The goal of any company is to turn a profit. The next goal is to continually turn a larger one. The revenue that your company generates is a product of how many units you sold and more importantly the price you sold them at. However, in the search for perfect pricing, many businesses overlook the most important thing about prices:
A price is only as cheap, fair, or expensive as your customers think it is.
The assessment of how reasonable your prices are begins and ends in the mind of your consumers. In other words; perception is everything!
Harvard Business Review reported that a study done by Bain & Company and ROI Consultancy Services (formerly PollBuzzer) surveyed almost 2,200 consumers in Atlanta and Washington, DC in 2017 and concluded that the credit that retailers revived for their prices can be extremely variable.
In their study, there was an example of a store with a reputation as an upscale retailer. This notion of luxury was reflected through their stores and product design and their consumers bought into it. Their customers believed that they were paying a premium for the store's products, when actually their prices were lower than average in both Atlanta and DC.
Harvard Business Review stated:
One option for the retailer would be to raise its prices slightly, since customers have already baked the (incorrectly) perceived premium into their shopping decisions.
They go on to talk about private-label brands and finding your place in the market as either a premium brand, discount one, or something in between. An example was given of a European apparel retailer struggling to find its place in the market and responding to market price competition by cutting their prices. Their efforts were unsuccessful because their consumers still perceived their products and prices to carry a premium over direct competitors. They also discovered in this search for optimized prices, that their consumers were more price-sensitive to certain products that they sold and not others.
The HBR concludes their article by stating that things like “adjusting signage” and “using private labels” are clearer paths to improving price perception and ultimately revenue growth.
While these factors may be of great performance, the power of raw pricing is being underestimated here. The root of this underestimation comes from a lack of acknowledgment of how important your customers opinions and perceptions truly are.
Taste and Preference
There are just certain things that come down to a matter of taste and preference. Sometimes these tastes and preferences are generally accepted by a majority of consumers. What I am not trying to do is discredit the power of marketing and branding. When you have a great product that is misunderstood by consumers you have a fiduciary duty to your company to highlight these misunderstandings and improve brand image and sometimes you can only take that so far.
What has a great amount of “backfire” potential is using marketing to turn your brand into something it's not in order to persuade and convince wary customers that your products are worth the price they command. As seen in the examples given by the HBR, it is clear that these companies spent a lot of time, money, and effort to essentially force-feed their customers their immovable prices. While I would never go as far as to say you can’t set a price and convince your customers why they are wrong if they don’t want to pay it, you just shouldn’t. That is not an effective or efficient pricing strategy. If you have marketed your product correctly, your prices should require no convincing.
The Customer is Always Right...
Designing a product that your customers conclude is not aesthetically or visually pleasing is not a problem that should be met with a barrage of marketing campaigns trying to convince customers that your “ugly duckling” product actually isn’t ugly. Who are you to tell your customers what does and does not look good to them? What’s that old saying...the customer is always right?
The General Motors Paradox
Chevrolet has been making their muscle car, the Camaro, since the late 60s and for many years it's been loved and cherished by many loyal Chevy customers. What wasn’t so well received was the 2019 Chevy Camaro. The front fascia of the car was drastically redesigned, the size and shape of the headlights were altered, and the car was given new taillights. Needless to say, sales dropped and there were (and still are) very many disgruntled Chevy petrolheads. What did Chevy do? Re-brand the Camaro? Launch a huge marketing campaign to tell us how wrong we all are about disliking the new design? No. They cut prices and pledged to make changes to the 2020 model year, returning to a more classic and original Camaro design.
While this is not a perfect example of a large company incorrectly estimating what their customers were willing to pay for a product, Chevy definitely incorrectly judged how the new design was going to be perceived.
A great number of examples of companies altering consumer perception can be found in the auto industry. For decades, car manufacturers have used marketing techniques and subtle design elements in order to differentiate a lineup of vehicles that really are not that different from one another. The first company to do this one a large scale was General Motors. GM has owned and operated over a dozen subsidiaries that manufactured vehicles under their own respective brands. Currently, GM owns Buick, Cadillac, Chevrolet, GMC, Holden and Wuling.
General Motors business strategy is built around the maintenance and acquisition of a variety of brands. They are able to leverage their portfolio by sharing R&D, drivetrains, electronics, software, and a variety of other components between product lines and brands as a drastic cost-savings measure. For years General Motors marketed its product line as something that someone worked up through as they became wealthier and more successful throughout their life. One would start their lives as an automobile owner with a Chevrolet. By the time they were older, greying, planning for retirement and had made a good deal of money, the car for them was a Cadillac.
Modern Day General Motors
Let’s look at an example of GM employing this strategy in the modern-day. At the North American Auto Show in 2006, GM launched the GMT 900 platform. This platform was applied to thirteen General Motors vehicles across four different brands. GM still uses the same strategy when designing their SUVs. Their current lineup of SUVs and trucks uses the GMT K2XX platform, which is currently being applied to ten vehicles. There is a version of the Cadillac Escalade that is priced over $30,000 higher than the Chevrolet Tahoe. While the Escalade does have a slightly larger engine and a different transmission.
