‘How to stop customers from fixating on price’ by Marco Bertini and Luc Wathieu, Harvard Business Review, May 2010

I have mixed feelings when reviewing articles on pricing because, though, as a financial person, I appreciate the importance of price as a driver of margin and shareholder value, it is sometimes difficult to put aside ethical concerns, particularly when titles like the one above are used. A consumer protectionist might paraphrase the article – ‘how to rip off customers without them really knowing’!

Putting aside such reservations, the article does offer some new ideas and insights, even to someone like me who has developed sessions on pricing from both financial and marketing perspectives. It starts by making the important point – borne out by many cases of damaged product reputations – that the constant offering of deals and discounts will not only reduce margins, it will also destroy brand equity. The authors suggest that there is a further negative impact of overdoing discounting – it makes customers fixate on price and fail to see the other benefits of buying the product; they become ‘commoditised customers’.

Four approaches are offered to get companies out of this downward spiral. They all seem to have some validity in particular circumstances but, when reading the descriptions, it struck me that practical application will much depend on product, market and competitive strength; there is also a certain amount of overlap between them.

The first suggested approach is to change the pricing structure. The example quoted is motor insurance companies who charge per mile rather than per vehicle, though it is interesting that the pioneers of this idea – Norwich Union – found that it did not convince customers in the UK. It would have been more credible to have an example that had worked!

The second approach is to ‘wilfully overprice’ to create interest and differentiation. This is based on similar reasoning to the old example of customers being offered two types of identical tomatoes and choosing the more expensive ones on the assumption that the quality must be better. The argument is that high pricing will make customers think differently about the value of the offering, making it seem special. Starbucks is quoted as an example and they might also have mentioned Apple, but the authors should have warned us that what may be possible with brands of this quality is likely to destroy the market share of lesser mortals.

The third suggestion will be familiar to customers of RyanAir and similar low cost airlines; you ‘partition’ the offering into component parts, thus highlighting the benefits and making customers more prepared to pay for the value provided. It is accepted that this approach can also produce customer irritation and it is only recommended where it draws attention to a benefit that the customer had previously overlooked.

The final approach is counter intuitive – to offer a similar price for all product variants, even though costs and value perception may be different. For example buying all songs for the same price on iTunes or all Swatch watches at $40, makes the customer forget about price differentials and appreciate the value of those at the higher end of the range.

It is good to see an article about pricing that looks at the topic from a marketing rather than financial perspective and there are some innovative thoughts, but it is hard to see experienced marketers changing their pricing strategy as a result of reading it. But maybe they will question a few of their conventional assumptions.

To read this article go to:
http://hbr.org/2010/05/how-to-stop-customers-from-fixating-on-price/ar/1