March, 2003
To Price Right, Understand How the Consumer Thinks
It’s an irony of the business world: although it plays a key role in
profitability, pricing is usually misunderstood by executives. They think they have to set
prices based on cost, or based on competitors’ pricing, or they use the
"OTA" method – which we’ll politely refer to as pulling prices
"out of the air." None of those methods will ensure an optimal price.
To arrive at the right price, you must understand the quirky
psychology of the consumer when it comes to pricing. For example, a company
sells two versions of a product – one for $14.95 and another, slightly improved
version sells for $18.95. The $14.95 item is the better seller; it’s also the
lower-profit product. Then a competitor comes in with a third product. A similar product,
but a fancier version, priced at $34.95. What happens at the first company? The $18.95
product suddenly becomes the best-seller.
Another classic glimpse into consumer psychology regarding pricing occurred when the
New York Times reported that Coca-Cola was testing a
vending machine that could sense the outside temperature and "automatically
raise prices for its drinks in hot weather." The story ran around the
world and was met with outrage. On the day the story broke, Coke backpedaled furiously, a
spokesman saying of temperature-controlled pricing, "We don't see [that] happening
anytime soon, if ever."
Of course, customers already paid a wild variety of prices for Coke, depending on the
setting. What the company got wrong was the human part, the perception of price. Consider
what the reaction might have been to this headline: "Coke testing machine that
automatically discounts prices in cool weather."
A variety of companies offer software that analyzes sales patterns and calculates
optimal prices, as well as when and how much to discount. In many cases, companies using
this software have found they can increase profits by discounting
less, but discounting sooner.
Some large companies, such as DHL, are using software that finds the most profitable
prices by actually offering different prices for a small sample of transactions and then
analyzing the rate at which customers purchase or decide not to purchase.
For those who can’t afford this kind of software, it’s important to avoid the
temptation of asking focus group respondents, "how
much would you pay for this" – which is notoriously unreliable. However, valuable insights can be obtained by presenting respondents
with a range of items at different prices, including competitive offerings, and asking
them which they would purchase and why.
Call Jay Zaltzman at Bureau West Research Group (tel: 1-818-752-7210) to discuss how
we can conduct research to optimize your pricing and increase your profits.
Sources: Fast Company,
March 2003; Bureau West research
Contradictory Research Findings? No, Different
Segments
We’ve mentioned it here in the past: Americans are cleaning
their houses less and using scented candles more to hide that fact! Certainly,
the days of the "housewife" who measures her self-worth by the polished shine of
her dining room table are long gone (does anyone remember that Lemon Pledge commercial?).
So how can we explain the phenomenal success of the Swiffer? To the uninitiated, the
Swiffer looks exactly like what it is: a long plastic stick attached to a swatch of cloth.
To thousands of neat freaks, though, it's an object of
near-fanatical devotion. Launched by P&G in 1999 as a broom alternative, the Swiffer
and its accessory products have already generated $315 million
in sales.
How to explain this contradiction? Are we a nation of slobs or a nation of neat-freaks?
Of course, we’re a nation of both – and everything in between. While we
intuitively understand that fact, marketers tend overlook it, and expect members of their
target market to all behave the same way. In a market as large as the U.S., there is a
great deal of profit to be made by understanding specific segments of the market and
catering to them. One of the most profitable uses of research is to
uncover and understand the different segments in your market.
Sources: Business
2.0, March 2003; Bureau West research
Bureau West Research Group can conduct the research you need to better understand
your target market, including focus groups, one-on-one interviews, on-site observation and
CRM data analysis. Give us a call at (818) 752-7210 if there's any way we can assist you. |