Pricing a Product? Read This First
Will I? Which one? These are two questions your customers ask themselves and answer every time they deliberate about a purchase. Will I buy a product (or service) in this category? If so, which one will I buy?
These two questions are important to consider when it comes to pricing your products and services.
If someone is in the market to buy a new car (Will I? -- Yes), then she is probably looking at her options (Which one?). If she is not in the market for a new car (Will I? -- No), then she probably isn't shopping around. Before a shopper chooses which bag of chips to buy (Which one?), she first must decide that she wants a bag of chips (Will I? -- Yes).
Let's explore these two buying decisions your customers make.
Before making a purchase, customers must decide to purchase a product in your product category. In other words, they have to choose to allocate money from their limited income or budget to your industry.
Related: How Pricing Can Power a Turnaround
Pricing is relatively powerless at convincing someone to purchase a product in a specific category. Pricing is much more powerful when influencing consumer choice within a category (the "Which one?" decision). Buyers typically require very large price changes to influence a change to their budget, but relatively small price changes to influence their product choice behavior.
However, there are three circumstances where pricing influences the "Will I?" decision that leads directly to purchase without a "Which one?" decision. Consider the following scenarios.
1. You have a monopoly. When Pacific Gas and Electric raises my electricity prices, I think about how to use less electricity. This is an example of me choosing to purchase less in the product category.
2. It's a brand-new product category. In this case, pricing plays a major role in potential customers' choosing to purchase or not. Let's look at a hypothetical example. If a pharmaceutical company invented a drug that would make us lose weight (one that actually worked), how would it price this? There isn't really any competition, so price wouldn't be based on choice value. Instead, it would estimate how many people value (use) the pill at different prices and set its prices based on whether people will buy in the category. In this case, think of brand-new product categories as short-term monopolies where the pioneer has a monopoly until competition enters the market.
Is the new product like an aspirin or a vitamin? This is an interesting analogy to help understand how much value potential customers place on a new product. Customers pay a lot for aspirin-like solutions, ones that solve a real problem or somehow ease our pain. Customers tend to undervalue vitamin-like solutions, ones that are good for us, but don't solve an immediate problem. The weight-loss pill discussed above would certainly be an aspirin-like product, solving the pain of millions of people who don't wish to be overweight.
3. There are large decreases in the lowest price in a market. In many markets, especially relatively new ones, there are a lot of potential customers who have not yet chosen to purchase a product in the category because even the lowest-priced item is too expensive relative to their income. Even today, many Chinese do not own television sets. However, as the price of TVs comes down dramatically, which has happened recently, more people purchase them. This is a highly elastic market exhibiting much higher sales as a result of price reductions.
Although we have identified three instances where pricing influences purchases directly through the "Will I?" decision, this is the exception, not the rule. There are other examples as well, like pricing for impulse purchases, where the consumer does not compare alternatives. Even in these situations where "Will I?" decisions lead directly to purchases, price does not play that large of a role. It takes large price changes to get someone to change their "Will I?" behavior, while much smaller price changes can influence the "Which one?" decision.
Customers make choices. With a few exceptions, they choose between relatively similar offerings every time they make a purchase. They choose which car to buy, which computer to purchase, which laundromat to frequent, which airline to fly, which Realtor to use, and which restaurants to visit. B2B buyers are even more deliberate when choosing their suppliers.
Potential customers trade off perceived attributes with price. Because the features of the alternatives are often similar, small differences in price can swing a purchase decision. In the world of pricing, this is where the leverage is. Not only is the "Which one?" decision most commonly the last decision the customer makes, it is also the decision where price has the biggest influence.
You need your product development team to create real value by differentiating your products from those of your competitors. You need your marketing team to translate this difference into significant perceived value to influence the "Which one?" decision. And then you want to use this differentiation, this added value, to price this offering as high as you can, as long as the customer chooses our product over your competitors' products.
"Will I?" "Which one?" is a simple concept, but I use it a lot when coaching small businesses to determine what pricing model to use. Every time you approach a pricing problem you need to know which one of these is the final decision. If the customer buys your product after answering only the "Will I?" decision, then you need to use a different pricing model than if the customer goes on to ask and answer the "Which one?" decision.
This article is an excerpt from Impact Pricing: Your Blueprint for Driving Profits by Mark Stiving from Entrepreneur Press.