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The Culture of Pricing (and why traditional survey research gets it wrong)

Pricing is a unique challenge that you want to get right. Many businesses do pricing research that has participants evaluate a list of product or service features and then offer feedback. Some of these research methods are more rigorous than others, but they all neglect to consider social context. Consumers don't just see price points as reflecting the value of a product or service. Their perceptions are shaped by prior purchase experiences and the extent to which the product or service can facilitate belonging to a desired social group. Pricing is also symbolic: some price points signal quality while others don't. To get pricing right, do the standard market research, but don't rely exclusively on that. A deeper understanding of context will make sure your business isn't leaving money on the table.

Building a new product or service can be fun. You’re solving a problem and tackling puzzles along the way, and who doesn’t like solving a good puzzle?

Deciding on a price point is not fun. A huge worry is pricing too high or too low. It’s like dating: come across as too high maintenance and you might scare them way; come across as too easy-going and they might treat you like a doormat. Even if you get the range right, nailing down the exact price point can be a pain. Move toward the high end and you could lose volume. Go toward the low end and your margins are compromised.

I’ve done my share of pricing research. Some methods are more rigorous than others, but even the most rigorous leave out something important because they involve an evaluation of only product attributes. While homo economicus might judge price points in a vacuum, real people are making purchase decisions in a social context. And social contexts can sway consumers in interesting ways.

When settling on the right price point you have to consider context.

Here’s what I mean and why it matters.

1. Consumers’ reactions to price points reflect prior purchase experiences. Consumers rarely enter into a pricing evaluation cold. Instead, they look for anchor points. They try to recall price points for similar products or services, and then compare all of that to what they’re considering to buy. If the price point they recall is low, then they’ll expect your price point to be lower. If it’s high, they’ll expect higher.

Imagine an electric automobile with a battery life ten times longer than electric cars currently on the market. If we played a game of The Price is Right and asked consumers how much they thought this car was worth, someone who’s only purchased second-hand gas cars might expect a lower price point than someone who recently purchased a Tesla. Their reference point is lower, and their reference point is where they start. We’d like them to consider how cool the car is, how valuable the battery life is, and how well it drives – and they do, but not exclusively.

2. Price points trigger symbolic biases. Every price point at Walmart ends in the number 9. It’s a trick we know well: price something at $29 and it seems more affordable than $30 – even though the actual difference is very small. Consumers have pretty much internalized the meaning of the number 9 in pricing. It means something to them. It means they’re getting a deal.

Many businesses rely on this trick. They default to ending all price points with 9 to improve sales. But price points that end in 0 also carry a specific meaning. Research has shown that while consumers interpret price points that end in odd numbers as reflecting a bargain, they interpret price points that end in even numbers as reflecting high quality.

The price on a tag is a symbol and a signal. If you don’t know what price points symbolize, you’re missing a huge part of the picture.

3. Price points enable social belonging. When I was a kid, designer labels were a big deal. The crocodile on the polo shirt. The polo player on the button up. The swan or horse on the back pocket.

My sister and I didn’t wear the labels because our parents couldn’t afford them. They were expensive, so to wear them meant you were part of an elevated social clique. The label was your ticket to belonging - and people were willing to pay more for that belonging. This is just as true in adulthood as it is in middle school. It's just as true now as it was then.

Paying for belonging is not the same as paying for a brand. A strong brand is more about building a relationship between you and your consumers; for example, you might buy a Harley because you identify with what Harley Davidson stands for. But belonging is about the people around you, your social capital and social opportunity. Belonging-driven purchasing happens when you buy a Harley so you can ride with the Hell’s Angels. And if you really want to ride with the Hell’s Angels, then you might be ok paying more for that bike.

Purchase decisions are swayed by contextual influences.

Consumers will definitely consider the attributes of a product or service when deciding what to buy, which is why doing a standard consumer research pricing study isn’t terrible. But if that’s where you start, you’ve started too far ahead. And if that’s where you stop, you’ve stopped too short.

Go here to learn about how Kabiri Consulting can help you get your pricing – and everything else – right.


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