When “cheaper” does not mean “better” – price is (not) everything
“Money doesn’t make you happy, but everyone still wants to prove it for themselves,” wrote Stefan Kisielewski. Many said something similar. Every one of us thinks, talks, and writes about money. About how to earn more and spend less, what to buy and why.
Whether we want it or not, money is an inseparable part of our everyday life. It’s a source of joy for some and a source of worry for others. We all live in times when finances are fundamental. Money shapes the world and our perception of reality. The marketing world is no exception to this. Therefore, if you want to…
- understand why price is an inseparable feature of a product;
- discover price impact on your perception of a product and the buying process;
- get to know different pricing methods (and learn to choose the right one for you);
- recognize the role of price in business, marketing, product strategy…
… sit back, take a sip of coffee or tea, and enjoy the reading.
Let me invite you on a challenging journey. Our goal is simple: understand how to use your product or service price to achieve your business goals. Are you brave enough to join me? 😉
How much is it and why so expensive?
Every transaction involves an exchange. In a bakery, I exchange a stack of coins (or a few digits in my virtual account that are supposed to represent those coins) for fresh bread.
To the baker, the money I pay has greater value than the bread he has plenty of. He is going to spend the money according to his needs.
It is a transfer of value. The exchange that takes place every day in the bakery is not just a “something for something” arrangement. It is a subject that requires consideration in a wider context. We need to account for everything necessary to make bread available for me to buy:
- the bakery located on my way back from a morning run;
- the quality of the flour and other ingredients;
- the bakery equipment;
- the time it took to make the bread;
- and a bunch of other things that I’m not aware of and don’t think about because I don’t need to. And I pay for this, too. When I eat warm bread for breakfast, I appreciate the fact there was no need for me to learn baking, and I don’t have to get up at the crack of dawn to knead the dough.
Nicosia’s model of consumer behavior is used to organize this phenomenon. According to the model, each transaction is a derivative of two-way communication between the parties – most often a consumer and an organization. It is influenced by the attitude, experience, and motivation of those involved in the decision-making process. And while these are often things we grasp intuitively, when analyzing a pricing strategy, it is worthwhile to analyze each element of the diagram below (Figure 1) and ask yourself how you can use it to achieve your goals.
The diagram should help you determine how the consumer’s attitude (constructed by their personality traits, experience, and preferences) can positively influence the decision they are about to make. It should also explain how to use this information to build more effective messaging and increase value for a customer.
Here’s marketing lesson number one: money is – by design – a carrier of value. It is a standardized measure of what you sell or buy.
And that would be the last simple statement here. After all, how do you define “value”?
Price as a carrier of value
It is hard to find a more subjective and abstract concept than “value”. After all, depending on your needs, situation, worldview, or ideals, you will understand this differently. For someone, buying bread will be just a way to satisfy hunger – such a person will not pay attention to the ingredients, will not think about the product’s role in the daily diet, and the primary criterion for choice will probably be the price. For someone else, the purchase of bread may follow an advanced decision-making process, including verification of potential allergens, ingredients, and the ethics of the bakery as a workplace. This person will be aware that the higher price results from meeting other needs.
In the marketing world, value is the perceived benefits minus expected costs. Let me point out that both benefits and costs can (but do not have to) be understood in purely financial terms (we will deal with the topic of argumentative categories later in this article). There are also emotional aspects, personal motivators, and so on. Although we like to think of ourselves as such, humans are not logical beings.
And so we come to marketing lesson number two: product value is a relative and subjective thing.
Price as a strategy element
I’m sure you have come across the 4Ps concept, also known as the Marketing Mix. It is an interdependence between a product, promotion, positioning, and price. In short, it is all about the proper management of all four elements mentioned above. It is the only way to make the market react positively to your offer. So one step at a time:
- create a good product that responds to the real needs of your audience;
- learn how to reach your audience with the right message;
- match your product or service distribution to your customers’ habits;
- last but not least – get the price right.
There is a pile of books written on this concept because, like everything in marketing, it is not a simple and obvious subject. It is not proper science where it is enough to substitute data into formulae to solve a problem. After all, what does “the right one” or “appropriate” mean?
There is just one short answer: it depends. It depends on your business goals, product strategy, capabilities, and resources. Most certainly, a goal defined as “sell as much as possible, at the highest possible price to a large number of people” will not always be the right answer. Also, it is not an easy one to realize.
There are many pricing methods but the most popular include:
- mark-up pricing (the simplest method, usually used by intermediaries and resellers),
- cost-plus pricing (similar to the previous one, except that here the expected profit per piece is fixed),
- perceived value pricing (a product is worth what people are willing to pay for it),
- competition-oriented pricing (equating price to competitors’ prices)
- auction-type pricing.
Of course, this is a model description – in reality, you can meet all kinds of hybrids of different methods.
