One of the five drivers of customer brand insistence is “value.” While value is comprised of more than just price (benefit bundle, perceived quality, etc.), it's important to understand pricing to deliver a strong brand value. Following are some concepts that you may find useful as you determine pricing for your brand’s products and services.
People often compare a product’s price to a “reference price” that they maintain in their minds for the product or product category in question. A “reference price” is the price that people expect or deem to be reasonable for a certain type of product. Several factors affect reference prices:
•Memory of past prices
•Frame of reference (compared to competitive prices, pre-sale prices, manufacturer’s suggested prices, channel-specific prices, marked prices before discounts, substitute product prices, etc.)
o Creating the most advantageous (and believable) competitive frame of reference is essential to achieving a price premium
•Prices of other products on the same shelf, in the same catalog, or in the same product line
o The addition of a more premium priced product typically increases sales of other lower-priced products in the same product line
•The way the price is presented – for instance, absolute number versus per quart, per pound, per hour of use, per application, for the result achieved, etc.; also four simple payments of $69.95 versus $279.80; for automobiles: total purchase price versus monthly loan payment versus monthly lease payment
•The order in which people see a range of prices – like when a realtor uses the trick of showing the poorest value house first.
It is extremely important to be able to estimate the impact of price changes on sales and profits. That is, it is important to know how a price change will impact consumer response, competitive response, and unit volume. Many business people erroneously believe that a price increase is the most cost-effective revenue generating marketing tactic. I have heard generally intelligent business people share their excitement about how a price increase will drop to the “bottom line” dollar-for-dollar. Most of the time, this is simply not true.
People display different price sensitivities to different products in different situations. Often people are relatively price insensitive, but only within a relevant price range. Once a price exceeds that range, people become very sensitive. Raising the price across that threshold is akin to walking off of a cliff.
The following factors decrease price sensitivity: