Psychological pricing is the practice of setting prices to appear subconsciously more appealing to a target market and to therefore positively advance the buying decision. This desired effect on demand is the reason behind establishing price points (like MAPprices, MSRP and so on). However, since there are different types of psychological pricing, it is essential to understand their differences and select the appropriate one for your brand.
Prestige pricing refers to setting prices higher than normal because lower prices will turn off the target market. This is therefore common for brands that are associated with luxury, high quality, high performance, exclusivity marketing triggers or some other type of unique value proposition (UVP) or brand position that carries a premium from which you can profit. Be sure to stress the UVP in the sales pitch, whether in packaging quality or words on the package.
Charm pricing is a popular pricing strategy used in retail. Since humans (used to reading from left to right) tend to focus more attention on the digits to the left, retailers often reduce prices like $1.00 to $0.99. $0.98 or 0.97. Although the difference is marginal, people generally consider it a more significant discount than a 1-cent increase to $1.01. In short, consumers perceive the small discount to be larger than it really is.
To test whether this can work for your brand, simply change your price accordingly and compare the market's response.
Needless to say, charm pricing has become so popular worldwide that the market expects a regular, non-luxury product when they see charm pricing. Consequently, avoid charm pricing for luxury products. Specifically, feel free to use whole numbers. In other words, rather than prices like $199, set the price to $200. Using charm pricing inappropriately like with luxury products could be detrimental to your brand.
Innumeracy refers to a pricing approach that takes advantage of the fact that many buyers are either unable or unwilling to understand some mathematical concepts involving numbers as they apply to daily life. This usually involves wording offers in ways that create a favorable illusion. Example(s)
Consumers respond more favorably to offers to get the 2nd item free over pay 50% off when the 2 offers are essentially the same.
When shopping for an item priced at $100, consumers easily feel special by the idea of getting not only 1 discount of 25% but an extra one of 20% 'just because the sales person ostensibly thought they were great'. However, the positive emotion deceives them, preventing them from realizing that, if the amount payable were calculated at once on a single summated discount of 45% (as b below), they would pay less ($55) than based on the discount being calculated in 2 parts. As illustrated below (in a), breaking apart the discount into 2 means that, when calculating the second second of the two discounts, that second discount will be calculated based on a price that is less than the original, ie less than the $100. Conversely, the summated total of the discount of 45% is calculated at once based on the higher original price of $100.
a) $100 x 0.75 x 0.20 = $60 VERSUS
b) $100 x 0.55 = #55
If your price can fall between $24 and $29, raise it to $29 without risk of consumers feeling ta significant difference.
Price Appearancerefers to the physical way in which your price is displayed. The appearance of prices can be adjusted to support either abovementioned charm pricing or prestige pricing.
Appearance of prestige pricing. High end retailers who have rounded up their prices (from $1xx to $200) recognize they are forcing upon their customers the pain of parting with more money than normal. For this reason, despite the fact they have clearly raised their prices, they try to make it appear as physically small and with as few characters as possible. In other words, they are trying to trick your mind into somehow thinking that the price is lower. For instance, a fancy clothing store may have prices written in small font and without the extra 0s at the end. Example(s):
The price will be printed with a small font as '200' and not $200.00. The $ sign and extra digits reinforce the price. This is further reinforced by the fact that consumers read all the syllables of prices in their minds and would therefore take longer to recite the longer numbers.
Appearance of charm pricing. Non luxury prices that end in .99 like 1.99 for instance may make the 0.99 as small as possible. Needless to say, charm pricing is also typically presented with signage that is loud and large with words like 'sale'.
1.99 (versus $1.99)
Final note regarding ethics
Beware as some consumers will find these practices deceptive while others will find them entirely acceptable. You will therefore need to consider your market very carefully.
Breakeven analysis is used by businesses to predict the point at which a new venture will stop making a loss (as operating at a loss is normal in the earlier stages of new ventures). Technically, the breakeven point is the point at which revenues finally catch up just enough with, and are therefore precisely equal to total costs. The most common application for breakeven analyses is for finding out the minimum number of product units a business must sell in order to catch up with costs. Knowing this allows managers to evaluate the soundness of their plans are. It is therefore used to evaluate the viability of a new business, project, new product, even operations management of daily activities and so on.
Uses & Benefits
to make predictions that include the following.
minimum outputs / units you must sell in order to start operating profitably.
profitability at different output levels.
margin of safety.
to perform sensitivity analyses, ie to estimate the viability of different 'what if' scenarios to evaluate your ability to enter into and remain within the 'profit' zone. Specifically, you can contrast the predicted results (see previous point) for each of several scenarios based on changing one variable, like pricing.
What if the fixed costs rose by x, or by x% every month?
What if your variable cost per unit rose by x%?
to set performance targets. Example(s):
Management teams and the salesteam can be given sales targets to ensure the business remains safely within its safety margin)
to set profit margin targets (and establish the appropriate pricingstrategy by comparing profit margins of different strategies, whether skimming, etc and how the business' ability to comply with the requirements, tolerate the implications, etc).
Profit margin analysis (previous point) implies sales pricing and costing. Consequently, in addition to examining the sales pricing stratgey, cost analysis can lead to setting or extending limits to costs (fixed and or variable costs like materials), essentially, the analysis informs whether the breakeven point is tolerable or must be risen or lowered. Common ways of lowering the breakeven point / costs include outsourcing, technology analysis & hihg-productivity upgrades, margin analysis, price analysis & changes.
to manage 'business risk' (ie the threat of financial failure because of factors, in this case fixed costs, that lower profitability if the these factors become excessive). Example(s):
whether through routine risk-based monitoring processes or after major events (like the pandemic), the analysis may highlight the need to find less costly ways of manufacturing, advertising and so on.
To explain and justify proposals to team members or third parties in specific and relatable terms. To this end, all of the earlier usees are applied.
When applying to the bank for funding, you say, "we are expecting to breakeven after x output (while referencing the functional ways in which your operations will seek to meet the output level)."
When applying to investors, they will know when you are going to make a profit and from what point they can expect to begin getting dividends.
Key Concepts
Fixed Costs (FC). Fixed costs do not vary, regardless of business activity or inactivity. While fixed costs can change, their change are not related to production. Examples include rent expenses that remain at a fixed dollar amount of $1,000 monthly, insurance expenses, fixed salary expenses.
Outputs. Outputs refer to the number of units sold.
Variable Costs (VC). Like the name suggests, variable costs vary with how much businesses produce, ie their 'output'. This is because these costs are directly related to the production of the outputs. Examples include the cost of raw materials used in manufacturing goods, wages, transport costs.
Revenue. Revenue refers to total, gross sales earnings. It is calculated by multiplying the sale price by the number of units sold.
The BreakEven Analysis Graph & Manual Calculations
1. Collect data for the following variables.
Output. 1) Current output and 2) a suitable interval scale to represent different levels of output. The range should be realistic to your business and start from 0 and end at the maximum that you can produce. (Example: 0, 5, 10, 15 handmade dresses if you currently make 7 dresses; 0, 1000, 2000, 3000 pens if you currently make 2,000 units)
Fixed Costs / FC (Example: factory space rental expenses of $2,000, IT costs)
Variable costs / VC (Example: cost price / CP, ie the cost of making or otherwise acquiring products which includes, among other things, raw materials, 15% sales commissions)
Sale price / SP per unit produced (Example: $20 per dress or $1 per pen).
2. Using a table like the one below, fill in the blanks. To do this; apply the following details to the calculation formulas that appear in blue.
FC (rent): $2,000
SP: $2.00
CP: $0.50
After completing these calculations with the data above, the result should look like the following. It is not necessary to color code. However, I have used red for costs and green for revenues.
Create the plotted diagram either manually or in MS Excel. The y (horizontal) axis measures output levels in units only. Conversely, the x (vertical) axis measures dollar value. It is most notably used to plot 2 variables: 1) total revenue and 2) total costs, both in dollars. A 3rd variable may be the fixed costs.
The green line represents total revenue while the red line represents total costs. Notice how the cost line always starts above the green line, which visually demonstrates that the operation always starts at a loss where revenues are less than costs. However, the lines eventually intersect at the break even point before the revenue line continues to finally rise above the cost line. This new position visually illustrates how the venture enjoys a profit for the first time.
Notice too that 'total costs' always start from the level of the fixed costs. On that basis, fixed costs should be monitored closely because they are a measure of business risk. For this reason, businesses often stress on keeping fixed costs at a minimum (while being more permissive with variable costs).
3.Find the 'breakeven output', ie the output at the breakeven point. To do this visually, draw a vertical line from the breakeven point to the y 'output' axis. That output is the minimum number of units sold requried to breakeven. In this example: visibly close to 1,500 and therefore slightly under 1,500 units. Alternatively, you can calculate the precise number using the following formula.
Breakeven outputs = FC / contribution margin per unit*
Breakeven outputs = FC / (SP per unit - VC per unit)
Breakeven outputs = $2,000 / ($2 - $0.50)
Breakeven outputs = 1,333 units.
Also notice that, in addition to establishing the breakeven output, you can also predict the corresponding profit. To do this visually, draw a horizontal line between the breakeven point and the x revenue / cost axis. The profit is just under $3000.
If you want to calculate the breakeven revenue value precisely, use the following formula.
Breakeven revenue value = (fixed cost / 'contribution margin per unit'*) x SP
Breakeven revenue value = (fixed cost / (SP-VC)) x SP
Breakeven revenue value = ($2,000 / '$1.50') x $2.00
Breakeven revenue value = $2,666.70
4. Know your 'output safety margin'. For our example, let's say we have a current output of 2,500 units. Since that output exceeds the breakeven output (of 1,333 units) and is plotted to the right side of the breakeven output, we are operating at a profit. The safety margin will indicate the number of units by which our current output (of sold units) must fall before we regress to that breakeven point. On that basis, the output safety margin is calculated as follows.
Output safety margin = current output - breakeven output
Output safety margin = 2,500 units - 1,333 units
Output safety margin = 1,167 units
The safety margin suggests how likely your business will be at certain levels of sales. I think businesses may establish safety margins and use bragging rights if they have advanced far beyond a given safety margin and confortably in the profit zone. Furthermore, safety margins in risk management can be used as triggers that prompt certain types of change when businesses slip within it.
Limitations of the breakeven analysis
While a useful tool, it is based on certain assumptions that may not always hold true. Not only should you share these assumptions but also make provisions to adddress these limitations, thereby minimizing potential risks (perhaps through strategies in your 4Ps like price skimming, well designed product mix, clever distribution channels (ie place) and so on).
the figures are only predicted NOT actual data
it is assumed that one price applies to your entire business and that it remains fixed.
it assumes that you have no waste like product defects, refund requests and so on.
it assumes that cost of sales remain the same. However, as businesses grow, they often develop economies of scale that lower unit costs (like through buying larger volumes of raw materials, economies of scale by improving technical knowledge beyond a learning curve). Conversely, costs could increase through PESTLE macroenvironmental factors like economic downturns that increase inflation and causes currency devaluations.
it assumes that you sell only one product when most businesses have a range of products. In response, some businesses use an average price.
the trustworthiness of its data depends heavily on the source and collection methodology.
CONTENT RELATED TO BREAK-EVEN ANALYSIS
Break even analyses are useful in the 'Finance' section of a business plan.
* The dollar contribution margin per unit aka 'contribution margin' represents the portion of sales that contributes to covering fixed costs (after deducting variable costs). It is like thinking about the net value of commercial trading that covers fixed business costs. The contribution margin contributes to to profitability (more reliably than the mistaken way of thinking of SP - CP as profit, because it is not. It only contributes). It is a useful consideration when considering risk management because fixed costs pose a potential business risk.
Earlier, I discussed the unique value proposition (UVP) concept, ie a special aspect of your offering that provides true or perceived value (emotional and functional benefits) to consumers. However, this post will extend that discussion to consider how your brand's UVP fits or is positioned within the context of your competitive market landscape. When measured properly, brand positioning aka benchmarking can even allow you to plot your and competing brands on a single graph using each brand's score where each score is based on consumers' perceptions of UVP. The scatter plot graph will therefore allow you to see the relative position of each brand. To further clarify; the graph would represent said 'market landscape' and the UVP score of each brand would be positioned as a plot point (perhaps using the brand's logo) on that graph.
