Category: Pricing

The True Value of Value-Priced Product Lines

A marketer’s dream is to achieve healthy profit margins on every product sold. The fundamental customer value equation of benefits received compared to costs to acquire and consume suggests increasing value is as simple as either adding benefits or reducing costs. Product positioning can follow one of these two routes, focusing on either value via a benefit provided (e.g., quality, craftsmanship, performance, or image) or cost (e.g., low price or extended payment terms). In order to succeed in staking a distinctive position for value proposition and positioning, it seems inevitable that a decision must be made to focus either on benefits or costs. What if I told you it may be necessary to deliver value through more benefits and lower costs?

Wendy’s Split Personality

One brand that realizes a need to offer value in the forms of benefit focus and cost focus is Wendy’s. The quick service restaurant chain is locked in a battle not only with direct competition from burger chains like McDonald’s and Burger King, but gains by Taco Bell and Subway are an additional threat to business. Wendy’s has experienced modest store sales increases, but management is concerned about sluggish sales of its value menu. Wendy’s was a leader in establishing the value-priced category more than a decade ago, but it has been eclipsed by McDonald’s in appealing to the taste buds of price-sensitive diners. At the same time, Wendy’s has worked diligently to carve out a brand position of quality and premium products that can command higher price points. Can Wendy’s be an upscale burger brand and a value-priced brand at the same time? Not only can it, but Wendy’s must be both.

The Benefits of Multi-Segment Targeting

Positioning a brand to appeal to two different market segments seems to run counter to admonitions to focus and not try to be all things to all people. However, there are compelling reasons to develop separate product lines for upscale and value markets:
  1. Captures greater sales potential – There are sales to be had in both upscale and value markets. A decision to focus on one segment only is a choice to forego revenue opportunities. In Wendy’s case, it is not a great price distance between the premium-priced fast food burger and the value offering. Thus, the brand position is not compromised by selling products at different price points.
  2. Can bring new customers to the brand – Value priced offerings can be viewed as a form of sampling. They can be a way to bring customers into your business to try your products. If they are strictly buying on low price, you have something that appeals to their needs. If they can be up-sold, the value line has served to build brand credibility and opens the door to extending the relationship by selling more profitable products.
  3. It is a competitive necessity – Sometimes, offering a downscale product line may not be a desirable decision, but lack of a value-priced line could put a brand at a competitive disadvantage. In Wendy’s case, it may be tempting to say “forget the value menu- let McDonald’s have those customers and focus on the upscale market.” Nice concept, but it could create a disastrous scenario in which customers switch to a brand that offers greater choice.

There’s the Beef

The above points support a brand segmenting the market to appeal to value conscious buyers as well as tapping more profitable opportunities by offering products that have benefits valued by buyers. I like how Wendy’s has its value menu positioned as “Right Price Right Size.” This approach is not strictly about low price; consumers concerned about calorie intake would perceive value in this product line for reasons other than low price points. Therein is the key consideration: Multi-segment targeting is not about high price and low price; it answers the buyer’s question “what’s in it for me?” Reality is that one product line cannot appeal to diverse customer needs. It is OK to take a brand downstream to serve price conscious buyers… to a point. If brand credibility can be maintained, moving into lower priced markets can be a way to find new customers and fend off competition.

Make Sure the Price is Right

Marketers like to think that the benefits delivered by their products or services will stand up as adequate justification for price. I, too, subscribe to that belief; a product that offers great value in terms of benefits to the buyer should never have to apologize for price. But, the reality is that many consumers are price conscious, and they will do what is best for their financial situation. Brand loyalty could be vulnerable in this situation. Buyers might be willing to accept a trade-off of slightly less quality or performance in return for spending less money.

Price Sensitivity is High
While indicators in the financial markets suggest that good times are back on Wall Street, there is less optimism that the same is happening on Main Street. According to a recent consumer survey done by Parago, price is a major concern when shopping for products. Among the findings of the survey were:

  • 42% of people surveyed said they have less purchasing power this year compared to 2012
  • 74% indicated they are more sensitive to price this year
  • 80% said they look for deals including rebates, deals, and lowest prices (69% last year)

In summary, price is a big issue, so much so that 81% said they would travel 5-10 minutes of their way to get a $10 rebate on a $50 purchase.

