Is the price right?

I’ve previously described pricing as the “ugly sister” of the marketing mix. Too many marketers don’t feel confident with it. For others, the involvement of Sales and Finance in pricing means they don’t feel entitled to fully influence it.
But pricing is critical – not only as a key lever for increasing revenue and profits, but also because it’s key to brand positioning decisions, it helps consumers navigate the shelves and sends cues about quality and value.
In some circles, to admit that you enjoyed reading a book about pricing is a brave thing. But that’s been my experience of “Priced to influence, sell & satisfy” by Atul Dholakia.
Dholakia is a well-regarded professor at Rice University in Houston TX, who’s specialism is applying behavioural science to pricing. The rather dull title is clever camouflage for a book that’s fascinating and digestible.
The initial premise is that traditional economics is pretty unhelpful to understand pricing decisions. We’re taught in school that prices are set by the interaction of supply & demand in a perfect market where everyone knows what’s going on… but the theory is based on unrealistic assumptions, perhaps the biggest being that everyone behaves in a rational way.
Behavioural science includes a bunch of subconscious ‘heuristics’ (or shortcuts) that people use to make choices. Understanding these in relation to price helps marketers to optimise price – helping consumers navigate choices and making more money for their retailers & own business.
There’s lots of great stuff in the book, but below I’ve pulled out a few of the themes that stood out to me.
A huge proportion of prices in Asia end with (lucky) eight
Psychological price points
Price has been used for years to send signals to shoppers. In Western cultures, prices ending in -9 are normally interpreted as offering good value. In Eastern cultures (such as in China and much of South East Asia) the number 8 is considered lucky and an invitation to prosperity, so very many prices there end with -8. Conversely in China the number 4 is pronounced “sì” which sounds similar to the word for death and nearly always avoided by retailers. These are essentially highly irrational, yet incredibly important drivers of consumer decisions.
To reduce mental energy, consumers tend to round prices to something that easier to compute. So, selling a product at €1.99 is interpreted by the consumer as 1-something, whereas pricing just a few cents higher at say €2.19 would be interpreted as 2-something. That rounding equates to quite a difference in perceived price.
Practical takeout – for retailers this means that some price movements are more valuable to make than others. For example, a price reduction from €2.19 to €1.99 is likely to drive much more incremental volume, than the same reduction from a starting price of €2.29. The latter might not be worth doing, since margin would be given away for not much increase in volume.
Round pound prices are easier to add up and may create more trust between retailer & shopper
Some retailers – such as Iceland in the UK – recognised the tendency to round to whole pounds and decided to help budget-conscious shoppers to feel more in control of spending by favouring ‘round pound’ price points in store.
How prices are represented has been shown to result in different interpretations. For example, a growing number of food service outlets and cafés are dropping the currency symbol and dropping or reducing decimal places; these apparently little tweaks have been shown to increase quality perception.
Trendy coffee chain Joe & the Juice has started presenting menu prices like 3,4 (meaning £3.40)

Price & memory

Dholakia suggests that marketers overestimate the extent to which consumers are familiar with prices and consequently, we worry too much about increasing them (the implicit assumption is that faced with price increases consumers will likely turn their backs on us).
From my own experience, I wonder if the fear more of an anticipation of the retailer’s reaction – that they’ll punish us with less support, reduced distribution or ultimately delist our products.
The author highlights three levels of pricing awareness: 

  • Price recall: this is where consumers can remember the exact price weeks or months after a purchase.  Few consumers – and in consumer goods, very few – are able to recall price with this degree of accuracy.
  • Price recognition: although they cannot remember prices, if prompted (say, by a menu) consumers can identify if it’s a price they’re used to paying.  For example, if I go into Pret-a-Manger I know that most boxed salads are between £4-£5, so I’d be comfortable with a salad at £4.79.
  • Deal spotting: the most superficial level of price understanding is where I can tell if a price represents a good/bad deal because it lies outside my reasonable range.  To take the same Pret example, I’d regard a salad at £7 as a rip off and a salad priced at £3 as incredibly good value.

Practical takeout – we tend to overestimate the number of consumers with perfect price recall. One of the ways we can help retailers (and help ourselves) is to uncover evidence-based shopper insights about pricing that are specific to our category.

Most consumers work within ranges of reasonable prices: exact prices are rarely remembered

Reasonable range

In most categories, consumers have a ‘reasonable range’ of prices which they will call upon to evaluate a purchase.
The range depends on context – a sandwich in a shop (grab something quick for lunch) would have a different reasonable range of prices associated with it when compared with a sandwich in a gastro pub (relaxed weekend meal out).
In this example, my quick lunch range might be $4-$5, whereas my relaxed weekend meal out range could be $15-$20 once my sandwich has been beautifully augmented with chunky chips, salad and a rustic dressing.
Products priced outside the range will tend to either be disregarded straightaway or at least viewed with scepticism.
Practical takeout – knowing your consumers’ reasonable range of prices is incredibly helpful to gauge the extent to which your products can tolerate a price increase. More specifically, if operating towards the bottom of the range, marketers can contemplate raising prices without too much loss in volume.

