Product pricing is a rather thorny issue that most of us deal with from time to time: How much should I charge for XXXXXX? Charge too much and potential customers avoid your brand; charge too little and you’re leaving money on the table. But, how to you figure your product pricing — especially for a new product?
Price is one of the 4 P’s underpinning marketing: product, price, promotion (advertising), and place (distribution/ logistics). In reality, product pricing is integral to market performance including profit, market share, and ultimately success (or failure) of your venture.
Many think consumers make simplistic pricing decisions — buy the cheapest product. And, while that might be true for commodity-type products, that certainly NOT true for differentiated products like the ones dominating store shelves and online etail sites.
In fact, consumers based product purchase decisions on VALUE, not absolute price. And value is a function of BOTH price and benefits related to the product. Basically value is:
value = what you get – what you give up
What you get
You get any number of benefits from buying a brand:
- bragging rights
- enhanced ego – status
What you give up
In addition to product price, you also give up:
- option to buy something else (opportunity costs)
- decision-making effort
Because consumers buy based on value, product pricing is particularly complex. For instance, Coke might sell for about $.25 when purchased on sale at the local supermarket as part of a 12-pack and $1.50 in a vending machine, and $4.25 at the local theater or sports venue. That’s because you have lots of options that are equally convenient at the supermarket and few convenient options at the sports venue. Thus, consumers have different valuations of the product in different situations.
Product pricing as part of brand image
Product pricing impacts how consumers view your brand — it’s brand image. And, most consumers buy brands based on seeing a brand image that “fits” the way they see themselves. In a way, consumers are consuming the brand image as much as they’re consuming the product itself.
Apple case study
That’s why Apple products — iPad, iPhone, Mac — command significantly higher prices than competitive products, in some cases 30-40% price premiums. Certainly, Apple products possess no better objective quality than competitive brands, so why is their product pricing so high and inflexible (have you EVER seen new Apple products on sale?). In fact, it won’t take long to find serious complaints about Apple performance, from the poor video quality of their iPhone to the poor battery life of their tablets. And, industry experts question the value of Apple products relative to HP and other competitors.
So, why do Apple enthusiasts stand in line to plunk down a serious price premium for the latest Apple gadget? Because Apple products possess the “coolness” factor — something consumers are willing to pay for. Sure, they may not be the best products on the market, but Apple innovations are the first products in tech categories. They invented the MP3 format (at least in terms of being the first to commercialize the technology effectively), the Smartphone (again, in it’s current format with those all important apps), and the tablet. Not only is Apple the first to introduce products we didn’t know we wanted, but soon grow to find indispensable, but their products are intuitively easy to use and sleek — much cooler than boxy, unattractive offerings from other brands. Even their advertising, “I’m a MAC, you’re a PC” emphasize coolness in their juxtaposition of hip actors against a drab model.
Thus, product pricing is more than just pricing as low as possible and hoping to capture market share from consumers looking for a good deal.
Want another example of how product pricing impacts brand image?
Cialdini starts his book, Influence, by sharing a story about how product pricing impacts brand image. He relates a story of a shop owner selling Indian jewelry in a little gift shop near an Indian reservation. The jewelry was priced better than competitors in the area and the shop owner couldn’t understand why it sold so poorly. Before leaving on vacation, she leaves instructions for her manager to reduce the price by 50% so she could get rid of it and use the shelf space for something that might help turn a profit.
Upon her return, she found her strategy worked — the jewelry was almost all gone. She congratulated herself for a great pricing strategy and thanked her manager for following instructions resulting in eliminating the poor-performing jewelry. The manager turned the color of a sheet and explained she misunderstood the message left by the owner and marked the jewelry UP by 50%.
Hence, jewelry seen as cheap at it’s original price, was seen as authentic Native American treasures at the inflated price. Consumers gobbled up the now precious jewelry.
Product pricing strategy
So, how do you, a business owner, use these case studies to set prices for your products and services? Well, I think they demonstrate 2 clear lessons.
Consumers pay for brands that “fit” them
In the case of Apple, consumers pay a premium because the coolness of Apple products translates into their image as cool. It’s important to note this works best for products used in public where others see how cool your products are and figure you’re cool, too.
Spending resources to stay innovative, to care about style as well as function, and sophisticated messaging to reinforce the image of your brand pay off in terms of product pricing — allowing you to charge a price premium.
Consumers use pricing to tell them how good something is
Of course, this only works when consumers can’t judge the objective quality of something, like in our jewelry example. But, frankly, there are lots of situations where consumers can’t judge the objective quality of something – especially services. I mean, think of an attorney. How do we KNOW he’s any good? We use his pricing, the opulence of his offices, etc as surrogates for how good he is.
For my colleagues who offer social media marketing or other marketing services, this is a serious consideration. If you give your services away too cheaply, folks don’t expect much in terms of quality and it’s harder to get bigger clients.