Ever wondered why a Mini Cooper is priced so high in India, way above most luxury cars in its segment, and more than double the US prices of the same spec car? I mooted this question to Mini Cooper brand head and wondered why they wouldn’t want to strip off such features as Harman speakers, two sunroofs, the mood lights and so on. The reasoning was that it could bring down the costs and so more consumers can afford it. His answer? If you remove all these, it will not be a Mini Cooper anymore, will it? Right on!
Clearly, a low price need not be the right price for many brands. Whenever I speak on pricing issues, most clients admit their pricing is totally wrong and how they have been sandwiched by competitors above and below. Little do the leadership members realise the value of communicating the pricing strategy down the line.
Pricing is often understudied, but overused. It is because most people assume that when they face a pricing problem, there must be a problem with the price.
They are wrong. We have seen in our consulting practice that a price change is often the wrong response to price resistance. Pricing problems can be caused by any aspect of the marketing mix. So why spend more time on pricing? It is necessary because problems with other aspects of marketing are rarely obvious until you understand how they affect the customer’s willingness to pay the price.
For example, at our firm, we often see clients who have great products but nevertheless are facing price resistance. There is no obvious problem with the quality of the product, or with the advertising’s impact and recall, or with distribution margins. Yet sales and profits are inadequate, so everyone assumes that the price must be wrong. However, by studying what is behind the customers’ reaction to price, you can understand what needs to be fixed.
First, the product may be great but over-engineered. One of our clients made a product that had an eight-year life, but we learned that most purchasers used it as a part in other products with three-to- four year lives. No customer complained about the product’s quality being too high – they complained about the price.
Second, communication of the product’s value may be inadequate or ineffective.
Marketing communication usually focuses on features and benefits, and assumes that customers can convert the information to value. Often, this is not enough. Even sophisticated purchasers often cannot quantify the value of the benefits they seek. Pharmaceuticals and medical device companies, for example, usually must quantify the value of complications avoided with products or buyers will undervalue the benefits. Similarly, advertisers often cannot quantify the value of the media they purchase, so they tend to undervalue publications or broadcast stations that offer superior value.
Third, customers who know the value of a product often do not think they must pay for it. They have been educated to push for a deal by a sales force that negotiates prices to maximise sales volume rather than profitability. Customers do not complain about this since they benefit from the situation.
The key to correcting the pricing problem is not to change the price. It is to establish policies that create an expectation of price integrity and to pay the sales force to sell value rather than volume. Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision. We think that we must design products, communication plans and a method of distribution before we have something to price. We then use pricing tactically to capture whatever value we can. Right pricing, however, requires that we put pricing at the beginning of the process. For example, a multipart marketing strategy usually is required in value-based pricing. Airlines complicated service packages with arcane restrictions, and their multiple channels of distribution must support pricing that reflects different values of the service to different segments. Without such a strategy, airlines would capture a much smaller portion of the value they have the potential to create. One of the retail chains proved this when they unwisely adopted “everyday low pricing” The strategy actually reduced profits because it undermined the company’s ability to segment customers for pricing. This store’s pricing problem was not with the structure of its pricing but with its inability to create value.
Strategic pricing is about much more than capturing value; it is about orchestrating the marketing fraction to create value that can be captured profitably. We recently recommended that a client design, position and distribute its new product for only a segment of a larger market. The client found this recommendation counter-intuitive since at current prices the product could be better positioned for the larger market. However, going head-to- head with the established competitors would have forced this client to cut prices to defend share, undermining the value of the market and that entry strategy. By focusing on only a segment that could benefit disproportionately from the company’s technology, the chance for competitive reaction was minimised. As a result, more of the value created actually could be captured in the price.
The right pricing will get you up there on profitability, if not market share. What we do not realise is that good marketing begins by determining what marketing efforts are necessary to support good pricing.
The writer spearheads execution and innovation for clients @CustomerLab