The end of the year remains the time where many businesses plan and execute price increases for the coming year. By how much, when and what product or market scope are then key questions. By getting market facts through price research instead of guessing what are the best areas to increase in, companies can improve the likely success of such increases tremendously. It can help a business get a firm grip on what product features are more important, what customer are willing to pay for a certain product or service, and analyse what competitors are charging for their products.
2018 has been a year where tariffs were a key topic in the news. The US government imposing tariffs on Chinese goods and the Chinese government doing the same to US goods had and will continue to have serious ramifications for businesses. Even though the first round of these tariffs were for steel and aluminium, consumers buy many products that contain steel or aluminium, which also drives the price up of ordinary consumer goods. Tariffs impact consumer goods the most and businesses are left with a tough decision to either hike the prices of their products or reduce their profit margins. This will result in a decline in retail volumes for many companies, with companies such as Pepsi and Coca-Cola having to raise prices for the consumer side in order to cope with the extra costs. Tariffs have seen the average cost of washing machines in the US jump by 17%.
These tariffs imposed by the Trump administration will impact two types of companies:
Willingness-to-Pay evolves over time
Most products and services experience a development in willingness-to-pay (WtP) over time.
Last week, we highlighted the inconsistencies in Apple's product pricing with the very low price for the Apple AirPods. However, this pricing seems to become increasingly consistent, with both the Apple Watch and now the new iPad supporting this pricing strategy. At just $329, it's definitely among the cheaper options on the market.
One theory behind this move is that Apple is trying to win new customers at an early age. And as we know, young people typically has a much lower willingness-to-pay. But as the saying goes "Once you go Mac, you never go back", and that's exactly what Apple is hoping to do: Acquire young customers by offering low prices, and cash in through retention and selling high-margin products to them later in life.
Generally speaking, Apple enjoy great brand loyalty, and a fair share of their customers would not consider buying alternatives to Apple products. Such loyalty takes time to build up, and by offering lower prices for some of its product, Apple can reach young, price-sensitive customers and nurture them so that when they gain significant purchase power, they have a preference for the Apple products.
This strategy is also evident in Apple's education pricing. Not only do they aggressively establish partnerships with universities around the world, they also offer significant discounts to both students and university staff (In the UK you can get as much as £431 off your MacBook!). Note this discount also applies to the university staff, despite their willingness-to-pay is sufficiently high to pay the full price. At first sight, Apple is leaving a substantial amount of money on the table: but it comes with a reward. Not only does it increase students' exposure to Apple products, but it also encourages university professors to use OS-compatible software in their teaching; a significant measure used by Apple to gain and retain customers as a lot of software is only compatible with either OS or Windows (think Xcode and Freeway).
While it seems Apple are leaving their high-margin pricing strategy behind, this is unlikely to be the case. Apple is and always will be about offering top-notch products and it is impossible to target such products at all consumers. More so, the lower pricing is simply a mean to getting new customers in the fold, so they can become loyal Apple customers and buy high-margin products in the future.
Topics: Pricing Strategy
Far too many companies fail to develop a long-term life cycle pricing strategy that is continuously adjusted across the product life cycle (PLC). Typically, the savvy company will conduct extensive pricing research to find the a launch price that is aligned with their target group’s willingness-to-pay, but then fails to re-evaluate the pricing continuously. This is problematic in two ways: Firstly, you will either be losing out on revenue or leaving money on the table as you fail to take into account the changes in the customer’s willingness-to-pay, and secondly, it will most likely deteriorate the returns on other products in your portfolio. Proper life cycle pricing across both the early, mid- and late-stage of the PLC is absolutely crucial to reap the rewards from the R&D investment.
In a previous article, we argued that you shouldn’t be looking to your competitors when setting your price. While this is true, knowing how your product or service is positioned in the mind of your customer will help you understand how you stand out from your competitors. And if you find your product is positioned pretty similar to a competitor, you can use price positioning as a tool to build a strong USP (Unique Selling Proposition) by setting a new price that is relatively higher or lower than your competitors’.
Topics: Pricing Strategy
Cost-plus pricing is a pricing strategy where you set your price by adding a fixed markup (typically a percentage) to the unit cost of your product or service. It’s a simple method and the first they teach you in the Marketing 101 class - but in reality, you should NEVER use it.
Price bundling refers to when several products or services are sold together as one single package. It is commonly used by sellers to limit the transparency for the buyer, so the buyer can’t scrutinize the price of each product in the bundle and whether or not this is in line with his or her willingness-to-pay. Thus, although the products are discounted, the seller can increase profits by selling products that the buyer wouldn’t else have bought.
McDonald’s meals are examples of this concept, and the fast food chain recently got into trouble over their “Extra Value Meals”, where they bundled cheeseburgers with drinks and fries. Customers were complaining that the bundle price was higher than each item bought separately, and while it is perfectly legal (and sometimes a very effective technique) to bundle products at a total price that is higher than the individual product prices added together, the claim that the bundle offers “Extra Value” has now resulted in a class-action lawsuit against the fast food giant.
Per Sjöfors discusses unbundling, and how it can be used to retain angry, price sensitive customers in his ebook.
Topics: Pricing Strategy
For companies to pursue a pricing strategy that is tailored to their marketing environment, maximizes profitability and minimizes the risk of leaving money on the table, knowledge of customers’ willingness-to-pay (or WTP) is crucial. Despite significant advancement in pricing research that now allows you to measure the customer’s willingness-to-pay with great accuracy, researchers have found that as little as 8% of companies use this best-practice approach when developing their pricing strategy.
Topics: Pricing Strategy