Monday, August 12, 2013

The Psychology of Pricing Part II

A Balancing Act

By Laura Iles - Senior Consultant, Integrated Insight

In the process of evaluating pricing strategies, we all begin the same way: searching for the Holy Grail of strategies in our space, the one to maximize profits. Beyond the basic math, then, what is it that differentiates the leaders in an industry?

To answer that, we must consider the broader impact of consumer perception and behavior within the context of pricing decisions. Occasionally, strategies which seem less attractive become more valuable when the psychological impacts of pricing are considered, and vice versa.

Pricing strategies require a delicate balance of the company’s requirements and the consumer’s needs. Too often, companies employ a strategy that blatantly ignores one of those factors.

Dynamic Pricing

Dynamic pricing in particular conjures images of the airline industry. Customers feel obligated to monitor multiple ticketing options over a series of days in their effort to find one that fits their needs at the right price.

Of course, we all know of someone who has gone through this effort, only to arrive at the gate to discover that their seat is gone, the flight oversold in an effort to maximize profits.

To the consumer, this process is stressful, frustrating and dis-empowering – not the concepts you want associated with your firm.

Price Matching

Price matching strategies reverse this imbalance of priorities. As big box stores price match online retailers in an effort to cater to their customers, it leads to a decline in profits that ultimately hurts the company and the consumers.

Consumer –Targeted Pricing

Other stores, such as retailers Staples and Home Depot, have eschewed the low online price strategy and instead taken a multi-pronged approach. They combine dynamic pricing, shifting in response to competitor’s pricing, with variable customer pricing based on demographic factors. [1]

In one such example, customers on the Staples and Home Depot websites are targeted by location (using their IP address). Proximity to a competitor’s store lowers the price point they are shown, while proximity to a local Staples or Home Depot store raises the price point. Sometimes the difference is negligible, other times it is significant. In neither case is the consumer aware the pricing has been tailored specifically to them.

Consumer Reactions

The targeted approach is perfectly logical from a business perspective. The more competition, the more it begins to make sense to compete on price. In low-competition areas, higher online prices ensure you do not undermine your brick and mortar business.

Unfortunately, as in the airline and sports industries, consumers do not appreciate the idea of paying more than their neighbor for the same product. The secrecy surrounding the mere existence of the practice further aggravates their sense of distrust.

To date, these stores’ refusal to divulge precisely how the pricing is determined leaves shoppers with the uneasy feeling that that they are being penalized for the city in which they live.

Ultimately, the lack of transparency is damaging brand images and leaving shoppers wary of being monitored and targeted.

Learning to Love Dynamic Pricing

Compared to wholesale price matching or a flagrant disregard for the consumer’s experience, the targeted strategy in and of itself is a valuable one. There is nothing to be gained, for either consumers or retailers, by continuing to engage in price wars, slashing prices to match other retailers and cheap online sources. Dynamic pricing, in its various incarnations, works.

The challenge facing many companies today is to increase consumer acceptance of new strategies by introducing them in such a fashion as to highlight the benefits to the end user. High barriers to entry have, to a certain extent, protected the airline industry from repercussions relating to the frustrations around pricing strategies. For other industries, success will not come so easily.

The sports industry in particular has handled the transition into dynamic pricing well, and can serve as something of a model for other industries. Teams were slow to adopt dynamic pricing for fear of alienating fans, a stance which helped to reassure loyal customers.[2]

Since adopting dynamic pricing, several of the teams, along with one of the main software providers, Qcue, have been remarkably forthcoming in discussing how and why new pricing strategies were implemented.[3] As a result, the variable pricing has slowly gained approval among fans, while team images remain untarnished.[4]   

Transparency goes a long way towards dispelling customer discomfort with new pricing strategies. The most efficient and profitable system in the world won’t do you a bit of good if you damage your brand because your customers think you are taking advantage of them.


No comments :

Post a Comment