On that basis, can you now see how 'brand positioning' may be understood to be the strategic process of creating competitive advantage in consumers' mind, especially at the 'evaluating alternatives' phase of their buying decision? Continual horizon scanning and proactive brand positioning or repositioning are the cornerstones for creating and maintaining a premium brand.
Why is brand positioning important?
The point of brand positioning is answering the question 'What value proposition sets (or can set) you apart from the competition?' Let's face it! If a brand is to be competitive to enjoy high income streams from an appreciative market, it needs bragging rights, about something.
Just imagine how, if your brand positioning makes you a clear outlier, your brand will be more 'recognizable' or better yet, can be 'recalled' (the 2 measures of 'brand awareness'). In turn, a brand with greater brand awareness is one that is sought after more.
Brand positioning is the sine qua non for effective market communication. It is afterall a means of using your bragging rights to establish your brand as a leader its unique way within the collective consumer mind.
Differentiate on the basis of attributes that your customers use for measuring significant value
When customers compare brands, they do so on the basis of single variables (at a time) that are meaningful to them. For instance, legal customers may use the extent to which lawyers listen to them analytically, a form of customer service. A car buyer would not have the same criteria for a car salesman, even if he is concerned with customer service. In short, the positioning must be customized for each industry, segment, brand, product, etc.
Some attributes that are commonly used for brand positioning include the following.
product quality
customer service
convenience
price
differentiation
To illustrate, the quality-based positioning approach, companies may highlight their superior quality through product performance (perhaps in resolving a pain point), compliance with well established industry standards for quality (like ISO certification), exceptional craftsmanship, raw materials that meet well esteemed specifications, sustainable practices, small-batch production, ... in short, whatever it is that defines 'quality' in their industry.
What attributes are important in your industry? How does your brand offer something that feels like a breath of fresh air to customers? For instance, if your industry offers a product or service whose implementation or use are renowned as being complicated, does your brand offer strong customer support that makes the process much easier?
Think insurance policies and their tedium! This is arguably the reason why Geico selected their famous 'grunt test' campaign. They wanted to show the world how their sign up process was so easy, that even a grunting cave man can understand it.
Attributes of focus should also change with emerging market trends. However, attributes can be anything that really matters to your consumers. Was your brand the first of its kind which is a fact that your customers value? Are you just the most popular? Are you the only one that responded to certain events that are near and dear to the hearts of your target market? Have you done a SWOT analysis of your competition and want to use a campaign to directly call out a competitior's weakness?
Most industries have multiple key attributes that can be simultaneously represented on 'perceptual maps' like below. Like in this example, consumers rate each key attribute so that brand managers can observe the relative position of all competing industry players. Each brand manager then contemplates "Do I like my current brand position?" "Is there a gap in the market that I can fill?"
In the example above, taste and being natural are the 2 key attributes for 3 key players in the sugar industry. A gap exists in the quadrant for more tasty and less natural, which would be better than Equal's current position of low ratings on both attributes. Should Equal fill that gap? However, the brand manager may also consider shifting the brand's positioning to the right if trends emerge in which consumers are happy to sacrifice taste for more natural products. If Equal's brand manager wants to respond to that trend, that brand may produce a variant that is more natural, perhaps only to a marginal extent to perhaps offer a natural option that is likely more affordable than Truvia.
Repositioning is brand risk management. Brand managers must continuously scan the horizon for changes that warrant significant branding response. Common prompts include changing target market (perceived) needs, improvements in your competitors' UVP, new product substutes and waning consumer interest.
Case study: Perceptions of the Old Spice brand changed over time. Specifically, the brand was unable to attract younger male demographic because it was associated with 'old men'. To counteract this, the brand changed its image. It appealed to younger men by changing its personality with style elemnts like younger very masculine male models and campaign slogans like 'Smell like a man, man!' are cases in point. This not only changed the brand's demographic by raised sales by 27% within only the first 6 months of the campaign's launch in 2010 but also emerged its category leader as a consequence.
Case study: Starbuckslost over 28% profits over 2 years following the 2008 economic crisis. In the face of economic hardship, consumer attitudes changed. They began to see coffee as a commodity - an ostensible existential nightmare for a brand that built on presenting coffee as a luxury. Consumers were opting for cheaper options like McDonalds coffee. In response to this risk management 'white swan', the brand hired BBDO, an agency that specializes in branding to reconvince the market that their coffee was worth the extra cost. Its campaign included slogans like "If your coffee isn't perfect, we'll make it over. If it still isn't perfect, you must not be in a Starbucks." and "Beware of a cheaper cup of coffee. It comes with the price". In short, the brand used the quality positioning strategy.
