Making prices hard to compare means a customer cannot easily determine which competitor offers the best value. It is a pricing strategy used by marketers that manage branded products that do not compete on price alone and are not positioned as no-frills or low cost brands.
The first and most widespread technique used is brand positioning. If the brand is positioned as a high quality or premium brand as opposed to a no-frills or low cost option, and is perceived to be superior by the customer, the marketer has a greater opportunity to charge a premium versus its competitors.
This is because customers ultimately believe they get what they pay for. The reasoning goes that good brands make better products. Brands are more trustworthy. More effort goes into product design and manufacture, and important corners are not cut to make way for a lower price.
The customer perceives that a branded product is a safer purchase since less is likely to go wrong with it. There is a reputation at stake. The customer feels more confident about making the buying decision. (Whether branded products are, in fact, better is often open to debate but what matters in marketing is not reality, but your customer’s perception.)
Depending on the type of product and its brand positioning, marketers tinkering with branded products need to take great care. While a branded tin of vegetables may be offered as a weekly supermarket special to encourage trial, it is an entirely different scenario when a prestige brand, such as Prada or Rolls Royce, embarks on a slash and burn.
The positioning of luxury brands particularly can be irreparably damaged by price reduction. The reason is that customers buy these brands because they are exclusive, most people cannot afford them. Dropping prices makes them affordable for more people, thus compromising the exclusivity factor.
The second technique to make prices hard to compare involves adding value to the pricing. Rather than reducing the price, the marketer offers more for the same price. How this is executed is limited only by the marketer’s imagination, the value-added components at their disposal, and their ability to manipulate their margins.
The key to its success is that whatever is offered in addition to the core product must be valued by the customer.
For some companies it can take the form of extras such as free shipping with purchases, the extension of warranties at a heavily reduced rate, or the delivery of after sales support on site instead of requiring the customer to visit the company premises.
In telecommunications, it may include a telephone handset as part of a deal. In banking, it may include free Internet and telephone banking options. For car companies, it may involve holding the retail price but adding extra features to each new model of vehicle released.
One friend of mine in retail offered a gift voucher of $50 to be spent in the store when a customer made a large purchase. This delivers twin advantages of enabling the retailer to move greater inventory, and the customer to feel rewarded for spending. It’s a win-win for both parties.
Other types of value-add to a product offer include the ability to finance over term (a common technique used by appliance retailers), priority delivery arrangements or the offer of 24/7 helpdesk support.
PRODUCT BUNDLING (OR PACKAGING).
The third technique, which is similar to adding value to the pricing, is the bundling of two or more products together and marketing them as a package. This has an important additional benefit to simply adding value to a price point.
For some industries, selling breadth of product into a customer adds brand stickiness. The more products the customer has with you, the less likely they are to take their business to a competitor, and this particularly applies to customers that have an ongoing relationship with their brand.
Selling all products as one package enables a more efficient, streamlined signup and sales process. The sales teams only need to sell once rather than returning to the same customer over and over to encourage product take-up. If it is possible, this is obviously a more efficient way to use your sales channel.
The customer needs to sign up one set of paperwork to initiate all products as opposed to completing paperwork for every product. This is good for your customer who is busy and doesn’t want to keep filling out your forms.
The key to the success of this technique is that the products bundled together must be complementary with one another (in other words, the customer is likely to want all products) and that together they represent better value than purchasing them separately.
Telecommunications is an excellent example of an industry offering preferential pricing for two or more products supplied to the same customer by the same provider. Residential customers can buy packages of mobile cell calling, a fixed line home phone and Internet connectivity as a bundle. Some telecommunications providers bundle TV as well.
Conversely, banking is an industry that has been slow to adopt packaging compared to its telecommunications counterparts, but would benefit greatly from it. Almost all banking customers use more than one product although many use different banks to supply them.
For example, a retail (or consumer) customer may have an everyday check account, an investment account, a credit card, Internet or telephone banking, a home loan, insurance and car finance. In business banking, the product mix may be even broader to include products such as international trade finance, asset finance, share trading and debtor finance.
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To implement this pricing structure, a marketer must have an extremely detailed knowledge of cost, margins and volume. It is not uncommon to loss-lead one product as part of the package mix to the financial benefit of another.
A great deal of modelling is normally required to determine the best mix of products. An analyst is usually required to test various price point scenarios based on the company’s known costs and volume consumed.
If the package is to be offered to a segment, the marketer is required to have detailed segment-level data to be in a position to develop a financially sound offer.
The fourth technique involves offering bonuses and is a popular retail strategy in grocery and apparel retailing. Examples of this technique include offering two for the price of one, buy two and get the third one free, or additional volume at no extra charge (such as 25% more for free).
The primary motivation for this is to move inventory. The customer is incentivised to buy more than they might otherwise buy while the retailer benefits from moving volume.
This is usefully applied to attract foot traffic into a retail outlet. Once the customers are in the store, the retailer has the opportunity to cross-sell other products to them.
The key to success of this strategy is to be able to purchase the stock cheaply. The price of one item needs to be sufficient to cover the cost of both items. Depending on the nature of the products in the 2 for 1 offer, it may not be possible for the retailer to return a profit on them.