How to Make Sure Price is Right
Findings from the Parago Shopper Behavior Survey would seem to suggest that price should take on greater prominence in marketing a product or service. Resist the temptation to chuck other strategies in order to adopt a price-friendly position. Price, like other marketing decisions, must be made with regard to the customer segment being served. Most businesses have different groups of customers in terms of their relationship state. Some customers are devoted and very loyal; brand switching is not an option to them. Other customers either buy infrequently or simply are deal prone- price is a more important criterion in their decision-making process.

If we simplify the customer base to two groups, more loyal and less loyal, we can begin to differentiate pricing strategy to appeal to each segment:

  • More Loyal Customers – This segment may be loyal to your brand, but they still are likely paying attention to price. Although their loyalty means they are not necessarily going to drop you for a competitor when the first attractive deal comes along, but they may opt to curtail their purchases. Buying less frequently or in smaller quantities could be their way of compromising between their affinity for your brand and affinity for the money in their wallet. Reward loyal customers by giving them incentives for buying. If you have a loyalty program in which customers accrue points for purchases, offer special days or times when double points can be earned. Regardless of the tactic used, the aim is to convey appreciation for their loyalty and encourage them to  buy.
  • Less Loyal Customers – The purchase motivations of this segment are pretty clear- price matters. For this segment, creating brand preference via price will be crucial. Rather than running blanket price-based promotions that target a mass audience, consider segmenting your database to identify buyers based on recency and frequency of purchase. Look for customers who have “fallen away,” not having made a purchase for the last six months, for example. I recall an instance in which this tactic worked on me very effectively. I received a postcard from Papa John’s saying something to the effect of “We’ve missed you- you have not ordered in a while.” The message included a discount; I cannot remember the exact amount of discount but it does not matter- obviously it worked because I ordered  that night!

Feel Their Pain
The biggest mistake that can be made when it comes to pricing is being oblivious or indifferent toward your customers’ concerns about price. Yes, your product may have exceptional value, but if consumers feel their money may be better spent even if having to accept slightly less value from a competing offering, they will do it. When the recession of 2008 hit with full force, marketers across many different industries responded adeptly by rolling out value priced offerings of their products. The message was clear: “We feel your pain.” Such a move freed customers from having to make choices about whether to buy or not buy because of price- they now had options while being able to remain brand loyal.

Three-fourths of all shoppers are more sensitive to price today not because it is a fun sport- they are worried about how to best stretch their dollars. Feel their pain and be there for them by segmenting pricing strategies to appeal to customers across the relationship continuum.

Marketing Profs – Consumer Price Sensitivity and Deal Seeking Up in 2013

Let Product Set Price

One of the worst kept secrets in the tech world was confirmed this week. Apple is adding the iPad mini to its tablet lineup. It’s 7.9 inch screen will combat Amazon’s Kindle Fire and other smaller tablets.

An area in which Apple is not targeting competitors is price. At $329 for the lowest priced model, the iPad mini is priced above comparable products… And that is OK. It runs counter to pricing strategy used by late entrants, but Apple is not the typical latecomer.

Apple does not have to obsess over competitors’ prices because price is set by product quality and customers’ perceived value of quality. Price for the iPad mini was set by the successes of the iPod, iPhone, and iPad. Users understand Apple!s value proposition; they need not be enticed by price to try the product.

Let your products and services set price instead of it being defined relative to other brands. To do that, a commitment to delivering a great experience is a must. The value you create today sets the stage for profitably pricing products tomorrow.

