I am often asked where a client can lower prices to get more volume. Typically, they want to know which segments or customers are buying elsewhere and would switch to our client if offered lower prices. It seems like a simple question, but the answer is rarely simple and often frustrating to our clients. Our view is if you care about profitability, lowering prices to chase volume is often a bad pricing strategy.
Two weeks ago I wrote a blog post, Don’t Get Angry About Prices– Change Your Buying Behavior, in which I opined getting angry about pricing accomplishes nothing. Shortly thereafter, I read an article in the Washington Post, Do Airline Tickets Need Warning Labels?, followed by JetBlue and United raising their baggage fees. Meanwhile Southwest still doesn’t charge for checked bags. These things all reiterated my view that companies should compete by differentiating themselves in whichever way they believe adds the most customer value, including transparent pricing or multi-part pricing. Read more
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.
Last week Pfizer announced increases in the list prices of more than 40 drugs for the second time within the year. The increases average 9.4%. Although there could be some political backlash, the pricing strategy is logical. Pfizer is recognizing their pricing power, they are incorporating buyer psychology into their process, and they are taking steps to avoid shocking or angering their customers.
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.
I was recently discussing the labor market with the CEO of an industrial services company. He said they were having difficulty attracting enough qualified employees, and that was limiting their ability to grow. When I asked why he didn’t just offer more attractive pay packages, he said it would be counter-productive. There is a limited pool of qualified employees; and offering ever greater compensation just enables them take employees from competitors, who could do it back to them. He essentially described a reverse price-war, and correctly pointed out that nobody wins price wars. While I agree price wars are harmful, I believe there are lessons the CEO could learn from dynamic pricing.
Last week I ordered tickets to a spring training baseball game, and it was another demonstration of the power of multi-part pricing. By that I mean the amount the customer ultimately pays includes multiple components, and they add up to more than the headline amount. When we experience multi-part pricing, i.e., pay the extras, we often grumble about it. However, we generally pay the extra fees and come back again, proving that multi-part pricing strategies can be very effective.
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.