During my recent vacation, there were multiple occasions where consumers expressed anger to me about prices they had paid or had refused to pay. The cases were all good illustrations of how people sometimes think about prices, and how they behave when making buying decisions. In my view, their actions were not always rational, and their anger had little to no effect. If the consumers really want lower prices, they need to change their buying behaviors.
I am a lifelong fan of the San Francisco Giants. I waited a long time before they finally won a World Series in 2010, and then again in 2012 and 2014. Of course, now that they have won it a few times, I want them to do it more often; and I pay close attention to the roster moves they make. Recently I have been lamenting the salaries they are paying to some players, wishing the players would simply be paid for performance. Then I realized – baseball is just a good example of customer willingness to pay and is not different from other markets. Determining customer value compared to their next best alternative and pricing accordingly is an important part of maximizing profitability.
Customer segmentation is a simple concept – identify groups of customers who tend to have similar levels of price sensitivity and set distinct prices for each group. Unfortunately, many companies either think all their customers are the same, or they don’t have enough information to create segments. In particular, we often see this in retail businesses. Unfortunately, assuming all customers are the same results in missed profit opportunities. With a little creative thinking, it is possible to let customers segment themselves and capture more profit.
I recently played golf with two doctors, following which we discussed customer satisfaction and customer ratings. One of the physicians, let’s call him Dr. Feelgood, expressed surprise that anyone would select a doctor based on ratings, and he lamented that negative ratings often reflected intangibles like staff friendliness and wait times, rather than quality of care. In my opinion those factors and more are part of the overall determination of quality and customer value. Differentiating any business based on superior intangible aspects can increase customer demand and improve pricing power.
Last week I read an article in the Wall Street Journal, The Secret Other Reason Basic Economy Is Everywhere. In the article, the writer seemed to imply airlines are doing something shady to force businesses to pay higher prices. In reality, the airlines are using smart segmentation techniques. They are simply finding combinations of features that are valued by some groups more than others; and they are matching them with price sensitivity of the groups.
I read an article in the Wall Street Journal Friday, New Worry for CEOs: Rising Costs From Metals to Meat, that discussed recent increases in inflation. Curiously, the article subtitle was Companies could be forced to raise prices or eat the additional expense. I think they have it wrong. Companies should look at this as an opportunity to raise prices and correct underpriced products and customers. Having the right pricing strategies for inflationary markets will help.
A couple years ago I wrote a post, The Myth of the Rational Consumer, in which I discussed evidence that customers really don’t want to change products or providers. I expanded on those views in a subsequent post The Myth of the Rational Consumer – Take 2. Much of the evidence I offered related to car owners who had selected specific brands and would not consider switching. Some recent events have demonstrated that although customers tend to be inert, if pushed too far, they will switch.
We are occasionally asked by clients or prospective clients to help them simplify their pricing. These requests are usually the result of the company struggling to manage the myriad prices they offer, but also often include a desire to make it easier to engage customers, or a desire to improve the margins on the lowest priced customers. In all cases, the companies want their overall profitability to improve. Unfortunately simplifying pricing is often not a good idea and can lower a company’s profits.
I am constantly reminded that customers don’t always behave the way the say they will, or the way we think they will. Earlier this month I read an article in the New York Times, Why Trying New Things Is So Hard to Do. Then over the weekend I read Dan Ariely’s column Ask Ariely, in which he cited the impact of the endowment effect. A couple years ago, I wrote a blog post, The Myth of the Rational Consumer, in which I discussed car loyalty. All these articles pointed to behavioral traits that make customers loyal.