Some marketers offer free entry to a competition as a promotional bonus. To be successful, the prize needs to be extremely attractive. The customer knows that a competition offers no guarantee to them of additional value as opposed to offering a bonus based upon volume which is much more tangible and immediate.
Off-even pricing defies logic but works. A customer is offered a price of $499.95 and feels as though it’s a much better price than $500. Direct market studies show that certain price points ending in 97 ($197, $297 and so on) compare more favorably than other prices that are at a slightly higher or lower price point.
TWEAKING THE PRODUCT.
The fifth technique I call tweaking the product. This technique involves making the product hard to compare by changing a particular attribute. It is commonly applied in grocery.
For example, marketers changing the container size to make comparing the price difficult (a technique that is negated when a supermarket displays unit pricing.) A product in a 10ml container appears cheaper than its 25ml equivalent at first glance, but its per ml price is actually much higher.
Marketers can change colours, shapes, flavors, add or remove sugar, preservatives and so on.
DOING THE OPPOSITE.
The sixth technique involves being the opposite and usually applies to service companies. If, for instance, the industry charges per hour, a marketer charges by fixed rate. The advantage of charging per hour is that the price appears cheaper. The disadvantage is that the final cost to the customer could be much higher than a fixed rate.
For charging at a fixed rate, the opposite holds true. The price looks higher at first (and most companies will factor in a contingency margin) but the customer knows exactly how much the service costs so can budget for it.
THE VALUE LEDGER.
The seventh technique is useful for service companies and those operating in the business-to-business (B2B) sector. It’s called the Value Ledger.
To create a value ledger, a company is required to keep a record of all the value delivered to its customer for free. It might include extra help, advice or free consultancy, free upgrades, the provision of above average return policies or the supply of a help desk. The company then applies a realistic monetary value to each item and this becomes the ledger. Sales then uses this ledger to explain to customers how much value they have received for free, making a more expensive price seem cost comparable.
CUSTOMER NEGOTIATED RATES.
The eighth technique is customer negotiated pricing which is pricing that is specific to an individual customer. Most often, this type of pricing is offered under contract between the supplier and the customer.
This technique is commonly used for large very customers that purchase in volume and pricing is very dependent upon the customer consuming the anticipated volume. (To ensure this occurs, many deals include penalty clauses that apply if the customer enjoys preferential pricing without consuming its committed volumes.)
Whether negotiated pricing is hard to compare depends on how the individual deal has been structured versus competitive offers.
To offer customer negotiated pricing, a marketer must know volumes, costs and margins intimately since it commonly involves using one product to loss-lead to secure the entire deal. In some industries, a stronger customer negotiated rate may be more easily deliverable by the existing supplier who knows exactly what the customer consumes.
A loss-lead product is a product that the marketer accepts to price at a loss in order to secure the rest of the products at a profit. Educated customers will look for this product to be a high-volume product so its reduced price delivers real benefit.
Customer negotiated rates may be complex deals depending on the nature of the industry. A good analyst is generally required to enable the deals to be structured to ensure profitability.
CAPPED PRICING/ALL-YOU-CAN-EAT MODELS.
Capped pricing, which is a common telecommunications pricing model, applies to a single product (as opposed to multiple products in a bundling scenario). A capped model provides for the customer to enjoy a reduced price in return for a certain commitment to volume. Once the customer exceed the volume agreed, per unit price rates are applied.
This is similar to all-you-can-eat pricing models which typify some business-to-business marketers. Under this structure, the customer pays a fixed charge for all usage, normally accompanied by a reasonable usage policy or enables the seller to increase the price if the customer moves beyond an agreed threshold of volume.
Where capped pricing tends to revert immediately to per unit charging once limits are reached, all-you-can-eat models tend to allow a threshold before reverting to per unit pricing.
All-you-can-eat models make it extremely hard for the customer to compare unit costs between competitors. A term commitment is likely to be applied to the provision of this pricing structure.
As is the case with product bundling, a marketer must have an extremely detailed knowledge of cost, margins and volume. Modeling is required to calculate the best price point based on volumes consumed. Under the all-you-can-eat structure, it is common to loss-lead one product to the financial benefit of another.
OTHER B2B PRICING ARRANGEMENTS.
In B2B environments, large businesses commonly deploying either a sales rate card or automated pricing tool (often built using a spread-sheeting program such as Excel) to sales staff. This tool offers price ranges which the sales staff can use to customise pricing while in front of the customer. (Pricing outside the ranges is typically referred back for management approval.)
This enables sales staff to create pricing and contracts on the spot. Having the customer there to sign the contract immediately ensures competitors cannot take the business.
In addition, another common practice is the preemptive negotiation of contracts prior to their expiry date. This ensures the customer’s business is kept off the open market where other providers can tender for it. This is suitable for price-sensitive businesses. It may be financially advantageous to accept a reduced price for the final few months of an old contract with the promise of further term commitment than to allow the customer’s business to go to open tender.
READ: More about pricing strategy.