The conversation around your conference table regarding inflation at minimum covers manufacturing operations, supply sources, shipping alternatives, perhaps renegotiating loans with your bank.
You are looking for strategies to deal with the impact that inflation is having on your sales, margins, bottom line. You are covering your bases, but you have no strategy that could get you to first base, let alone hit a home run.
Thanks to Covid, supply chain dynamics, Ukraine, etc., you are at the mercy of inflationary pricing.
Or are you?
What I find amusing about the elements in the conversation regarding formulating a pricing strategy is that the most crucial element is missing – your customer. He provides the most critical perspective of all. After all, it is his decision, yay or nay, that keeps your cash register ringing.
Whatever your strategy is, it is his perspective that validates your perspective. He moves the conversation from theory to reality.
The obvious response to the above is that his response is obvious – he wants lower prices. He can only stretch his budget so far. And his household operational budget is in direct conflict with your operational budget. Which explains why the bottle of Tylenol on your desk only lasts about a week.
But rather than overlooking your customer’s perspective about price, you should be taking a closer look.
Yes, your customer purchasing habits change in inflationary times. There is plenty of research data to verify that he will reach for the less expensive product on the shelf, he will cut back on discretionary items, eat at home rather than at restaurants, forgo that vacation, forgo that designer label.
Yes, you will need to do price grinding with your suppliers, within your operations, to offer our service or product at a price the consumer finds acceptable.
But all that does is get you on the playing field, gets you to be considered – along with your multitude of competitors who have done their own price grinding. You are in the same competitive marketplace, but fighting for a smaller customer base, and operating with smaller margins.
Thinking about pricing from the consumer’s perspective could give you the edge in increasing margins and increasing sales.
There is a difference between the way you look at pricing versus your consumer – with the consumer, there is a flexibility. Your CFO crushed the numbers, and the bottom line you offer your supplier and charge the consumer is the bottom line. Not so with the consumer.
The consumer has broader considerations that give him broader flexibility in how he makes a purchasing decision.
In simple terms, he has emotional considerations. A simple example: His daughter just graduated summa cum laude from college. The gift he was going to give her was within his budget. But he is aware of the hours and demanding work she put in and the impact the summa will have on her career, so he is motivated to go beyond his budget. He gives in to spending the extra dollars, even knowing that at the end of the month, he may regret doing so – but emotions win.
The caveat I have expressed repeatedly, “We act upon emotion. We validate with intellect,” applies even in inflationary times.
Incorporating an emotional strategy in your pricing considerations accomplishes two things in your favor:
Makes your product/service more appealing.
Overcomes resistance to higher prices.
Nullifies your competitor’s pricing strategy.
Emotions do what facts and features cannot do – create relationships. Consumers act upon how they feel about a brand, or even a single mom and pop. All branding is designed to make the transaction not cold and heartless, but familiar and trustworthy – the consumer is connecting with someone he feels at home with.
There is a major disconnect between how you see your pricing and how the consumer sees pricing. You see it as a disparate element unto itself. The consumer sees it as an element of branding. In his eyes, your price helps define your brand.
A recommended pricing tactic to integrate price into your branding is to present your pricing structure as a part of your value and ethics. And be transparent.
IKEA does so brilliantly with their “democratic design.”
“Democratic Design is a tool we use when we develop and evaluate the products we put into our range. It has five dimensions, which are function, form, quality, sustainability, and low price. When there is a balance between all five, we consider that the design is democratic.
“The five dimensions are always represented in the products, but the balance between them is not always equal. We constantly review our range and take out or improve the products that do not live up to our customers’ expectations.”
In a similar fashion, Southwest airlines developed its pricing strategy that underscores the essence of its values and ethics – ‘Tranfarency.’”
“Transfarency is where customers are treated honestly and fairly, and low fares actually stay low—with no unexpected bag fees, change fees, or hidden fees.”
You will find the following on the Neptune Furniture website:
Our pricing explained.
We are often asked about our pricing, and so we decided we should explain how we go about it. The basis, as is the case in all that we do, is centered around “doing the right thing.” Nothing matters more to us; this central principle is the North Star that guides us.
Having spent the first ten years of his career in the army, our co-founder, John Sims-Hilditch, entered the commercial world with a strong sense of fairness, decency and the conviction that making a profit should not be the central purpose of a company, even though survival would clearly require this. Instead, he believed that quality, value, and service – which, together, form the reputation of any organization – should be the indicators of success. The numbers needed to add up, but selling something for as much as you could get away with just did not feel like the right thing to do.
