Customers, and people in general, will generally say that prices are very important to their choices. They say if the price is too high, they will buy from someone else or just not buy at all. While there is always some truth in that, customers don’t always behave the way they say they will. So, build your pricing strategy around what customers do, not just what they tell you.
We can all think of examples in our daily lives where prices are less important than other factors, but it is worth considering a few examples. Recently a friend who owns a condo in Chicago was explaining a myriad of different taxes in the city, and he sent me a link to an article, “Wealthy” Chicago Households On Hook for $2 Million In Debt Each Under ‘Progressive Solution’ To Pension Crisis. The point of the article was that the city is trying to solve its debt problem by only taxing the rich, but if all that burden is placed on a small group, that group will leave. According to the author, the price of living in Chicago will be too high, so the wealthy will simply move, and the city will have to increase taxes on others.
I asked my friend, who also owns a house in Florida if he was considering selling his condo, but he said “No.” I pointed out that he just complained about the high price of living there, but he seemed unwilling to do anything about it. He replied that Chicago was his hometown, he still has family and friends there, and he likes the sports and restaurant scenes in the area. He knows the city will tax his pants off and complains about it, but there are several aspects of living in Chicago that are more important to him than the price of staying. So, he stays.
As another example, let’s consider Facebook. The company offers its platform for “free”, but the price of the app is some tracking of users’ lives. As of Q1 2019, there were approximately 2.4 billion users who have accepted that price. As all tech company capabilities have expanded over the past decade, people have “demanded” the tech giants protect their privacy. During that time, Facebook has faced a long list of complaints about their lack of protection of user data. The most recent incident involved the company paying people to transcribe user conversations which were captured from their smart speaker. Users have learned that Facebook has significantly more interest in monetizing user interactions than protecting them, and yet they still use it. In this case, users are saying they value their interactions with friends and family, and they value the ability to post things about their own lives more than their privacy. They understand the price of using Facebook is greater than they originally believed, but they are willing to pay it.
Finally, let’s consider Starbucks. They sell coffee at premium prices. For years, restaurants charged $1.00 to $2.50 for a cup of coffee. It’s closer to $1 at fast food locations; and the cost per cup of brewing your own coffee is significantly less. Many devotees of Starbucks say it is worth the price because it just tastes better, but if you are putting something in it instead of just drinking it black, can you really taste the difference?
Coffee is considered a commodity on the futures exchange, but Starbucks charges premium prices. I always find it amusing when I work with clients whose salespeople tell me they sell a commodity and their customers only care about prices, yet those same salespeople will come to work with a Starbucks brew every day. Although they don’t recognize this behavior in their customers, the salespeople are saying there are aspects like the taste, the service experience and made-to-order process that they value; and they are willing to pay more.
There is no doubt that people care about prices, and we would all like to pay less for the things we buy. We are also willing to complain about prices if we think it might help bring them down; however, there are nearly always other aspects of our decisions to buy or not buy that are more important than just the price. So, when setting your pricing strategies, don’t take everything we say as gospel. Watch how we actually behave to get the real truth.
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