Perplexing Pricing Strategies

Part art, part science, pricing is perhaps the most important of the four Ps of marketing. It’s such a critical piece of the mix that developing and refining your strategy can be agonizing. There are so many possibilities, but only one price.

I’ve worked on some pretty complex pricing models and strategies in the past, but a humbling conversation with my great-uncle reminded me often the logic we use to set our price baffles (and angers) the very consumers we’re aiming to attract. Here’s a look at some of the pricing strategies in place today, seen through the critical eye of a suspicious, penny-pinching consumer, John Q. Public. We’ll start with my uncle’s personal favorite:

• Charge a lot more for it, and people will think it’s better. Whether you’re looking at bottled water, cosmetics, clothing, or athletic equipment, you’ll see this strategy in use everywhere today. If you’re seeking a way to increase revenue, try upgrading your packaging and setting your price 50 percent higher than your competitors’. No explanation to the consumer is necessary. People will see your significantly higher price, assume your product must be significantly better, and voilà — you’ll see an instant increase in both revenue and units sold.
• Create a fake price, then give a fake discount. This strategy has been a mainstay of the travel industry for quite some time, with hotels being the most successful at employing it. It’s also widely used in the consumer goods industry, particularly at outlet malls or other “discount” stores. And it’s so easy to implement! You simply invent a new, staggeringly high price for your product and display it as the “retail price” (or “rack rate,” as it’s known in the travel industry). The actual price you charge for the product doesn’t change, but it’s displayed now as a discount price. Your customers go wild over the amount they save and feel as if they have money left over to buy more from your store. You make a lot more money without even changing your price.
• Match your competitor — even if the products are different. Are you having trouble with a pesky competitor that has added more bells and whistles to its product? Don’t worry; you don’t have to change your product. Just raise your price to match the competitor’s price! Customers are guaranteed to assume the products are the same. This strategy is underused in most industries, but the folks in electronics and software have mastered it. But be warned, you must match the price to the penny. A variation in price of even one cent will cause the consumer to wonder. For this strategy to work, the prices must be exactly the same. You just saved millions in product redesign costs!
• Pretend you made your product better. This strategy is also known as “Old Faithful.” When all else fails, raise your price, then market the product as “New! Improved!” There is no way consumers can prove you didn’t change a thing. If you tell them the product is better, they’ll believe you. This strategy works best if you can communicate the improvement without changing your product packaging. A packaging change will just eat away at your increased revenue.
• Charge more for buying more. This is a great way to increase your price and your order size at the same time. Take a product with an uneven price, say $3.69, and put a big sign over it that says, “Special! 2 for $7.75.” Trust me, your customers will not stop to do the math. Your 10 percent price increase goes unnoticed, and your customers buy twice the amount of product — happy they are saving money. This strategy works in restaurants, too — just create a “meal deal” that’s actually priced higher than the à la carte components. Be warned, this strategy can backfire if you use rounded numbers, such as $2 or $4. Consumers will add if it’s not too hard — they aren’t stupid.
• Charge extra for mandatory parts. This strategy is used widely in the automotive industry. You set a low price for your product, say $100 for a car. But if you want windows, it’s $20,000 extra. Now you must stick to your guns on this one, because some customers will try to buy the car without windows. You simply say, “We have none of those in stock right now.” This strategy can work well for any product with more than one piece to it; I don’t know why more businesses haven’t figured it out yet.
• Change the price on the shelf, but not in the computer. A favorite in any business where barcodes are scanned at checkout, this strategy is passed off as an oversight. Even with a background in pricing, I fall prey to this strategy repeatedly. You mark the price of the item down on the shelf tag but “forget” to enter the price in the computer. Customers stock up on the sale item without ever realizing they were charged full price. Some customers will figure it out and get mad, but with this kind of revenue increase, surely you can afford to lose a few picky customers. Although I suspect this strategy is illegal, try auditing your grocery store receipt next week, and you’ll see what I mean. It really works!
• Add a toy and charge whatever you want. This guerrilla attack on parents’ wallets uses children’s high-pitched voices as the weapon. It’s particularly effective with cereals, fast food, and toys. This strategy can’t go wrong. It’s even considered child abuse in some states to make your children eat generic-brand cereals if a toy-carrying, higher-priced alternative is available.
• Scare people, then charge whatever you want. Last but not least, this adaptation of the “add a toy” strategy is suitable for adults and removes all price sensitivity from your target audience.

  If you tell people they will suffer if they don’t purchase your product, your sales will immediately increase. Be sure you have enough inventory on hand before you undertake such a drastic strategy. The more dire the consequences, the better the results — to a certain extent. If you claim consumers will die without your product, you will have limited success. Consumers are much more afraid of going bald, gaining weight, getting wrinkles, and so forth. This is a sure-fire way to pass off a price increase in hard economic times. Pick an unpleasant physical side effect, and you’re on your way to a more positive revenue stream.

What pricing strategies are you employing today that may be subject to misinterpretation by the general public? Have you seen any head-scratching pricing decisions you think other ClickZ readers would enjoy? Click the feedback link, and share your favorite pricing strategies with our readers.