Category: Pricing

The Meaning Behind Price

A product’s price is more than the dollar amount required for purchase. Price contains meanings that influence our perceptions of a brand. For instance, high price typically sends a signal of high quality, while a low price may elicit connotations of value, basic, or even low quality. So, it would seem that if a marketer is going to err on setting an optimal price it would be better to be too high than too low. If you subscribe to that belief, you may want to check out how HTC has destroyed that myth.

HTC is aiming at the high end of the tablet market with the Jetstream, perhaps named because its price is sky high! Jetstream is priced at $700 for a 32GB model, plus it requires a two-year contract with AT&T. The price is comparable to the Apple iPad 2; its Wi-Fi +3G 32GB model retails for $729 on the Apple website. The key for taking market share from the leader is to differentiate- in this case, offer something that the iPad does not have. HTC does not succeed in differentiating on benefits or price. It is a high-end offering in a category that has an entrenched high-end brand.

Unfortunately, the HTC Jetstream fails to position itself for success using price. Its “me too” price at the upper end of the market gives no compelling reason for tablet shoppers to pick it over iPad 2. If HTC intended for its price to position Jetstream as a premium competitor to iPad, it appears to have not worked. Is it just a matter of time before the price drops?

What meanings will customers uncover when they encounter the prices of your products or services? You should never have to apologize for the price you set, but be certain that it represents fair value and is consistent with your brand’s identity.

Fast Company – “Forget That iPad, What’s It Gonna Take To Put You In This $700 HTC Jetstream Tablet?

Managing the Inevitable: Price Increases

We all know about the two things that are inevitable in life: death and taxes. If you operate a business, there is a third inevitability: price increases. Whether it is due to rising costs for transportation, materials, or other expenses thttp://www.blogger.com/img/blank.gified creation of a product or service, passing along price increases to customers is a reality. The decision to raise prices may be rather easy; communicating price increases to customers may not go so smoothly. Just ask Netflix.

Earlier this month, Netflix created a firestorm among its subscribers when it announced that it was unbundling the DVD by mail and online streaming options for receiving movies. Customers who pay $7.99 for mail delivery plus an additional $2 for online streaming will have to pay $7.99 for each plan beginning in September. The 60% price increase for affected customers did not sit well with many of them. The result is not surprising- many customers say they will drop Netflix service rather than be forced to decide if they want to spend $6 a month more for both services. With 25 million subscribers, it will be interesting to see: 1) how many customers follow through and cancel their subscription,and 2) if their departure will have a noticeable impact on Netflix’s profitability.

The problem Netflix created was not that it raised prices, but it did a very poor job of communicating why prices were raised. Do customers deserve an explanation when prices go up? Absolutely! If we are going to talk about being in relationship with customers, part of being in a relationship includes working through rough times such as when prices must rise. In this case, Netflix is dealing with rising costs of home delivery as well as licensing fees paid to movie studios and must stem the tide by changing its pricing models.

When prices must increase, it is imperative that the marketer communicate how the product remains a good value. Otherwise, why should a customer pay more just to help cover costs? Netflix could defuse some of the sting of its price increase by comparing its value proposition (e.g., selection, convenience, and cost) to Blockbuster, Redbox, and other options for movies and entertainment. Never feel that you have to apologize for your price, but make certain that the value offered is never in doubt.

The Meaning of the Music Industry’s Sales Song

Many young people become enamored with music during their teenage years. They listen to songs intently and seek to decipher meanings or messages they believe are contained in the lyrics. That description fits many of my friends and me in the early 1980s. We were eager to take away something substantive from the songs we heard. Sometimes we could, and sometimes, well it was harder!