Case study: McDonalds recognized that consumer perceptions were becoming disfavorable. Specifically, consumers began to perceive it as unhealthy. The brand improved this reputation with healthier options like salads.
The brand positioning statement.
A brand positioning statement briefly 1) identifies the target market, 2) describes benefits / value to the target and 3) implies current relative exploitable weakness in your competition or industry. This statement can be used for recreating mission statements for internal and or external customers.
Examples.
For serious athletes, Nike gives confidence that provides the perfect shoe for every sport.
To cultured millenials, Starbucks is a premium coffee house that adds an intimate and valuable experience to a consumer's life style by integrating caffeine with a comproftable environment.
Steps: How to establish your brand positioning
Know the key industry attributes and how to measure them.
In most cases, a variable is simply a contiuum of the same thing. For instance 'price' is either low or high or range in dollar values.
In footwear, one key attribute is a categorical scale that has 'performance' and 'fashion' on either of its extremes. ('Correspondence analysis' is used for statistically for mapping categorical variables).
Determine your current brand positioning. This can be an informal 'back of an envelope' exercise and or part of a formal beta testing survey.
Analyze your compeitition; identify them and perform SWOT analyses for them (while also incorporating into them considerations of the PESTLE analsyis). In addition to this simple video, see the other more comlex discuss at the end of this post.
Analyze your industry for weaknesses that you can resolve.
When Geico realized that an inherent weakness in its (insurance) industry was that consumers found the standard application process upsettingly difficult, they differentiated the brand by providing the value of convenience with an application process that was uniquely so much simpler that it could even pass a cave man's 'grunt test'.
If any, know your industriy's inherent shortcomings.
Know your UVP
Create a positioning statement for a promotional campagin.
Establish a suitable positioning strategy. This is particularly important when your attribute-related market positioning is similar to that of competing brands. In such cases, select a strategy as the basis of differentiation. Strategies may be one of the other attributes like one listed above; price, convenience and so on. The price-quality trade-off is very common.
M&Ms emphasized the product quality by stressing the product's durability, safety, reliability. Its tagline "Melts in your mouth, not in your hands" is consistent with that.
Integrate your brand's differentiating qualities throughout your brand's organization, especially into all elements of the front line including brand personality like brand style, a 'differentiating tagline' and so on.
Constantly evaluate how well your positioning is working.
Scan the horizon for emerging trends that can change the nature of the market landscape and, by so doing, present new risks (opportunities or threats).
Reposition to adapt to emerging trends and circumstances. This often involves changing key brand elements like the product (qualities), price and even brand personality.
Avoid brand extensions that are generally unsuccessful and, over time, may even dilute the power of your brand position in the mind of consumers. Line extensions may include extending the product mix to include other types of products. The risk appears to occur when brands attempt to do something contrary to the key characteristic that helped to gain its position with clarity in the minds of consumers. Examples include the following.
Bayer's was a leader as a pain relieving medicine because of 'Aspirine'. However, a subsequent attempt to use the well established name to introduce an alternative non-Aspirine pain reliever 'Bayer Migraine' failed.
Dial was a well established brand for soap. However, when it introduced deodorant, the deodorant failed.
My gag reflex is still strong every time I remember the case of Colgate, a well established brand renowned for clearn dirty mouths that then attempted to use their name Colgate for food products. Am I the only one that has this strong a reaction? Possibly not because the new food product was unsuccessful.
You can use perceptual mapping not only for single brands against others but also for different iterations (formulas, colors, etc) while doing new product development. Furthermore, you can make the graph three dimensional to include the variable of unassisted brand recall if respondents needed to name the competing brand. The plot for each brand will not be a dot but a circle whose size reflects the number of times it was recalled.
CONTENT RELATED TO BRAND POSITIONING
Positioning is very important in the 'evaluating alternatives' phase within the customer's buying decision process.