Which one is the best? The one that fits your strategy.
And so we come to marketing lesson number three: the price of your product or service must be an integral part of your strategy and cannot exist outside of it.
Price is always customer-centric
Every good strategy starts with a customer. In a bakery, you don’t spend money on bread – you pay for satisfying your hunger. When you go to a car showroom, you don’t pay for a set of metal sheets and tires. What you buy is safety, mobility, independence, and prestige. When you build a house, you don’t invest in bricks and cement, but in the realization of your dreams, in warmth on a cold winter night, and a shelter from the summer heat.
Of course, the above is a simplification, but it is also a great mental exercise that allows marketers, product owners, and salespeople to walk in customers’ shoes and understand not only what they sell but also what customers buy. These are often very different things.
This shift in perspective is one of the success factors for those who have done their homework. Let’s look at the most trivial examples: Apple, Ralph Lauren, Prada, and Gucci.
Contrary to what skeptics claim, their products are not expensive “just because they are.” They are high-priced because someone has invested time and energy into understanding the people they want to reach. They discovered their needs, desires, and motivations. These brands made pricing part of their overall strategies and created an appropriate image to attract the right group of customers.
Let’s structure this using the EKB model named after Engel, Kollat, and Blackwell who developed it in 1968. It assumes that every commercial relationship consists of 5 basic elements: problem recognition, search for options, alternative evaluation, purchase, and post-purchase behavior.
problem recognition – > search for options – > alternative evaluation – > purchase – > post-purchase behavior
Sounds obvious? Perhaps – but if so, why do so many organizations act in total disregard of this way of thinking? It’s not hard to find cases of companies that focus exclusively on the penultimate element of the entire cycle – the purchase. They completely ignore what happens in a consumer’s head before (and how they should respond to it) and what a customer is left with once they’ve made the purchase. After all, this is important because building a perception of a product’s and service’s value should happen at every stage of the EKB model. Let’s look at:
Recognition of a problem (that a customer can solve with what you offer) is based on internal and external factors. And while we cannot directly influence someone’s thoughts and experiences, as marketers, we have control over some elements of the environment and the signals that reach them. I don’t mean aggressive advertising.
It’s about expert content (content marketing), deliberate referral marketing (which is most effective if you take proper care of a customer after the purchase), or compelling messages compatible with the recipient’s lifestyle. To achieve this, you have to get to know your customer well, and that is not easy.
But there is something more behind this mechanism. Something that can be expressed by the word “relationship”.
And so we come to marketing lesson number four: the price of your product/service is a reflection of your customer.
Price as a product feature
Let’s play economists for a moment. According to textbooks on economics (which is defined as the science of limited resources), price has an informational, redistributive, and simulative role. According to the laws of economics, the greater the demand for a good, the higher its price.
This statement is true in the vast majority of cases. Those cases have a common denominator: the lack of differential value-added.
The fundamental law of supply and demand assumes a comparison of the same products, but it does so according to the principle of ceteris paribus, meaning “all else being equal.” The snag is that those circumstances are rarely identical, and they certainly don’t have to be.
So if I have to choose between two loaves of bread from one bakery, with identical ingredients, available for purchase in the same place, I will base my decision on price (because all other decision variables are equal) and buy the cheaper one. However, if one of the loaves came from a bakery that employs people with disabilities and conducts sustainable and ethical business that aligns with my values, low price will no longer be a determining factor.
It could also be that a low price will actually put me off! It’s not hard to imagine a situation when a low price discourages a particular segment of customers from buying.
Doesn’t a strangely cheap product immediately arouse your suspicions? Everything seems to be fine with the product, the composition meets your needs… but how is it possible for a producer to offer it 30% cheaper than the competition?
Consumers subconsciously associate price with the quality of a product. The Fair-Value concept in the diagram below illustrates this phenomenon. In short: the higher the price, the higher the value in the eyes of a customer.
Before you exclaim “EUREKA” and add two zeros to the price of your product, pay attention to the “fair value” line, which results from various market factors (including the prices of competitive products, market equilibrium, etc.) and your marketing mix that I mentioned at the beginning of this article. In short: the price is only fair if you can justify it. Being able to justify it means your customers accept your justification.
And so we come to marketing lesson number five: the price of your product/service is appropriate as long as you can convincingly justify it.
So… when is price irrelevant?
Price always matters, although sometimes not as much as it might seem at first glance.
Understanding the mechanism that governs the purchasing process is one of the pillars of a successful business model. Price is the language every company uses to talk to its customers. A language is a tool. You can use it to insult everyone around you or to change this world for the better.
In this article, you’ve learned how price affects the way a product is perceived. And although this is just the tip of the iceberg, I believe that this knowledge will help you shape your pricing policy more consciously and understand how it should correspond with your overall product and company strategy. Pricing definitely should not be left to chance.
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