A majority of the car is identical to that of the Tahoe. A majority of the differences between the two cars are cosmetic. What you are really paying for is that Cadillac badge on the hood of your SUV and General Motors has convinced many of their customers that it’s worth every penny of that $30,000. Cadillac was started as a brand that conveyed luxury, wealth, comfort, performance, and reliability. So long as those are the things that GM’s customers continue to associate Cadillac with, they can continue to command that high premium for a re-branded Chevy Tahoe.
There is a difference between the customer not understanding your product and thus not being able to correlate a certain price level with the said product. In a situation like that, you must do everything in your power to guide your customers into a place where they are educated enough to make a reasonable decision as to whether or not your prices are adequately set, high, or low. It is important to not confuse the situation of a customer that doesn’t understand your product for a customer who understands your product and just fundamentally disagrees with your price (i.e. they think that the price you are asking for your product does not reflect the customer’s perception of your product and the relative price that they would be willing to pay).
While GM now does a good job at “proving” to their customers that a Cadillac is worth more than a GMC or Chevy, there was a time in GM’s history where they had so many different brands that were sharing so many different platforms and components that it actually confused their customers.
Don’t Confuse Your Customers
Fortune magazine took a photograph in 1983 that made the cover of their magazine that visually displayed GM’s problem. The shot captured four GM vehicles: Chevy, Oldsmobile, Pontiac, and a Buik. All of these vehicles, from the angle that the picture was taken from, looked almost indistinguishable. GM is a great example of using the power of product and price perception to their advantage, but also going through a period of just taking it too far. In the 80s, GM had a lineup that was almost indistinguishable to new customers. At first glance customers were puzzled as to the differences between a Chevy and an Oldsmobile when looking at them side by side at the dealership.
Of course there were differences here and there and a knowledgeable car salesman would have been able to walk you through exactly what was different about your high-end Cadillac and why it was better than the Pontiac’s that were being sold across the street, but even then the differences were vague, small, and at times more a matter of perspective and perception than actual material differences. The largest and most apparent difference between the vehicles shown on the cover of Fortune was their price tag.
When that is the only major perceived difference between products, a majority of customers will simply choose the cheapest one. This is why, as important as price perception is, it must be coupled with strong and compelling elements of product perception that allows a customer to justify a given price in their head.
Another company that has historically been known to capitalize on product and price perception is Apple. They have learned how to capitalize on the attributes of a product that can create an almost cult-like loyalty from their customers and attract new customers to the brand year over year. GM made the mistake of differentiating their lineup under the hood and in other places where customers couldn’t see and simply didn’t care about. Apple took the opposite approach. Apple differentiated their products in the exact ways that customers were the most receptive to: visually, ergonomically, and monetarily.
Apple has been criticized for years now for producing products that were technically and functionally inferior to their competition at much higher price point. However, they use their high price strategy to their advantage. Tim Cook has asserted that the high price points of all of their products are thoroughly justified. The “halo” effect that they give to new product launches aids in the perception that a “superior” product is not only superior in performance, but also in styling, ease of use, and even as a symbol. Many would argue that Apple has become a part of pop culture.
Having the latest and greatest product that Apple has produced is now just as much as a status symbol as it is a tool used for learning, business, and entertainment. Those who are not as knowledgeable about the performance and technological specifications of a product will choose Apple because they associated their products and the price point of Apple’s products with wealth, success, status, and simplicity. Apple has convinced their customer base that their high price points are now something that is not just product dependent, but instead something that is a part of the brand and its culture.
Cult-like following or premium brand?
Apple has learned something from their prices. Specifically, Apple has learned a great deal about their customers. This “cult-like” following that the brand has was arguably the vision that Steve Jobs had for the company and its products, but I don’t think they could have ever imagined how price played into the culture of the company and its customers. Apple has convinced their customer base that their high price points are now something that is not just product dependent, but instead something that is a part of the brand itself. Apple would not be Apple if you weren’t paying a significant premium for their sleek looking products. They’ve learned that they can charge more, because their customers expect to pay more and actually enjoy doing so.
Some Closing Thoughts
Ultimately, prices don’t come from your competitors and neither does how your customers perceive your prices. The perception of price may not end with price alone, but that is inarguably where it starts. A product is only as luxurious, premium, discounted, or good as what your customers are willing to pay for it. What retailers really need is an effective way to use prices as a means of two-way communication between their customers and their company. The sellers send out a message, their initial price, and buyers send their response. If the buyers (customers) perceive the prices to be too high for what you are trying to sell them, they don't buy. Alternatively, if their perception of a price is low or “right on the dot” they buy. What one must always be aware of is price perception’s relationship with other perceived attributes of a product. All of these must work in harmony in order to comprehensively satisfy your customers and their wants, while turning a healthy profit.
Being able to effectively use price as a form of communication to better understand your consumers' perceptions of your company and your prices should be the first mountain climbed in the search for higher profits.