Behavioral economists refer to the decision making process brands use to set a price in the minds of consumers, especially when those buyers are dealing with something that is unfamiliar to them, as “anchoring”.
Anchoring provides a reference point from which to perceive and negotiate “worth”. Brands looking to set a high value on what they offer anchor highly; brands looking to position themselves as accessible and everyday do the opposite.
De Beers anchored the value of their rings around “two months’ salary”. The message to purchasers – in this case, men in a jewelry store (perhaps the ultimate social fish out of water) – was that it will hurt but it’s worth it. At the other end of the value scale, when Coca Cola originally positioned their “delicious, refreshing” drink at 5c a glass, they were sending a clear signal to drinkers that Coke was the affordable beverage everyone could enjoy every day. Both messages were on brand, even though they presented vastly different value propositions.
De Beers’ “price” of course takes no reference from the actual cost – how can it, given that two people could have very different salaries? But then, neither for that matter, does Coke’s.
One thing is certain. In this age of ‘fair pricing’, what companies charge is certainly a topic that incites a lot of debate, as the reactions to this article about the cost of making a designer T-shirt prove.
I’ve found brands often look to reference their pricing on what they think a product should be worth (in their eyes) rather than how valuable it might be to a consumer and more particularly, how its anchor price compares with the other anchors that consumers see around them, and draw reference from, every day.
The price you anchor from should benchmark the value you propose to deliver. If you propose to deliver high value, do as De Beers does, and anchor highly. Set an anchor that articulates a clear expectation for what consumers can look forward to. Brands tend to focus on the tangible costs when they look to set such a value, but in today’s much more experiential economy, intangibles are a critical element of the value equation. With that in mind, here are my nine value influencers.
1. The value of what the product does to the person buying/using it – how does it positively impact their lives? What contribution does it make to them socially, communally and personally?
2. The ease with which they can access similar functionality – how common is that? And what do others charge to deliver something similar, and something very different?
3. The power of the brand – what the brand’s own story tells the buyer they should anticipate paying.
4. The perceived value of the components – vital for brands with ingredient brand components (such as Intel) but also for brands that use formulations (e.g. beauty products) because it adds to the perception that the consumer is getting more for their money, or that the brand is more accessible because it uses generic ingredients. Either way, components can help ‘explain’ price.
5. The look of the product – how beautiful/functional is it? – is it something people would want to be seen with, or to have? How much thought, effort and money went into making it look like that – and now that it does look that good, how easy is it to replicate and how long will that replication take? Packaging too transmits very powerful “value” signals because it elicits feelings of indulgence at one extreme and thrift at the other. I sometimes refer to design as part of a brand’s IP margin.
6. The demand for the product against supply – previews, press and social media coverage can fuel “must have” or “must ignore” status, heightening or degrading perceived value.
7. Where is it available – setting sets strong price expectations because environment can have such a powerful effect emotionally. The same goods available at a street vendor for example are likely to cost less than at a conventional store because the buying experience is so different. I expect to see stronger integration between physical and online environments in the years ahead for brands that cost more. At the same time, I expect any cost differential between the online cost and the in-store cost to close.
8. Service levels – the levels of support that come part and parcel with the product versus those that consumers must pay for. This is changing rapidly in some sectors like aviation as brands look to charge less upfront but also include less. Particularly at the budget end of the market, service at anything beyond basic maintenance is increasingly a fee-based addition. This allows value-conscious brands to anchor their prices lower, making them appear more attractive.
9. The “world of difference” coupon – the extent to which buying the product makes a difference to the world, either through what the brand has done ethically or what it plans to do as a result of the consumer buying. The lower the price premium, the lower the expectation that the brand will contribute globally.
The key thing to remember about these influencers is that they are volatile. Each one shifts in worth (and therefore influence on the anchoring price) depending on its priority to the buyer at the time, the relative attraction of others and the extent to which a brand has been able to develop and sustain loyalty with that buyer. In most cases, brands should be looking to improve the proposed value on an ongoing basis, or at least retain current margins in the face of commoditization, through a combination of small and larger changes to these value influencers. Such changes, brought to market and promoted socially and in the media, give consumers a sense that they are continuing to pay the right price for what they are now getting.
One way that I commonly suggest brands make sure they keep their pricing competitive is to regularly audit their proposed value against their proposed price.
• What have we been charging (and what has the response been?)
• What do we want to do with that price (retain/increase/decrease)?
• What will we need to adjust to make that price feel fair to the consumer and be competitive against our rivals?
Let me close with an interesting aside from Rory Sutherland. In one of his presentations, he dryly observed that, while price anchoring was an important social signal, and one that consumers took serious note of, there were sectors in which, in his opinion, it simply didn’t apply.
It was impossible, he said, to accurately value the price of wine because most people knew they wanted a drink but didn’t know enough about wine to make a value judgment about what they should be paying. Winemakers, he cheekily suggested, could in effect state the quality and set the price at almost any level they chose because drinkers actually couldn’t tell a good wine from any other. Vino, he concluded, in a social context anyway, was one of those products that was consumed for the impression it made on others rather than the effect it had on the consumer.
You may or may not agree with him. Either way, the price anchoring at play is something to think about (and maybe test) the next time you’re out and you get the bill for the white you had with dinner…Is a glass of wine with dinner reassuring at, say, $9 a glass – or outrageous. Cheers.
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