Brands & Price Sensitivity

It is extremely important to be able to estimate the impact of price changes on sales and profits. That is, it is important to know how a price change will impact consumer response, competitive response, and unit volume. Many businesspeople erroneously believe that a price increase is the most cost-effective revenue-generating marketing tactic. I have heard generally intelligent professionals share their excitement about how a price increase will drop to the “bottom line” dollar-for-dollar. Most of the time, this is simply not true.

People display different price sensitivities to different products in different situations. Often people are relatively price insensitive, but only within a relevant price range. Once a price exceeds that range, people become very sensitive. Raising the price across that threshold is akin to walking off a cliff.

Factors That Decrease Price Sensitivity

• Relevant brand/product differentiation.
• Marketing and selling on factors other than price.
• Convincing consumers that quality differs significantly among products and brands in the category.
• Self-expressive or “image” products or brands. (For example, if I wear sports apparel featuring Nike’s swoosh logo, it implies I have the “Just do it” attitude of Nike’s “authentic athletic performance” essence. If I carry a Gucci handbag or wear a Rolex watch or drive a Mercedes-Benz, it says I have social status. If I wear a Harvard ball cap, it says I am extremely smart and successful; and if I wear a Harley-Davidson tattoo, it says that I know the freedom of the road, that I am a free spirit.)
• Brand advertising.
• Situations in which price is a signal to quality—usually for relatively new or unknown products or brands.
• When it is difficult to ascertain a “reference price” within the category.
• When there are significant switching costs—in dollars, time, effort, risk, or emotional impact.
• Product categories for which the risk of failure is an important issue.
• When the price is insignificant relative to the total budget or discretionary income.
• When the item does not significantly contribute to the cost of the products and services that a business sells.
• When the price falls within the expected price range for products in the category.
• When offering “value-added services” vs. “price discounts” to motivate purchases.
• New markets.

Factors That Increase Price Sensitivity

• Price promotions, especially when people are able to stock up on the price-discounted items
• Mature and declining markets

© 2015 Brad VanAuken Excerpted from Brand Aid, second edition, available here and here.

Important Pricing Concepts

Pricing strategy is an element of brand positioning that is hardly ever talked about. So I thought I would summarize some of the more important pricing strategy concepts here. For a more in-depth coverage of this topic, Brand Aid covers this in much greater detail.

Here are some of the more important concepts:

• Cost plus pricing insures a profit on each item sold but is a very unsophisticated approach to pricing.
• People often compare a product's price to a reference price that they maintain in their minds. This reference price can be influenced by memory of past prices, prices of other products on the same shelf, the last price they paid for a similar item, the way the price is presented, the order in which people see a range of prices and several other cues that the marketer can influence.
• Price sensitivity and price elasticity are similar concepts. They focus on how sensitive people are to price changes. One way to think about this is how units will move up or down as a ratio to how much the price is increased or decreased. One would be advised that sensitivity can change, especially as certain price thresholds are crossed.
• Price as a signal to quality. In many categories, especially professional services and luxury goods, higher prices can be a signal to higher quality. If the price is low, the product or service is thought to be inferior. In these cases, a higher price actually increases demand.
• Price segmentation is a way to maximize profits by offering a variety of prices based on different customer need segments. Airlines segment prices, as do concert halls.
• Loss leader pricing uses a very low (sometimes unprofitable) price on a high visibility item (often heavily advertised) to lure customers in, who will presumably buy other items at full retail. Retailers often use this approach.
• Setting price based on customer value. With this approach, one determines what the product or service is worth to the customer and then sets the price accordingly. Hopefully, the customer value far exceeds the product's or service's cost. 
• Aligning prices with distribution channel perceptions. A brand might sell different versions of its products at very different prices in Walmart versus Lord & Taylor, for instance.
• Bundling or unbundling products and services will allow for different prices to be charged. 
• Altering the quantity to change the price point charged. This approach is often used by consumer packaged goods. 
• Penetration pricing refers to pricing the product very low to penetrate or quickly gain share in a  new market. 
• Price skimming refers to pricing the product very high initially, usually to recoup product development costs, and eventually lowering the price as more competition comes into the market. This approach is often taken by pharmaceutical companies. 
• Price discounting. This approach is often used to "juice sales" in the short run but usually has a negative long-term impact on brand value perceptions.
• Value pricing usually means offering the product at a low price point relative to the average price point in the category.
• Premium pricing usually means offering the product at a high price point relative to the average price point in the category. Premium pricing is related to the concept of price as a signal to quality.

I hope this has provided a useful overview of the different approaches one can take to pricing a brand and its products and services.