Category: Pricing

It is a great time to be a consumer, if you have money to spend. Businesses of all types are responding to weak demand and bloated inventories with deeply discounted prices. As a marketing professor, I think about how I have urged my students to think about how to deliver great customer value without using low price as an easy out. Many brands built their success on being able to charge price premiums because of exceptional benefits offered. Does the approach of building value through benefits still work in today’s price conscious marketplace? I would say “no”… and “yes.”

A benefits-oriented value proposition is more difficult to leverage today if a product is one that is a discretionary purchase for consumers. For example, a person being more cautious with personal expenditures may conclude that life can go on without Starbucks lattes. Although the consumer appreciates Starbucks’ offerings and perceives value in them, he or she might simply opt to cut back on this non-essential purchase. A second variable that makes a benefits-driven value proposition challenging to leverage is if the product sold is perceived to have many available substitutes. The more a product is viewed as a commodity, the more difficult it is to command price premiums.

There is also a “yes” answer to the question of whether price premiums can still be garnered. If a product is truly exceptional in terms of benefits delivered, a company might sell less of it but still be able to sell at a price premium. Also, if there are few perceived alternatives, there is a greater chance of being able to charge higher prices for a product.

Even companies that still have the ability to charge price premiums must be sensitive to the plight of their customers. If your buyers are hurting, what can you do to add value by making product acquisition easier? Price freeze for extended time periods? Price reduction? More flexible payment options? Being responsive to customers’ needs now could pay dividends later when they are more prosperous.

The battle for the price-conscious consumer is always difficult. It is often a scenario of many competitors fighting for sales of low profit margin products. The quick service restaurant category is a prime example of the fight for the value customer. McDonald’s, Wendy’s, and Burger King have gone toe-to-toe with value menus. Many items on their value menus were priced at $1. Value menus are a tool for luring cash strapped customers or enticing an additional visit.

Now, in the face of rising commodity costs, the value menu is being redefined. Menu items for $1 are no longer realistic in that they are no longer low margin items but in many cases loss leaders. Thus, the frame of reference for what are value prices is shifting upward. Burger King has added two new items to its value menu (Cheesy Bacon BK Wrapper and Spicy Chicken BK Wrapper) at a price of $1.39. It is expected that other brands will have little choice but to follow suit if they intend to continue to market value priced menu items.

As much as consumers may not like this upward resetting of the definition of value price, it is necessary. Value pricing at a loss provides value for only one side in a transaction! Value priced products can be a key part of a product portfolio if they contribute complementary sales yet do not cannibalize sales from higher margin items.

Link: The Wall Street Journal – “Burger King Corp. Provides More Value for Restaurant Guests”

Rising prices are all around us. We have gotten so numb to the idea that when a company announces that it has decided to pass along rising costs to their customers we merely shrug and accept it. Or, do we? Many products that have increased in price (namely gasoline and food products) are essential items. While we can curtail our consumption, the need for the product remains.

In the case of a non-essential product like soft drinks (although I have a long running affair with Diet Coke so it seems more essential to me than it really is), a price increase could be the trigger to lead consumers to seek alternatives. The largest bottler of Coca-Cola in the U.S., Coca-Cola Enterprises, has indicated it intends to raise prices after Labor Day. Rather than paying a higher price for Coca-Cola products, consumers may opt to drink similar products at lower prices. Private label brands could become a more attractive option for consumers feeling the pinch of rising prices. Even worse, consumers might cut back or quit drinking carbonated beverages altogether.

I don’t fault Coca-Cola for seeking to cover its costs, but Coke is accepting a risk that its sales will take a hit. A situation like this is precisely why companies need to avoid a reliance on selling price-sensitive products. If Coca-Cola can deliver innovative, unique products it would have a chance to realize higher profit margins that the commoditized standard cola product cannot deliver.

Link: New York Times – “Largest Bottler of Coke Plans to Increase Prices”

It has not been a good week for American Airlines. First, the company drew the ire of air travelers by announcing it would charge $15 per checked bag beginning June 15. Then, American had to backpedal on a decision to charge $2 per bag checked by skycaps at Boston’s Logan International Airport and ban skycaps from accepting tips.

These recent moves by American Airlines are bewildering. It is no secret airlines have struggled since 9/11, and the effects of rising oil prices hit particularly hard in the airline industry. But, the company’s decision to use bag checking to create a revenue stream is a huge mistake. Travelers understand that the costs to use air transportation have risen. It would be much more palatable to build costs into prices of tickets. Add-on charges for baggage handling on top of higher fares just will not sit well with customers! Also, American is taking a risk that other airlines will follow suit with similar charges. If not, American may be forced to back off the fees. Unfortunately, the damage to customer goodwill will have occurred already.

Link: Baltimore Business Journal – “American Airlines to Halt Curb

I have very strong feelings about the role of price in the marketing mix. I once worked for a snack food company that nearly priced its way out of business. We frequently offered trade promotions and other price-related incentives to retailers and distributors. We had little trouble selling products when we lowered the price. The problem was we made little or no money. It took a change of Marketing VPs to put an end to the insanity of giving away profits with heavy discounting.

The analogy I use with my students about price is to equate its use as a marketing strategy with a tree limb. A limb that falls from a tree can become many things for a creative child: a gun, light saber, baseball bat, or many other possibilities. So it is with the marketing mix- it is the most adaptable of the 4Ps of the marketing mix. Pricing can be adjusted downward to respond to competitive situations or raised to address cost increases or maximize revenues.

There is a downside to pricing, though. It can be very dangerous, as was the case for the snack food company I mentioned. A reckless use of pricing can seriously damage gross margins, overall profits, and brand equity. Just like a limb can potentially cause injury if not handled properly, unwise use of pricing as a marketing strategy can lead do damage to profits and a brand’s well being.