Fast forward to 2010, the adolescent experience of learning from music can be extended to businesses learning from the music industry. A recent article appearing on FastCompany.com painted an interesting contrast about the state of music in the United States. On one hand, data shown in the article reflects a woeful state for music sales. Annual sales volume is less than half of dollar sales 10 years ago when adjusted for inflation. Such a dramatic slide in sales would usually trigger red flags that product interest is waning, but we know better. The article leads with a quote from Tom Silverman, a music industry executive, who says “More people are engaged with music than ever before.” His view is based on the our options for consuming music today without paying for it (Pandora, iTunes, and Internet radio, to name a few legal options).

What was broken in the music industry for some time is not the consumer’s interest in music, but the long-time product kingpin: the album. Artists and music companies packaged a collection of songs in a single product, but in many cases music lovers may have had an interest in only one or two songs. Now, rather than paying $14.99 for a CD to get a few coveted songs, consumers can buy single tracks for $1.29 and get only the songs they want to pay for. So, instead of music sales being driven by what the labels want to sell (but consumers do not want to buy), the product that appeals to most buyers is the individual song.

As I read the article and thought about the transformation of product sales in the music industry, I could not help but wonder “are there other industries that suffer from an out-of-touch sales model”? Did a similar situation lead to a decline in the American automobile industry? Are lack of offering new approaches to products and distribution responsible for stagnation in the soft drink industry? It seems that opportunities exist for businesses that are willing to depart from the status quo if selling products differently will positively influence consumer acceptance. It requires listening to the music (as performed by customers) to interpret the meaning.

Don’t Be Afraid to Go Downscale

One of the most significant effects of the recession has been consumers scaling back purchases in many ways, including trading down to purchase lower priced brands. It is an alternative to eliminating purchase of a certain product altogether. Serving customers in downscale segments has always been a delicate situation for marketers. On one hand, the potential to generate revenue from customers that may not be able to afford a company’s core brands can be reached through value priced offerings. On the other hand, a foray into value segments could have a negative impact on image perceptions of the core brand. A common strategy for managing this dilemma is to create a separate brand identity to distance the lower priced brand from the core brand. But, this approach diminishes the ability to leverage the strength of the core brand.

Coach is a brand that has enjoyed a brand positioning as a luxury lifestyle brand, the very type of brand that was vulnerable to consumers forgoing it for a lower priced alternative. What made Coach particularly vulnerable was that its core product, handbags, is more of a discretionary purchase, meaning that consumers might postpone buying a Coach handbag or trade down to another brand. Its response to the recession: tackle the shift in consumer behavior head-on with a line of lower priced handbags. Coach’s Poppy Collection carries an average price of about $200 compared to more upscale products priced at $400 and higher.

Is there a risk to a brand like Coach to entering lower priced markets? Yes, although some people would argue that a $200 handbag is not exactly a value priced offering! A branding strategy that isolates lower priced products to a certain line or group like the Poppy Collection is a way to protect core brand associations while enjoying the benefits of tapping into Coach’s brand equity. It is a matter of practicality versus pride; strong sentiment to “protect” a brand may steer strategy away from entering lower priced markets, but practicality recognizes that consumer behavior has undergone a distinct change. Product development should be guided by meeting customers’ needs, and at a time when the psyche of the consumer is still fragile that means exploring options in downscale markets that meet consumers where they are.

Marketing Daily – “Coach Makes Big Gains on Small Prices”

Usage Rate Pricing: An Acceptable Strategy Unless You Are AT&T?

AT&T created a stir among its wireless customers and technology bloggers last week when it announced a two-tier pricing system for its data plans. One plan provides 200 megabytes for $15 a month, while the other plan provides 2 gigabytes of data use for $25 a month. The move to end unlimited data consumption appears to be aimed at easing congestion on ATT’s network. The idea of charging more for a service the more it is used is very reasonable, but if the aim of the new pricing system is to deter heavy data usage it would seem to run counter to what a business wants customers to do: consume.