Price for the Tie, Experience for the Win

Optimism abounds for the upcoming holiday shopping season as retailing industry analysts predict sales gains in the neighborhood of 4 percent. Christmas sales are key to a successful year for retailers, so they are preparing to be very competitive this year. One area in which many retailers are focusing is pricing, specifically being price competitive with online sellers like Amazon. Brick-and-mortar retailers are fully aware of savvy shoppers roaming their stores armed with mobile apps that enable foster price comparisons with a quick swipe of a bar code as well as the ability to search the Internet for information and reviews. Fearful that shoppers will walk out of their stores to buy online, many retailers are touting their willingness to match price.

Meeting competitors’ prices is hardly a new practice in retailing. During my four years spent in retail management in the late 1980s, competitive shopping trips were a regular item on my to-do list. Technology has made price shopping easier for retailers and of course, customers. While a retailer does not want to lose a customer just because a competitor down the road (or online) is selling the same product for $5 less, a sole focus on price as a competitive tool is not productive long-term.

Matching competitors’ prices should be used as a move to negate any advantage competitors might realize from charging less. Communicating a price matching policy is wise, particularly for a retailer like Target that is proactively promoting price matching to inform potential customers that lower prices found elsewhere, including online, can be matched by Target. However, a long-term view should be taken with regards to what will keep a customer coming back to a store.

As a consumer, I am grateful when a store is willing to meet a lower price offered by a competitor. I will gladly take them up on their offer. But, meeting competitors’ prices does not inspire me to visit a store again in the future. The total experience of doing business with a retailer is much more influential – merchandise presentation, customer service, and feeling like my business is valued matter to me. Meeting price is a cost of doing business, not a customer relationship strategy.

Retailers should adopt a price matching policy but realize that it only gets them a tie with competitors. If parity is the goal, then playing for a tie is acceptable. But, if you are playing for the win the total customer experience still cannot be beaten.

Marketing Daily – “It’s Beginning to Look Like an Appy Holiday”

Build business or build brand? Yes.

Retail icon JC Penney (make that JCP) is under scrutiny by investors and the retail industry as it attempts to pull off a radical makeover. CEO Ron Johnson’s vision for JCP is to create a totally new shopping experience in stores. A major element in his marketing strategy was to introduce “fair and square” pricing. The plan called for substantial reductions in promotional pricing and accompanying newspaper advertising. Instead, shoppers would be able to buy products at everyday low prices. The response has been less than enthusiastic as evidenced by same-store sales declining 22% and Internet sales plunging 33% in the second quarter. Ouch!

JCP’s actions are curious in that management seems to have taken an either-or approach to marketing. The first months of Mr. Johnson’s tenure as CEO saw a pronounced shift toward brand building. The emphasis was on shaping perceptions and image of JCP. This emphasis occurred at the expense of tactics that were effective for generating store traffic. The result was a redefined brand but fewer shoppers in JCP stores. Now, the pendulum is swinging back the other way as business building is pushed to the forefront.

Now to address the question in the headline – should marketers focus on building their business? Yes. Should they focus on building their brands? Yes. It is unnecessary to choose one emphasis over the other. Such an approach will prove to be disastrous long-term. Different people in your target market are at different points in their relationship with you. Brand building is needed for customer acquisition, attracting new buyers to your products or services. Business building is important for retaining customers. JCP assumed its existing customers would stay with them after implementing the new pricing program, but many of them failed to see adequate value compared to the previous promotion-oriented pricing model. Thus, a dual focus is needed for marketing to concurrently build business and the brand.

Advertising Age – “JC Penney Looks to Newspapers in Revamped Marketing Push”

How to Raise Price without Raising a Ruckus

Death and taxes may be the only certain things in our lives, but Ben Franklin apparently overlooked price increases on the products and services we buy and use when compiling his list. Businesses are squeezed from a variety of sources as costs are increasing for ingredients, parts, labor, insurance – you name it and it is probably going up. Price increases roll downhill, or more appropriately down distribution of channels. The stopping point: The end user.

We do not like paying more for products and services, but when price increases are needed they can be implemented in a way that is palatable to customers. In a recent interview with MediaPost’s Marketing Daily, Jean-Manuel Izaret, a partner with Boston Consulting Group’s San Franciscooffice, acknowledged that raising prices can be tricky in an environment in which disgruntled customers can take to social media to stir a backlash against increases. Price increases by Netflix and fee increases by banks led to a scathing response in social media that contributed to Netflix’s massive subscriber loss and a retreat on planned bank fee increases.

