Exciting customers through price
Article Date: Jan 30 2009Marco Bertini, an assistant professor at London Business School, discusses how price can be used to pull in customers and why some companies get it wrong.
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Transcript
When products are in on the process of becoming commoditised or they are already in commoditised markets, the firms first and foremost try to innovate, which takes a long time. They also try and do more advertising to get the attention of the customer. What all these things are missing is an understanding that not only are products and services commoditised but also the mind of the consumer is becoming commoditised. And by this I mean that consumers are only thinking about price. They are not receptive to new attributes, new benefits, higher quality and so often times innovation and advertising fail.
In my research I looked at two things, two separate things. First what is the price difference that you should set between your products and the competition and second, how to structure your price, when you have multiple benefits to sell?
Assume that you are a firm that has a brand new attribute to sell and it’s not getting the attention that it deserves, then how much more should you charge in the marketplace for that benefit? What we find is that, there is really three different ranges that a firm can take. It can charge a little bit above the competition. It can charge an awful lot above the competition, or something in the middle, a modal difference in price, so what we find is that any time you charge a little bit or a lot higher than the competition, it’s basically a no brainer situation. What we mean by that is consumers basically will buy or not buy, but will never think about the product. When the price is somewhat in the middle between these two numbers, it’s a stage when a consumer says ok, this price is expensive, this product’s expensive but it’s not that expensive so what is the difference accounting for, why is it more expensive? In this sense, they start thinking in their mind, trying to find reasons for the price difference and once they find those reasons they start liking the price.
The other piece of research that I’ve done involves the other things that firms can do, is how do we set prices, the price structure, when we have multiple items to sell, so the classical example is Amazon, they sell books on the web, on the internet and they also have shipping so they have to charge, well they can charge for shipping and for the book, so the question there is shall we present one single price for the whole transaction, or shall we have two separate prices.
My research finds that there are two types of attributes in the world, there are those that the consumer really really wants, the book, and then those that enable the transaction, like the shipping. You have to have shipping, but you don’t necessarily want shipping. And those attributes appear to be so so unimportant, and so small, when a price is put on them they become very very important, all the attention goes on to those attributes and that’s why you find it very often happens that consumers buying on the internet are turned off from a purchase because shipping is expensive, when it’s actually a very small part of their transaction. So again decide how to price either one all inclusive price or a partition price depending on where you want attention to go.
The challenge faced by firms in a commodity market is to perhaps put less emphasis on advertising and innovation and not to leave price to chance. How do we get our customers to be excited and attracted to our products again? Paradoxically, through price.
Marco Bertini is teaching on Pricing for Profit, a new two-day programme at London Business School.
