Price changes: Things to consider beyond just the numbers
One of the most interesting tends in food retail in the past decade has been the way in which increasing price awareness consumers has manifested itself in the products they choose. The continual flow of data we now all have at our fingertips mean it's all too easy to check where the most price efficient places to shop are. However price isn't just about having the cheapest in the market - far from it. Regardless of whether you're selling Corn Flakes or Cars, price has an important role to play in the long-term success of your product. Here's why
Consumer perception is complex
The range of information we use to form our opinion of a product or brand is vast. How many people would assume Alfa Romeo's are less fuel efficient than Fords? Or England have a better chance of winning the Euros than Wales? Slight dig at our national team there but hopefully you get the point: we use a range of evidence to form our own perception, even when we have no hard evidence to support our perception. These may come through direct experiences of the brand/product, but often they may also come through other means - try risk aversion, decoy pricing, and priming as just a few of many examples. All of these complexities contribute towards what the consumer perceives as the right price.
What does this mean for your product? The price point communicates far more than value for money.
Price doesn't act alone
I've been involved in many projects that (for one reason or another) treat price as an isolated factor in an otherwise overly complex commercial process. The reality of of it is that the best companies know how to measure and control the effect their pricing strategy has on their consumers/customers, but also roll the principles of doing so into their wider commercial agenda. This inevitably should encompass factors such as brand equity, long-term market positioning, and Innovation/NPD.
Why? As explained in the previous point, consumer perception is complex. Consumer perceived price comes from understanding the products features and benefits, and using information/perception to decide what they should be paying for a product. Therefore levers you use to grow in a few years time, such as new models, or innovations will be affected by the current consumer perceived price.
What does this mean for your product? Consider price as one component of the commercial roadmap you intend to take your company on over the next few years. Considering how you think the market will play out and what you will do to grow will help you identify the right pricing strategy to enable that future success.
Consumers love consistency
When was the last time you heard someone getting excited/upset about the price of something they like going up or down? Aside from the short term thrill of snatching a potential bargain, research shows consumers like to know how much they're going to pay for items. The theory of cognitive consistency has been around for decades in Psychology, and I find it fascinating when it's applied in business. For example, some electronics manufacturers limit their channels of distribution to have greater control over pricing and branding. I bought a pair of AKG headphones last week. They're sold at fewer retailers than competitors, and at one price point, thus eliminating my emotional need to validate a lower price point perception (unlike their competitors who's price can vary by 25% on any given day).
What does this mean for your product? Commitment to consistency is key. Showcase what your product is about, set a price point or price corridor harmonious with consumer perceived value, and do not deviate excessively.
Of course this doesn't take into account social reciprocity...but I'll cover that in another post :)
Price can be distracting
Linking with consistency, price can also distract consumers from the purchase decision. Why?
The proliferation of choices, and the number of choices we need to make nowadays is mentally exhausting, and well documented in business and psychology. We use a portion of our mental resource every time we make a choice, or add complexity to a choice. Hence why some business leaders purposely reduce the number of small decisions they need to make every day, such as what to wear and what to cook.
What does this mean for your product? You can reduce this mental exertion by making the decision on price as easy as possible. For example, simplify the price point, reduce the number of similar products on offer, or price match your competitor.
Price reduction is often difficult to reverse
Price is often the easiest lever to trade for market share, which regularly leads to price wars. The UK grocery retail industry has been locked into this profit eroding cycle for years, with no end in sight. Of course the macroeconomic factors of the last decade are the biggest single cause of these wars, but I can't help but feel complexity of trade tactics (such as Hi-Lo pricing) played a helping hand. The lesson? Once consumers no longer trust you on price, they seek cheap and simple. Once they've found cheap and simple, they're more difficult to win back.
What does this mean for your product? Be very wary when using TPR (temporary price reduction) or other forms of pricing levers too readily. Easier said than done: every company has targets to hit and most sales teams feel the pinch toward the end of the year when shifting the last few cases become imperative. As an organisation however, this behaviour can be seriously damaging to long-term profit, as well as brand equity.