When completing your SWOT analysis, pay special attention to the strengths of your competitors, especially the leaders. Those strengths should not be the basis on which you should try to compete with them. You will need to find some alternative.
Product demand matrix is essentially another type of brand positioning tool. However, its two variables are price and number of customers demanding the product. It therefore plots sales channel locations where your and competing brands may enjoy demand that corresponds with your product offering based on its level of high endedness and price. It is useful for figuring your more direct competitors and provides an opportunity to know which competitors to observe for inspiration for packaging, pricing and so on.
Perceptual maps. When analyzing your perceptual map, see if the plots exist in all or most quadrants. This is favorable to a straight line. For instance, in simpler plots, price and quality are commonly used as the 2 attributes, However, since these variables are often highly correlated in the minds of the market, the plot essentially measures only 1 (and not 2) variables. In such a case, all of the plots form a clear straight line, often a diagonal one. This type of result is not ideal as it suggests that the research process was not designed to get maximum value from the data. To counteract this issue, it is advisable to use variables that are not as highly correlated. Having said this, note that patterns with wide gaps do not necessarily indicate this issue. In some cases, they suggest a gap that can be exploited or one tjat is undesirable. Examples of undesirable gaps include cases in which manufacturers will not make expensive products to be sold cheaply .... or customers won't buy expensive products that are low quality.
The other way. Can you plot how you perceive key characteristics of your target market personality type? ... If your target's problems are special or outlying somehow, you might have the opportunity to personalize your messaging even further. For instance, Skinny-fat solution, a muscle building plan might signal to its target by saying, "It's hard enough for regular guys to build muscle. But us; the skinny-fat guys? It's impossible with the typical advice ..." Notice how this brand is making a very clear distinction between the regular segment and its own. It also shows how the competition is failing this niche. "... This is why I don't follow typical advice. Instead, I use my own 3-step system. Want to learn
A commodity is a good or service that is the same, ie it is undifferentiated from that of other manufacturers or sellers. Consequently, competition can be based only on price, specifically the lowest price. Examples include table salt, water, public transport and electricity. Consider other examples that are readily and commonly available in your area like agricultural produce, bananas, beef, eggs, fish and so on. None of the sellers can raise their prices as they will quickly go out of business because the market will stop buying from them. The market places value for a commodity on price. Customers expect low prices. Consequently, sellers suffer low profit margins and can make money only if they sell in high volume. They also suffer further when new competing products enter into the market likehow 'pH-balanced beauty bars' entered into the personal care market with claims of being gentler on the skin, thereby challenging the emerging desire for real natural soap (which is often sought after based on perceptions of being gentler than chemical bars).
The solution to this apparent trap is product decommoditization or differentiation ... ie 'branding' and brand repositioning. Ways in which this can be done is by adding value to products in ways that are meaningful to your target market like adding new inputs (like ingredients, labor, experiences within services) that are sourced and or managed in a special way, adding a service to the otherwise commodity product and so on. Since competitors will follow when they realize you succeeded in increasing the profit margin, you will need to advance your differentiation strategy. For instance, when you start to differentiate, prepare to decommoditize your product in planned stages that does not seek to immediately achieve the maximum. For instance, after your competition follows your approach of converting your products into being 100% natural, you can then convert into 100% natural and another feature that is meaningful to your market like 'certified organic' or 'vegan'. This step-by-step approach may make it easier to raise your price in the market to a bearable extent in a particularly price-sensitive market. Otherwise, if you have the wherewithal to raise entry barriers and your market can bear higher prices, decommoditize your product to the maximum extent.
After going through the extra trouble of differentiating your product, it is imperative to raise your price accordingly, not only for the sake of benefiting from the opportunity but as a means of avoiding potential future commercial suicide if you are operating in a highly competitive environment. Imagine this! If your decommoditized product is priced like a commodity or higher to such a limited extent that it is not noticeable, your competition can decommoditize and price his product more appropriately. Since a differentiated product becomes competitive on the basis of perceived or real quality rather than price, your relatively low price may signal lower quality to the market, especially if shrewd competitors capitalize on your faux pas, even without direct attacks. By such a point, you can not easily raise your price. You will be in reactive rather than proactive mode engaging in damage control of your brand's reputation.
Here are some case studies of decommoditization.
