Pricing Strategie

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Photo by Henry & Co. on Unsplash


This is the fourth part of my "Understanding Marketing" series. It deals with how to price your product. What effects the price of a product.I recommend Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon


Pricing Puzzles

Trader Joe’s

  • Why does Trader joe’s sell nationally-branded water, e.g., Poland Spring, at very low prices?

Walmart

  • Why does Walmart sell Tide detergent for $4.73?

Catalog Company

  • Why are more shoes sold at $49 than at $44?

5Cs and Pricing

  • Customers (most important, discussed last).

  • Company

  • Collaborators

  • Competitors

  • Context (not discussed)

Four Inputs to Pricing

  • Floor - Marginal cost of the product.

  • Ceiling - customer willingness to pay.

  • Competition

  • Price for distributors or resellers.

Inputs to the Pricing Decision

  • The floor and ceiling bound the Economic Value to the Customer (EVC) metric

  • Note, however, that the 5Cs affect the final location of the actual price between the floor and ceiling

Company Issues

Financial Considerations

  • Target margin or internal rate of return (IRR)

Consistency in the Product Line

  • Price of new Toyota Camry is influenced not only by prices of Honda Accord or Ford Taurus, but also by the prices of Toyota Corolla and Toyota Avalon.

Consistency in Image

  • It’s difficult for Neiman Marcus to cut prices in response to price competition.

Competitor Issues

Competitor Aggressiveness

  • The ability of the competitor to sustain a price-based response, i.e., whether competitor has “deep pockets”; propensity for “irrational” behavior.

Willingness to Respond on Price

  • Direct financial cost to the competitor

Competitor Position

  • Market leaders are more likely to initiate; followers are more likely to imitate.

Collaborator Issues

Collaborator Incentives

  • How hard will the collaborator work to “push” your product; what kind of “pull” support do they expect?

  • What other functions will perform, how much influence do they have? (see Distribution session)

  • Also, it’s not just about margins - Return on Assets (ROA) also matters



Customer Issues

Price Sensitivity

  • What drives it?

  • How can we measure it?

Psychological Issues

  • Odd numbered endings (e.g., $3.99, $1,995, etc)

  • Mental Accounting

  • Prospect Theory, including reference effects, loss aversion, and diminishing sensitivity

  • Endowment Effect


Customer Factors

Price Sensitivity Affected By

Ease of Comparison

  • Private label products, i.e., retailer brands used to be placed in a separate section in the store; placing the private label next to branded products increases the ease of comparison and thereby increases price sensitivity.

Expenditure

  • Large volume users tend to be more price sensitive

  • Buyers tend to be more price sensitive when the focal component is a large part of total costs.

Shared Expenses

  • A separation of between the user, e.g., an employee and the payer, e.g., an employ can lessen price sensitivity.

Price/Quality Inferences

  • When quality differences exist between, but the user cannot distinguish them e.g., in the case of complex legal services, price sensitivity will be lessened.

  • This is especially true when the seller uses branding and other methods to signal quality.


Psychological Factors

9 endings [e.g., 3.99, etc.] Some experiments suggest that charging odd prices results in a substantial effect.

Experiment: Effect of advertised price endings on sales of margarine:

  • Regular price $0.83; Salse = 2817

  • Discount price $0.63; (+194%)

  • Discount price $0.59; (+406%)


Getting Deeper into Customer Factors

  • Price sensitivity: Drivers and measurement

  • Psychological factors.

The 7Ms

Classic Campaign



California Milk Processor Board: The Solution

Milk advertising in 1992:

  • Adults: Milk is healthy

  • Teens: Milks makes you strong and beautiful

  • Kids: Milk is cool and fun

Beliefs about milk in 1992:

  • “I like the taste of milk”: 80% agree

  • “Milk is a healthy drink”: 89% agree

Solution:

  • Increase mindshare: create memorable advertising campaign

  • Manage “rationing”: encourage buyers to bring more milk home.


The 7M Framework

Targeting & Positioning

  • Market (Who should I talk to? Target audience)

    • People who currently drink milk

  • Message content (What should I tell them? Key Benefit/Positioning)

    • Make sure you have enough milk (it complements many other meals)

Advertising decisions

  • Mission (What do we intend to achieve? Awareness, Knowledge, Interest, Trial)

    • Increase milk consumption by one glass per week within a year

  • Message design (How should I say it? Creative Strategy/Solution)

    • Got Milk? “Deprivation” compaigin

  • Media strategy (How do I reach them?)

    • TV, print

  • Money (How much do I need to spend?)

    • ??

  • Measurement (Was it worth it?)

    • 60% aided recall in 3 months

    • 2.6% ($30M) increase in annual sales

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