And so, our “bottom up” pricing principle was created.
Put simply, bottom-up pricing starts with the actual cost of creating an item in the collection. The full cost principally includes the costs of design, raw materials, energy, craftsmanship, transport, and communications, all with a key focus on sustainability. From there, we add on a consistent percentage for profit (typically 10% net) in order to ensure we remain viable and able to develop for the future. This establishes the price at which we sell to our customers. It is that simple and transparent.
Kudos to the folks at Neptune. Not only did they integrate price in their branding, but they used it to communicate their “brand story” – creating trust, likeability, personality, integrity – all cementing an emotional connection.
The software company Buffer.com, in a blog, elaborates on the way it calculates its fee, and the way it spends its money – and does so in depth.
And it sums up the value of doing so: “One of the things we are incredibly excited about at Buffer is transparency. A big part of that is because being transparent simply feels like the right thing to do, intuitively. That, by itself, seems reason enough to pursue it.’
“We have seen some incredible things happen since we started to focus more on transparency in the last few years. Transparency breeds trust, and trust is the foundation of great teamwork.”
Making pricing part of the conversation rather than burying it creates emotional linkage that separates you from your competition
Pricing can also be used to affirm the brand image through presentation and tone
The Belgian beer, Stella Artois, is a contrarian when it comes to pricing. Not only is it higher priced, but it also promotes the fact heavily in its advertising with its theme: “Reassuringly Expensive.”
By charging more, Stella affirmed its premium quality position. One of its award winning ads featured a coupon that, if used, ostensibly increased the price of the product rather than decrease it. Its ads both support its premium position and its brand personality.
The key to emotional pricing strategy is understanding that the exchange of dollars for product or service is predicated on value. Value underscores everything. The consumer is willing to surrender his hard-earned dollars in exchange for something that he believes provides equal value. Price is or is not a measurement of value. As an example, you could buy a non-brand hand lotion at a 99-cents store, but very likely you gladly pay dollars more at a chain drug chain. Reason: At the chain drug chain, you are certain of the brand, and certain it will deliver as promised. At the 99-cents store, you are saving money but are not sure of the value you are getting in return.
For humans, emotion has value. Certainly one of the great demonstrations of this is the award-winning MasterCard campaign: “There are some things money cannot buy. For everything else there’s MasterCard.”
All advertising is predicated on creating an emotional value. Tesla appeals to the emotions of three segments of the market: those concerned about the planet; those concerned about social image; those who want to be at the cutting edge of technology. The reward of protecting the planet is a feeling. Social stature is a feeling about one’s place in society, in how others perceive you. Cutting edge is something you identify with. None are physical. None are measurable. All are emotional.
There are many manifestations of emotional value. To cover them all will require more space in this newspaper, perhaps even necessitating removing the publisher’s opening thoughts. Fortunately for the publisher, there are principles you can use when forming your pricing strategy.
Marketing should be a part of the pricing strategy conversation. What emotions are you promoting and how are they communicated? Separating marketing from pricing is undermining the full power of your marketing and pricing strategies – they should be integrated.
Understand what exactly your customer is seeking through your product/service. Keep in mind the “your customer does not buy a quarter-inch drill bit. He buys a quarter-inch hole.” What end-benefit is he seeking from your product? The Tesla purchaser wants to help save the planet, firm up his social stature, firm up his self-image. Those are end benefits that are purely emotional.
Make sure all facets of your communications, on-line and offline, as well as sales presentations, communicate the emotional value you are providing.
The emotional value you provide is what separates you from your competition – and makes competitive pricing less relevant.
Seeing pricing from the consumer’s perspective transforms your price guideline from the rigid costs of material, manufacturing, operations, et al, to the more elastic guideline of emotional value. Which in turn gives you elasticity with your price ceiling, margins, and profits.
The consumer is your antidote to inflationary pricing.
Invite him to the conversation.
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Chanina Katz has over two decades experience in major Madison Ave. ad agencies developing highly successful strategies and award-winning campaigns for such blue-chip clients as Colgate, RJ Reynolds, Hilton, Home Depot, General Mills, KFC and many others in a wide variety of package goods and services businesses. He provides marketing services for a range of businesses, from start-ups to major corporations. He lectures on marketing and creativity. He can be reached at Bullseyemarketing1@gmail.com.