Case study: Air travel is a form of public transportation. As seen in the cases of no-frills air travel like Ryan Air, Easy Jet or Southwest, air travel can be allowed to remain as a commodity. However, consider the way in which exclusivity marketing and also tiered loyalty rewards programs decommoditize air travel. Essentially, airlines decommoditize their product by adding a new type of experience to the basic concept of moving from point A to point B, specifically, they provide comfort (like nicer facilities in their special lounges), extra services (like free WI-FI), convenience (like shorter waiting times) and an emotional boost (like the pleasure of being seen in a 'high financial status' situation).
Case study: Some utility companies created their own 'new type' of electricity called "digital electricity" (even though the electricity they sold was the same as any other utility company). They succeeded by overcoming an important pain point of the highest resources market segment. Specifically, they targeted businesses that depended heavily on electrical technologies like computers. Current fluctuations and power outages were a pain point for such companies like Google, IBM and Microsoft. Consequently, by assuring such companies of the solution to the problem, the utility company was able to sell their 'new' decommoditized product. Over time, not only did other technology-dependent businesses (like banks) follow the lead of the first 'digital electricity' customers but high-resources households with the same perceived need.
Case study: To counteract falling sales in the beverages market, Cadbury Schweppes improved inputs that aging baby boomers, a key market segment valued highly, ie 'natural ingredients'. This segment was particularly preoccupied with aging in a healthy way. As a result, Cadbury Schweppes saw sales continue to rise for years after making this change.
Case study: When 7-Up competitors began to imitate their 'natural ingredients' approach, 7-Up decommoditized further to an extent that would make it hard for competitors to catch up. Specifically, rather than merely offering some 'organic' ingredients, they converted their 'natural' products into '100% organic'.
Case study: The chemical formulations of any brand of bleach or aspirin are regulated by law. Consequently, all bleach or aspirins, regardless of brand are the same. However, because of branding, people will sometimes even knowingly pay more for the same product. Clorox and Bayer remain the leading brands regardless. Consumers generally pay 55% and 43% more respectively for these brands.
CONTENT RELATED TO DECOMMODITIZATION FOR PROFITABLE PRICING
*IMAGE ABOVE. While water is abundant, Perrier has created a high end brand by bottling natural mineral water, its distinctive green bottle, and boasting its competitively higher levels of naturally occurring carbonation.
Retail volume pricing refers to offering price discounts for larger quantity purchases of a product. Consequently, the more that a customer buys at once, the larger the discount. As illustrated in the examples below, volume pricing is most commonly presented through differences in product size and number of units bought at once.
Example
Small plate: $1.00
Medium plate: $1.15
Large plate with unlimited extra helpings: $1.43
Example
1 unit of shampoo X: $1,00
3 units of shampoo X: $2.85
Benefits of volume pricing
Larger orders. Larger orders provide customers with the reward of a lower price and possibly lower shipping costs.
Creating new customers. First-time customers can have a lower price to try the product before getting the standard price for the second order.
Compensates consumers for their perceived diminishing marginal product value. one theory posits that as someone consumes a product, the initial wow effect diminishes over time. The lower price helps to compensate for this.
Frees up human and other resources. This is a matter of working more efficiently.
Beware. Volume pricing is NOT a panacea as it applies favorably in only some cases.
'DOs & DON'Ts' and Considerations
Customers expect a discount, even though there are often no or very negligible differences.
Customers are considerably more likely to buy volume priced products if the products are non-perishable or has an extended shelf life.
Price sensitive customers report taking out a calculator at stores to verify the level of saving.
Proceed ONLY IF volume pricing still generates more sales and a profit. For instance, personal care commodity product savings are likely to range from roughly 4% to 14%, with the higher priced products having the higher discounts. When asked, some low resources individuals said they will not buy the discounted product if the saving is on the much lower end, especially since they must pay out more initially. Ironically, this is the segment that seeks savings more but less likely to get it with the products that target them. Respondents suggested that they are more likely to buy with discounts like '2 for the price of 1' (ie 50% off) or '3 for the price of 2' (ie 33% off). You may consider ways other than price discounts as a means of increasing sales. Interestingly however, higher discounts on higher end products can help to target lower resources individuals.
