Saad K. Bashir on why brands need to weigh in at the right price.
How many of us really know the price we pay for our phone calls? Some of us may feel we know the exact charges, others may have an idea; the truth however is that the majority do not know the exact price they are paying.
Price is an overrated attribute.
A recent MIT study interviewed people queuing at a particular store. They found that although 80% of the customers thought they knew the price of the items in their basket, only 50% actually knew the correct price. Because of their relative lack of price knowledge, customers often seek ‘price cues’ to inform them whether something is a good deal or not.
Many telecom-specific research studies have highlighted price as the most important attribute from an intending buyer’s point of view when it comes to choosing a network operator. However, after that the overall awareness of the price point and the package details drops drastically (although as we move further down in the SECs, the trend reverses).
Customers will always say they want lower prices. However, in many markets and product categories, price serves as a guide to quality, and pricing too low can send out a negative signal. For instance, how many people buy cooking oil or washing powder based on price alone? If that were the case, then the lowest priced brand in the category would be the category leader, but the reality is different.
From an organisation’s point of view, price is a very weak differentiating element. By simply positioning itself as the cheapest in a category it might bring volumes in the short run but as a strategy it cannot last because the competition can always match the price and offer a superior product. Simply put, although consumers might say that price alone is the driver that shapes their choice, subconsciously they are looking for brand functionality benefits as well.
Companies put a lot of emphasis on price determination by using the three C formula: cost, consumers and competition. However, companies often fail to grasp the importance of pricing products and services across their lifecycle, particularly in innovation intensive sectors such as consumer electronics, consumer durables, IT, medical devices and pharmaceuticals, and the consequences of this are often felt across the entire industry. This is especially true today as companies introduce products more regularly, with lifecycles that are often measured in months, not years. There are external pressures for low prices coming from customers who are expecting more for less, as well as internal pressures stemming from the belief that pricing is a make or break factor in product launches. In addition, a company may have a number of related products in the marketplace at the same time, and this further complicates the lifecycle of pricing.
Two points are essential to price effectively throughout the lifecycle of a product or service. First, companies should actively manage the trade-off between price and volume (or profit and market share) to maximise returns. Most businesses fail to test customer value perceptions and price sensitivity after the product launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in the market, a price move for one can have important implications for the others. We can draw some insights from how luxury brands use the price element. The reason why luxury brands do not use price as a differentiator is because they are about aspirations and lifestyles and their customers are willing to pay for this.
Pricing is a complex and critical area because of its nature. Companies can try to get it right, although there are factors such as raw material costs, tax regime and the overall economic situation, which are beyond one’s control. n
Saad K. Bashir works for a telecom company in Pakistan
First published in the September-October 2011 issue of Aurora
No comments:
Post a Comment