According to Mr. Izaret, two keys to successfully raising prices in a turbulent customer environment are:

  1. Offer a range of price points with varying value propositions for customers. If a single price point is increased, customers might view the increase as a take-it-or-leave-it proposition and opt to leave.
  2. Position the price increase as a necessary step, not for the company but to benefit the customer. An increase might be necessary to address a business problem, but the problem needs to be expressed in terms of how it impacts customers (e.g., convenience of product delivery despite rising fuel costs). 

I have never heard of a business receiving a “thank you” for a price increase, and such displays of gratitude are unlikely to begin anytime soon. However, if a price increase is accompanied with a commitment to maintaining value for customers it may be understood and accepted.

Marketing Daily – “Pricing and Social Media: Can Brands Push Back, Too?”

Great Content Key to Gannett Paywalls

Newspaper publisher Gannett made news itself this week by announcing that it will implement paywalls, or subscription-based sites, for its 80 local newspapers. Gannett’s flagship brand, USA Today, will still be free online. For the local papers, website visitors will be able to access five to 15 articles monthly for free. After that, a subscription will be needed to download content.

The decision to erect paywalls by Gannett is bold. In a time when economic uncertainty remains among consumers and free information is abundant on the Internet, shifting to a pay-for-use model may seem risky. Gannett looks to success of national papers The Wall Street Journal and The New York Times, which have “metered access” in place- giving away some content but restricting access to most articles to subscribers. Transitioning to a subscription-based model entails a trade-off of creating subscription revenues versus devaluing the newspapers’ online reach (and appeal to advertisers) as fewer page impressions will occur when unlimited free access ends.

Can Gannett’s subscription-based model succeed? Sure it can. But, one condition must be satisfied… and it is a biggie. The content that Gannett previously gave away must have sufficient value to justify readers paying for it. Two attributes that can be at odds with one another, depth and timeliness, will be important for Gannett’s local products to contain. Quality journalism in the form of long-form feature stories as well as content exclusive to online subscribers are two ways to enhance depth of information. At the same time, subscribers will expect a pay site to offer up-to-date news in an environment in which “developing story” and “breaking news” are reported hourly in broadcast media.

Whether migration to a subscription-based model works for Gannett will come down to a simple marketing tenet: Product value must justify the selling price. The key to success is not so much persuading readers to accept a pay model (although that will be important) as delivering great content that people will pay to have.

Digiday – “Gannett’s Paywall Gamble”

It’s the End of the Sale as We Know It

When attempting to navigate the rocky road that is department store retailing, maintaining status quo is not a viable strategy. The department store sector has been challenged for years by greater merchandise assortments of specialty stores and lower prices of mass merchandise discounters. One company caught in the fight for relevance has been JC Penney. Sales in 2010 were $17.8 billion, down from $19.9 billion in 2006. In addition to declining sales, the company faced a brand image problem as it was perceived as old and stale.

The response to the challenges faced by JC Penney was laid out this week by new CEO Ron Johnson, an Apple disciple. The boldest strategy change is a radical shift in pricing and promotion. The company is ditching the traditional high-low pricing model. Instead of frequent sales and discounts, a three-tier pricing strategy will be used. Products will be at an everyday low price, monthly values, and best price Fridays on first and third Fridays each month. Analysis of transactions revealed that only one in 500 items was sold at regular price, so the move to streamline the dizzying number of promotions (nearly 600 a year) to a more straightforward pricing approach is logical.

Let’s jump to the most important question: Will this strategy work for JC Penney? The key to its success will be convincing shoppers that the value-based pricing approach is better for them than sales featuring hot prices and coupon offers for additional discounts. A rational analysis of the pricing approaches would point to value pricing as a better deal for buyers. However, we do not always make rational buying decisions. The psychology of a sale suggests to shoppers that a bargain may be realized when a product’s price is temporarily reduced. Add an incentive like a coupon on top of the sale price, and buyers have been trained to expect value delivered in this way from retailers.