Usage rate pricing is an effective segmentation strategy. Not all wireless customers have the same needs in terms of phone minutes or data download consumption. However, AT&T seems to be walking a fine line that makes its new pricing system punitive for its heaviest users. Rather than trying to discourage their use of the network, AT&T should engage these customers to determine how it can serve them more effectively. At the same time, it should determine the financial value of these customers to the company and possibly seek other ways to generate revenue from these customers that do not discourage their use of AT&T’s services.

One reaction to the new pricing system has been proclamations by some AT&T customers that they will exit their relationship with the brand as soon as their contracts expire, if not sooner. In AT&T’s judgment, the possibility of this outcome is a risk it is willing to accept. But, is customer alienation and creating negative associations about the brand worth the risk? That is the situation AT&T faces as it waits to see if any of its competitors follow suit with similar pricing strategies.

Bloomberg – “AT&T Sparks User Backlash with End to Unlimited Plans”

A Branding Story as Told by Pop-Tarts

I will confess that I have a weakness, one that will likely not lead to my demise, but a weakness, nonetheless. I really like Pop-Tarts, whether it is the real deal from Kellogg’s or a wannabe store brand. Pop-Tarts are an inexpensive, tasty, and convenient breakfast I can grab between a workout (had to squeeze that in) and starting my workday. I realize that a 45-year-old man is probably not the profile of a typical Pop-Tarts consumer, but I am all too happy to be an outlier.

A recent shopping experience for Pop-Tarts reinforced the impact price can have on perceptions of a brand. As I was packing food to take to the office, I realized I was out of Pop-Tarts. No problem, as the snack bar in my building on campus carries single-serve packages of Pop-Tarts. However, I was shocked to learn that the price for a package of my breakfast vice was $1.49. A quick comparison: an 8-pack of Pop-Tarts retails for about $2.29 at the supermarket, and a convenience store near campus sells the same single-serve package sold at the snack bar for 99 cents.

I questioned myself as to whether I let this be an issue because I was acting like a little boy pitching a fit because his Pop-Tarts cost too much. No, I do not think that is the case. It seems to me that pricing a product 50% higher than a convenience store is a wee bit too high. A bigger issue is looming: the perception that the foodservice vendor is taking advantage of students (and professors) because it has a somewhat captive audience has negatively affected my view of the foodservice company across the board. Now, buying a snack or meal on campus is not even a last resort. I simply refuse to do it because I would be supporting a brand whose pricing certainly does not provide value to me!

The point of my Pop-Tarts story is to remember that all of your marketing decisions communicate, not just your communications program. In this case, a selling price that is significantly higher than other options sends a negative message about the seller. It could just as easily be a product with an instruction manual that is difficult to understand or a store with inconsistent or inconvenient store hours. They all have the same effect: damage to brand equity by way of hurting brand associations that comprise brand image.

What’s Behind Costco’s Power Struggle with Coca-Cola?

Costco finds itself embroiled in a pricing dispute with Coca-Cola. Unhappy with pricing the beverage giant is giving the warehouse club chain, Costco has responded by not restocking Coke products on its shelves. The company has taken its dispute public, saying “At this time, Coca-Cola has not provided Costco with competitive pricing so that we may pass along the value our members deserve.”

What is Costco up to by publicly calling out Coca-Cola on its unwillingness to negotiate more favorable prices? This move would seem to allow Costco to score points with consumers. After all, all customers want lower prices for products. Costco is portraying itself as champion for its customers, doing battle with a corporate giant like Coca-Cola. Beyond gaining favorable publicity for calling for better pricing from a supplier, there may be little benefit of such a move long-term.

Costco may have picked the wrong brand to battle. Coca-Cola is a high equity brand. It has more leverage in the marketplace than Costco. Customers who are unable to buy Coke products at Costco will likely make their purchases at another store. How does that help Costco? Coca-Cola has profit responsibilities to its stakeholders, and it is resisting efforts by one of its customers to alter its business strategy. Manufacturers have been pushed around a great deal by retailers in recent years. It will be interesting to see how, or if, Coca-Cola pushes back in its feud with Costco.