Establish prices around customer perception and not simply a markup on manufacturing costs. On this basis, price discounts may be inappropriate for products needing to use higher prices to signal higher quality. For such high end products, volume pricing may be inappropriate for retail. Tier pricing (mentioned below) might be more suitable for wholesale customers.
Know your customers' buying patterns as they relate to volume. For instance, if your customers usually buy small volumes, volume pricing is worthwhile. Otherwise, if they already buy in high volume, do NOT proceed as the discount will be un-necessary.
This point has 2 messages; 1) Investigate to understand the reason for lower sales and 2) Segment your market to price accordingly. Slow sales may have nothing at all to do with prices. For instance, there are case studies of products being priced between 2 segments without adequately capturing the demand of either. Prices for such products need not be discounted. Rather, the opposite, ie raising the price has worked to better target a market that strongly believes that higher price suggests higher value.
Initial price of $1,000 perceived as too high for consumers
Initial price of $1,000 perceived as not sufficiently serious by professionals
Solution that worked: Raised the price by 63% and targeted professionals. Sales soared with the professional segment.
Higher margin products are best suited to volume pricing.
If your customers like small volume sales, ensure they still have that option when applying volume pricing.
Like other forms of price discounting strategies, volume pricing can negatively impact customer perceived value of the brand. Consequently, stress the benefit of higher volumes versus stressing the obvious economic saving. For instance, 'buy for the whole family', 'stock up on travel size units for the upcoming travel season', 'Share the joy! Give one to a friend', etc
If you decide to implement volume pricing, allocate someone to analyze whether volume pricing is worthwhile regarding raising sales and profitability.
CONTENT RELATED TO VOLUME PRICING
Volume pricing ought not be confused with tier pricing. Tier pricing establishes unit price tiers and is often used in wholesale pricing, an area in which sale volumes are considerably larger (than retail). Notice the volume ranges in the example immediately below.
You may be selling retail now. However, you never know if the future will present opportunities for wholesale, as crazy as it currently seems. Consider wholesale pricing as part of the process of calculating your retail prices (for the volume offers). Ensure that all parties can reap some financial benefit, especially yourself.
A Minimum Advertised Price / MAP policy is an agreement between manufacturers and retailers. Among other details, it stipulates the lowest price retailers may advertise a product for sale. For instance, if the MAP for product x is $399, retailers may not show a price for lower than that amount.
Benefits of MAP for manufacturers
Since prices signal product quality for many products, especially those that consumers associate with personal image, the MAP ensures that the perceived brand quality remains in tact.
Benefits of MAP for retailers
A MAP policy can prevent price wars. Price wars minimize profitability. Furthermore, this effect can be long term because, an offending retailer may find it difficult to raise prices for that or comparable products again.
The MAP encourages specialist retailers to add value to the network of retailers by virtue of their expertise and services. After all, these retailers are generally small businesses that are unable to compete only on the basis of price. However, they offer expertise and closer contact with the target market. This close relationship allows for greater feedback and product improvement.
The MAP is the same for all authorized retailers. The uniformity of the MAP policy encourages compliance among retailers. Not only can an offending retailer be disallowed from selling the product but also compliant retailers will gain more flexibility with their prices as they may more easily widen their profit margin.
Ongoing compliance with MAP may further increase profitability because it may earn compliant retailers discounts and special purchase prices.
How to minimize or prevent MAP Violations
Unfortunately, violations are a reality, especially among unauthorized sellers. This in turn may encourage authorized sellers to follow suit. The following are some ways in which manufacturers may limit or prevent violations.
Recruit and select only retailers whose characteristics suggest they are less likely to violate the MAP. Examples include retailers that are high end, are unlikely to use your product as a 'loss leader', already attract the products' target market and are already sufficiently settled with a wide assortment of products.
Have a clear agreement among all retailers regarding what constitutes a violation. There are many gray areas. For instance, manufacturers and retailers may vary in their approach to selling products below the MAP at the checkout, regardless of the ticket display. Bundling may (not) be allowed. If allowed, manufacturers may require none of the items in the bundle should have a displayed individual price.
Monitor retailers and enforce violations as soon as possible. Unfortunately, this may involve penalizing best customers.
CONTENT RELATED TO MINIMUM ADVERTISED PRICES / MAP.