Price tiers

Most of us are familiar with the fairly commonplace 3-tier pricing approach used by retailers – dubbed “good, better, best”. The thinking goes that you navigate to your price tier, then evaluate different options (brands, claims, flavours, price points, etc) within your chosen tier.
This model normally comprises between 3 and 5 tiers (more than 5 tiers is not advisable as it becomes too confusing) and can be found not only in supermarkets, but also many industries – including automotive, travel and leisure.
Different price tiers help shoppers “mentally organise” the options on shelf. Pricing tiers can be used by retailers to get consumers to trade up. Rather than a linear progression of equidistant price points with corresponding increase in quality/features, the more successful brands are priced to exaggerate the differences at the top end and make trading up at the bottom end look attractive.
This example of prices for different seats on a Virgin Atlantic flight from London to New York illustrates the point.
The basic fare is £1,411 (not exactly cheap for a transatlantic flight). In comparison, the option of getting a bit more legroom in ‘Delight’ for an extra £60 for my 8 hours in the sky seems pretty attractive. I also get to board earlier to join the scrum for the luggage bins.
The next step up, to Premium, is much bigger (but still ‘only’ 30% more than Delight) and crucially, the price is still £1000-something, so it’s still anchored off my starting price of £1000-something.
The most expensive option is Upper Class – the full bells, whistles, flat bed, free pyjamas and swanky bar experience. Who knows, they may even include a lock of Richard Branson’s hair in my goody bag.
The pricing people at Virgin recognise that if I’m contemplating this fare, then I have more money than sense, or someone else is paying. In any case, I’m not sensitive to price.
Perhaps the main purpose of a £7000-something price in this table is to emphasise the apparently incredible value of Premium to the immediate left.
Practical takeout – although we cannot dictate prices as brand owners (that’s illegal in many places) we should recommend price tiers that help consumers to find the right products. Preferably we should encourage them to trade up (and never make it look attractive for them to “trade down”). To make tiers work for the consumer, either the retailer (or the brand if it’s big enough) needs to provide enough choice in taste-based features at each price tier.
The author spends some time specifically looking at “decoy” prices. These are prices that provide another point of reference to consumers and help frame other products as better value. These can be used to optimise sales & profits.
Cleverly arranged in reverse price order, Range Rover has model options ranging between £85k – £30k
Let’s say we have two options priced at £150 and £250, and we want to increase sales of the more profitable £250 option. We could add a third option at say, £450. By comparison, the £250 option seems good value, plus as £250 now becomes our middle price point consumers may assume our mid-range is the best seller (safe option) and might trade-up from the £150 product (which by implication is now basic or entry-level).

Price as proxy for quality & the placebo effect

Consumers generally believe that “you get what you pay for” – in other words, there is a strong perceived correlation between increasing price and increasing quality.

This belief so widely held that many studies have shown that higher priced products are more effective/satisfying (even when there is no material physical difference to cheaper options).

And it’s not something that reserved for expensive cars or holidays, studies have shown that medicines are reported as being more effective when the patient knows the price is high, luxury food is more special and pleasurable when it is known to be expensive.
While I think the principle is easy to get, I like that the author has included a model for “thoughtful value mapping” that the marketer can apply to review price/quality relationship in their own category. Ultimately the model helps find the ‘sweet spot’ of price & quality that represents best value, as it’s perceived by the consumer.
For 25 years, the strap line for Stella Artois was “reassuringly expensive” a direct appeal to consumers’ sense that higher price equals a better-quality product.
Introduced in 1947 and still going strong – the strap line that guarantees eternal love
DeBeers is a famous – and very early – example of using price to signal value. Often times case studies celebrate the diamond brand for establishing the pricing benchmark of spending 2 months salary on an engagement ring.
Dholakia also highlights a second angle, switching people to diamond rings (from less expensive stones & gems) by associating the purchase of a diamond ring with a commitment to a lasting relationship through the strapline “a diamond is forever”. The implication being if a partner is prepared to invest in a diamond, it signals his high level of commitment to your long-term happiness together. Wretch-worthy, but incredibly effective.
Practical takeout – we need to regard price as more than one dimensional, recognising that it also sets expectations for consumers about quality. In food and some other categories, private label continues to grow share. Often marketers are reluctant to recognise that its not just a price game – but the quality offered for the price charged is what’s disrupting the equilibrium.

Frequency of price changes

According to the author Amazon used to change the price of SKUs about every 6-7 months on average, for some products that is now 6-7 times a day. Technology now enables price to respond to time and context. In Asia, electronic shelf edge pricing allows retailers to change advertised prices instantly.
Uber’s model famously includes surge pricing that applies a multiplier to the journey cost when there is a high demand for taxis or limited supply of available drivers. Although fairly transparent this approach is not without its critics – the highest multiplier (recorded in Scandinavia) equated to charging fares of nearly $1 a second.
Helping get Canadians home. You can almost hear the chorus of “thanks for that”
Dholakia cautions against changing prices frequently – “just because you can, doesn’t mean you should”. His argument is that prices that move constantly create distrust, slowing decision-making by preventing people from relying on subconscious default shortcuts. By introducing this ‘friction’ the likely outcome is reduced purchase intent.
Amazon has played a game-changing role in deflating prices to the consumer. On the face of it, this should be good news for buyers. However, the author highlights a flip side. Factors like longevity and quality have become increasingly less important in decisions; creating potential problems in terms of dissatisfied consumers and the environmental implications of more ‘expendable’ products.
Practical takeout – consumers generally hate frequent price changes and they also tend to distract away from non-price elements such as the features and benefits of a product. So, price moves should be well-considered. Being too preoccupied about price alone drives to a race to the bottom, which quite apart from the obvious pressure on brand margins, (ironically) may not serve consumers well beyond the short-term.

The greatest challenge in pricing is the human factor. On the face of it, the approaches in this book look more complex than a traditional micro-economic thinking. But – because this book recognises the reality that pricing decisions are about psychology and emotion – to marketing practitioners the approaches presented will feel far more grounded and applicable as a result.

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