This is actually a very complex questions because price has an enormous impact on how much product you’ll sell. And, the whole issue of pricing is ripe with myths. Use 1 of these myths to price your brand and you may be hurting rather than helping your brand.
Price myth #1 — use a standard mark-up
Using a standard mark-up is one of the most common strategies for pricing your brand probably because it’s so easy. To use this strategy, you simply add up all the costs associated with your product or service, then add 20% or 50% or some other amount (commonly you’re targeted ROI – Return on Investment) to come up with the final price.
Pricing using a standard mark-up is common for retail businesses and manufacturing — situations where you can easily determine how much each product costs.
Price myth #2 — you should price your brand lower than competitors
Pricing based on what competitors charge is also a common pricing strategy. And, for some goods, lower prices look very attractive. For instance, many people have little brand loyalty to their soft drink and commonly buy either Coke or Pepsi depending on which brand is cheaper this week. If Coke were CONSISTENTLY higher priced than Pepsi, it is likely Coke would see a decrease in the amount of product they sold.
That’s WalMart’s strategy — to feature lower prices than their competitors such as Target or Kroger’s. Of course, lower prices come at a cost — and one that consumers pay. WalMart can only keep prices lower by paying less for the items they stock. WalMart pays less because they buy huge quantities of a select number of options in each product category. This reduces the options consumer find in their local WalMart store.
Price myth #3 — consumers prefer the cheapest products
This is actually a dangerous myth because it leads businesses to make bad pricing decisions — it’s also the reason marketing broke off from economics 85 years ago this month. Sure, when it comes to buying a commodity like apples, consumers want the cheapest ones around. If you charge more than everyone else, you won’t sell a single apple.
But, when products are different (branded), consumers vary in their responses to price. Apple is an excellent example of this. Apple products sell for a significant premium price over all their competitors — from iPhones, to tablets, to computers, to iPods. Are their products so technologically superior that they do tasks better or last longer? Don’t even get me started on THAT debate. But, the reality is that their price premium has little to do with their technology and everything to do with their brand image and brand loyalty. Apple owners would rather fight than switch (to borrow the slogan from a cigarette company). Buying Apple products is a symbol of coolness that Apple owners are willing to pay for.
Price myth #4 — companies that charge more make more money
This is categorically untrue. In fact, LOWERING your price may actually generate more income than a higher price. That’s because income is a function of both price and quantity and consumers will buy more at a lower price than a higher price. So, when lowering your price leads to enough additional sales, you can make MORE money by lowering price.
In fact, it may be better for a firm to lower their price rather than spend a lot of money advertising their brand. Of course, this only works for brands that already have sufficient advertising to make consumers aware of their products in the first place. Firms can use sensitivity analysis to determine when lowering their price makes sense.
Pricing myth #5 — you should charge the lowest price you can
This is a corollary to myth #3 which assumes consumers buy the lowest priced brands. In fact, especially in cases where it’s hard to determine how “good” something is, consumers often use price to tell them something is good or better than something else. Cialdini tells a story in the first version of his book Persuasion about a store selling jewelry. The store owner leaves word to discount the jewelry by 50% so she can get rid of the slow moving inventory and replace it with something that might sell better. She comes back from a trip to discover her strategy worked — all the jewelry is GONE. In discussions with her manager; however, she discovers the manager misunderstood her instructions and doubled the price of the jewelry.
So, how do you explain that the jewelry sold better at twice the price?
Easy. At twice the price the jewelry appeared to be genuine, while at half the price, the jewelry appears to be cheap costume junk.
Of course, this pricing strategy only works with products that consumers find difficult to judge (determine their true value) — jewelry, professional services — and items that only show their value over a long time — cars, major appliances, furniture.
Price versus value
These myths exist because firms fail to understand that consumers exchange money for benefits. If your brand provides better or more benefits, it can charge more and still provide excellent value. And, remember, some of the benefits might be psychological rather than tangible benefits.
Hausman and Associates
Hausman and Associates, the publisher of Hausman Marketing Letter, strives for superior value for our clients by providing a virtual agency that eliminates overhead. Every dime a client spends goes directly into services that make their brand SIZZLE. We are not the cheapest agency out there, but we provide cutting edge services by the best people in the business. Please, take a minute to explore some of our service options or subscribe to our newsletter to discover more at the intersection of marketing and social media.