JC Penney desperately seeks to carve out a distinctive brand position. If it cannot position through products, service, or brand image, perhaps price is the final frontier. If this strategy succeeds, JC Penney can re-establish its relevance. JCP (as it is branded via its new logo) must deliver a great shopping experience to go along with its simplified pricing. If it succeeds, JCP shoppers may just be singing “It’s the end of the sale as we know it, and I feel fine.”

AdAge – “JC Penney Reinvents Department-Store Retailing”

Add Value, Not Fees

One of the greatest benefits of paying attention to the world around us is that we can learn from the mistakes made by others. When we see someone make a decision or take an action that leads to an undesirable outcome, our response might be “Note to self: Never do that!” While observing the mistakes of others does not serve as insurance that we will not fall into similar traps, we can have our eyes opened to missteps and consequences that we may not see otherwise.

Businesses have the same luxury of learning from the mistakes of others. After all, business decisions are made by people who have the capability to exercise bad judgment. But, even savvy businesspeople sometimes fail to take advantage of the opportunity to avoid mistakes made by other businesses.

Case in point: Verizon Wireless and its short lived plan to charge a $2 “convenience fee” for certain payments. The fee would have been levied on certain payment methods that were already available to customers… for free. No additional service or benefit being added; just a fee tacked on to the bill total. Customer backlash was swift and vicious in social media, and Verizon quickly backpedaled and announced it would not implement the fee based on “customer feedback.”

From the outside looking in, it seems Verizon Wireless could have saved goodwill and not created customer angst if it had only paid attention what happened in the banking industry just a few months ago. Banks that announced a $5 monthly fee for debit card usage were besieged with customer protest, and the plans were scrapped. But, damage was done as banks that did not plan to implement fees used that point in their marketing in contrast to the “greedy” banks.

What can we learn from the banking industry and Verizon Wireless and their ill conceived plans to implement fees? Price increases are inevitable, but it is better to increase price via new value. Adding fees without new value being offered is bad business. Consumers are too savvy and these days too connected to passively accept higher costs without more benefits delivered. And, for most products we buy there are enough alternatives that enable us to not have to do business with companies that seek to extract extra dollars without giving anything new in return.

Beware the Incentive Escalator

Price-based incentives are effective for attracting buyers and generating trial or enticing customers to buy again. But, using price breaks to stimulate sales comes at a cost greater than the amount of discount offered to lure buyers. All efforts to craft a desired meaning for your brand can be negated by a promotion-intensive strategy. An unintended consequence can be that consumers believe your product is not really worth full price if discounts are offered frequently. Although incremental revenue generated from price-based promotions may be realized, the distinction of “work hard vs. work smart” comes to mind. We have to work harder (i.e., sell more) to cover the expense of discounting, yet the potential damage to brand equity can still occur.

Evidence of what I call the “incentive escalator” is found in a report by Experian Marketing Services on search terms related to retailers. Percent-off deals are among the most popular searches, and consumers’ expectations of retailers’ deals seem to be increasing. In 2009, 20% was the most common discount search term; that figure shifted to 30% in 2010. Deals sought by many consumers in 2009 were not sweet enough just one year later. Where does it end? Will 35% be the top discount-related search in 2011? How high will consumers’ expectations soar about the discounts they believe retailers can offer? Similarly, an increase in searches related to free shipping indicates that online shoppers expect to continue to have access to incentives from sellers once they have been exposed to them.

Choose whatever saying you want: the cat is out of the bag; the horse is out of the barn; the toothpaste is out of the tube. Once price-based incentives become a norm associated with your brand there is no turning back. Strive to build customer relationships that are not dependent on price to reduce the chances of finding your brand riding the incentive escalator. Look to brands that you admire- chances are they have succeeded in ways other than discounting.

Marketing Daily – The New Consumer: ‘30% Off Is The New 20%’