Pricing strategy is one element of brand positioning. A key concept in pricing strategy is reference prices.
People often compare a product’s price to a “reference price” that they maintain in their minds for the product or product category in question. A reference price is the price that people expect or deem to be reasonable for a certain type of product. Several factors affect reference prices:
- Memory of Past Prices.
- Frame of Reference. That is, the price as compared to competitive prices, presale prices, manufacturer’s suggested prices, channel-specific prices, marked prices before discounts, and substitute product prices, etc. Creating the most advantageous (and believable) competitive frame of reference is essential to achieving a price premium.
- Prices of Other Products on the Same Shelf, in the Same Catalog, or in the Same Product Line. The addition of a more premium-priced product typically increases sales of other lower-priced products in the same product line
- The Way the Price Is Presented. For instance:
- Absolute number vs. per quart, per pound, per hour of use, per application
- Four simple payments of $69.95 vs. $279.80
- Total purchase price vs. monthly loan payment vs. monthly lease payment (e.g., for automobiles)
- The Order in Which People See a Range of Prices. Realtors, for instance, use the trick of showing the poorest value house first.
- “Rule of 100.” Percentage discounts seem larger if the total amount is less than $100. If it is more than $100, the absolute discount amount in dollars seems larger.
© 2015 Brad VanAuken. Reprinted from Brand Aid, second edition, available here.