BMW entered the U.S. market, they thought pricing would drive success so they entered slightly below market pricing for similar features. They failed at their inaugural product launch.  

When they raised their price above the market, suddenly consumers said, “These cars must be special if they charge a much higher price.” This is a great lesson for brand managers struggling with tight margins. BMW had a better product worthy of the higher price. Can you justify the higher price for your product or service? Do you offer something extra that drives home your brand’s value proposition?
 
Whether you are an accountant, photographer or service provider who charges 20% above the market rates, how do you justify your difference in fees? 

Do you offer something of value that customers can’t get elsewhere? Do they understand the difference? Is it truly special enough to be worth the premium? Maybe, you want to limit the number of clients and want to only work with those who can afford to pay at the high end of the scale. If you can maintain a higher price, you don’t need as many clients and you earn more with fewer hours of work. But what is the benefit to the customer or client to pay more?
 
Ask yourself – how you can justify charging a higher price and what added features, services or benefits do you need to separate yourself from the crowd?  Is an electrician who charges $150/hour better than one who charges $100/hour? Why would I use the more expensive one if the cheaper craftsman will do? What if the electrician for his higher fee also offers a quick 15 point audit of areas where fires occur and you get that as part of the visit? I often irrationally justify getting my car fixed at a dealer where it is more expensive because they wash my car for free. Ridiculous, I know but that is how illogical we consumers are often in our behavior.
 
I often hear people say that the market won’t allow you to raise prices. Do you offer some added value, real or perceived, that is truly different to your target audience?   Do you effectively communicate this value? 

Being different can be worth a higher price if you can package it in a meaningful way to your customer or clients. Try experimenting with raising prices tied to a new offer or benefit that becomes part of your standard approach. 

Maybe your brand is worth more but your price is telling  the wrong story. 

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3 Comments

  1. Rosie Addison
    Rosie Addison on October 7, 2012 at 3:34 pm

    Hi Jeffrey,

    Absolutely agree with everything you said and I love your example of your own purchasing-rationale when it comes to Exxon!

    I would also add that again and again the clients who are wanting rock bottom prices are the clients you really don’t want to deal with! True in my experience wherever I’ve worked & now that I have my own business.

  2. Jeffrey Slater
    Jeffrey Slater on October 7, 2012 at 4:37 pm

    Rosie, Great comments and insights. If you don’t say no to certain customers, you let them run your business. Take the wheel— you are in the driver seat. If you are offering great value, price isn’t the issue. Cheers. Jeff