Comcast.net – “Costco Nixes Coke Products Over Pricing Dispute”

Value Does Not Always Have to Equal Low Price

Value- it’s the mantra marketers chant to persuade buyers to select their offerings. We like to assume we have a good understanding of what customers expect when it comes to value. A tendency exists to equate value with low price. The judgment that a product provides “good value for the money” even suggests that our brand does not have to be the lowest priced option to be perceived as a good value. But, price too often is the measuring stick used to make determinations of value. Even in difficult economic times, price need not be the lone source of customer value.

Value judgments are based on a comparison of benefits offered by a product or service with the sacrifices required to acquire it. Managing customer value from this perspective suggests we have but two options to enhance value: increase benefits or decrease sacrifices. Again, the tendency is to decrease sacrifices (i.e., lower price) because who wouldn’t want to pay a low price? That assumption overlooks that value can come from reducing other sacrifices (e.g., fast delivery or favorable credit terms) or strengthening benefits offered.

An example of delivering value via benefits comes from Kraft. It is charging 99 cents for its iFood Assistant iPhone application. Giving the app away could be a way to encourage more users, but Kraft believes the value the app delivers as a resource for consumers via a mobile platform justifies charging a nominal price. Value is correlated with relevance. A brand that is relevant to consumers delivers value. Before succumbing to the temptation of creating value through low price, consider all other sources for enhancing value so that it is not created at the expense of profits.

Are Market Share Gains Worth Profit Margin Losses?

An article in The Wall Street Journal this week reported how Hewlett-Packard has set out to become the market leader in PCs. A key strategy in H-P’s quest is using low price to attract buyers. Case in point is offering an entry level laptop for just under $300 in the recent back-to-school selling period, with plans to do more of the same this Christmas. H-P is moving toward its goal of being the market leader, with its 2nd quarter market share hovering around 20%. Dell, H-P’s chief competitor, had just under 14% share for the same period.

Market share is nice to have, but it is crucial not to lose sight of the profit picture. H-P’s operating margin was 4.6% in July, down almost 1% from the same period last year. The prevailing mindset in the pricing game has always been to set a lower selling price, and additional sales volume will make up for the lost revenue. Nice concept, too bad it rarely happens. In this case, H-P’s expectation could be that increased sales of PCs will lead to sales of complementary, higher margin products, such as printers, ink cartridges, and other peripheral devices. Another interpretation of H-P’s pricing strategy is a signal that it sees PCs becoming more of a commodity, making it difficult to maintain high profit margins.

For its part, Dell appears to staying out of a price war with H-P. It is focused on its own profit situation, and giving up profits to sell a few extra PCs does not seem to be an option for Dell at this time. Market leadership and profitability are two distinct metrics. Dell has chosen to find some other approach rather than price to compete in the PC market. At some point, Dell may feel compelled to fight H-P’s prices, but for now it is pursuing more profitable options to compete.

The Wall Street Journal – “H-P Wields Its Clout to Undercut PC Rivals”

Protecting Brands in a Down Economy

A weak economy has forced marketers to evaluate the pricing structure of their products. Consumers are being more cautious with their spending, and value priced offerings have become more commonplace as businesses strive to meet consumers’ needs and remain competitive. It is important to note that there is a difference between offering value priced products and lowering prices on products. In an article in 1-to-1 Weekly, John Gaffney points to examples of how companies have responded to the economic downturn by offering new products. For example, Quizno’s created a value line with its Torpedo sandwiches. This line provided an alternative to the core sub sandwich line, which remained essentially unchanged.

What are the implications for brand management? Customer value does not have to be price-based. Offering price-based value, like Quizno’s Torpedo subs, is one way to win customers and market share. The ideal is to avoid damaging brand equity of core brands by discounting price. It opens flood gates that are very difficult to close. Protect brands in bad economic times so that they are poised to succeed when good times return!

1-to-1 Weekly – “Innovation Beats Pricing in New Economy”