You Can Use Price Structure to Improve Sales

When we think about price we are tempted to think often in a fixed total dollar volume. For example if were to produce cars, we might think about the MSRP. How we frame the price and communicate that to customers changes the way they perceive the value and what they perceive as the nearest competition.

When we describe the price of a car in terms of it's total MSRP, cars seem expensive. This is because the perceived competition is a major life expensive. We compare it to things like our annual salary, or the price of our house. The MSRP can shock us in a negative way to see the car as expensive and as a poor value.

Most car manufacturers have figured this out and so they have learned to reframe the price in terms of a monthly loan or lease price. When they do this, we compare the monthly payment to our monthly income and in this way the price suddenly seems palatable. In fact, the total price you will pay with a lease or a loan is actually higher, but see it as more feasible.

When we compare the price to something like our monthly income, not only does it seem more feasible we develop a positive association because we see how a car can help us get and maintain a job. We see the car as opening life possibilities, like seeing family more often, and helping our children get to a better school.

When you price, consider how the actual price itself communicates what your perceived competition is.

How A Fair Price Can Make You and Your Customers Happier

How To Price

I believe that an important part of happiness being supported by the world around us. Price is a big part of this because it means making sure that your customers get the most of your offering. It may seems like selfish matter, but really it is about helping your customers be happier.

Lets’ start with the basics. How do you determine price? The first place to start is to consider it from your customers’ perspective. How much is your product or service worth to them? How do they determine if a price is fair? Price is not cost plus. Price is not what customers are willing to pay or what market forces dictate. Price is something that can be calculated fairly objectively.

People determine price by comparing your offering to what they perceived as the nearest competition. Lee Iacocca was one of the first to clearly demonstrate this principle with the invention of the Ford Mustang in 1964. Lee was the CEO of Ford and wanted to sell more cars. So he came up with an idea. People value cars like the Corvette but they cannot afford them. Sports cars were perceived as extremely expensive.

Lee had an idea, take an economy car, and make it look like a sports car. The result? The Mustang, a smash success. People who had less money could pretend they have a real sports car. He changed the perceived competition of his automobile by describing it as a sports car. While the Mustang was clearly less powerful than the more expensive corvette, it was also less expensive. This seemed fair to consumers. It was a cheap sports car rather than an expensive economy car.

So when you price the first major thing you should consider is what is your nearest competition, then consider how your product offering is better or worse from your customers’ perspective. Being worse is not necessarily a bad thing, as you can see in the case of the Mustang. It can even been seen as the smarter choice.

Quantity Sold

Another important point here is not only did the Mustang sell for more money than an equivalent economy car, Ford sold more of them. There was a double benefit. We are often told that price sells. Price does not sell, value sells. The greater the value of your offering the greater the quantity.

Value to your customer is determined by difference between your price and your perceived value. The greater the difference between your price and perceived value, the greater the quantity you will sell. The Panasonic DVD player at Walmart sells better not because it is the cheapest. The cheapest is probably a brand you never heard of. Instead the Panasonic sells because the price is low relative to its perceived value.

Oracle

Let’s consider a couple of examples of where this has worked. The fist is Oracle. When Oracle came out there were other database products on the market. My favorite was and still is MySQL, which in time was acquired by Oracle. I could not find a single reason why Oracle was better. I remember using it in a project for Harvard and Oracle did not support mass importing of data. The feature was broken, and when I talked with them, they said they had no intention of fixing it.

I am sure some people out there will be convinced that Oracle is better, but I will ask you to consider carefully why you believe this. How did Oracle succeed over MySQL? They positioned their product not as a database solution, but as a replacement for full time employees(FTEs). Their argument was, if a major corporation used a RDBMS, they could dramatically reduce their expenditures. It was easy for corporations to see how a computer could replace a department of FTEs (at $50-100K/annually), and therefore Oracle was seen as a cheap alternative, even though corporations were paying over millions of dollars for it.

Because MySQL was so cheap, they could not afford to educate their customers on the value of an RDBMS. Most of Oracle’s money went into sales and marketing, not product.

The iPod

Another success story was the iPod. When the iPod was released, the reviews on the product were actually not that great. I had an MPIO MP3 player that outperformed the iPod in every single conceivable way. It was easier to use, had better controls, was more comfortable to hold, had an FM radio, an easier to read display. It was also cool.

I suppose that some of this is my subjective opinion, but the point is that there was not a vastly huge differences between the $199 iPod and my $25 MPIO player.

MPIO seemed to have the marketing strategy that they needed to have the best product and the best price. They seemed to believe that MP3 was going to be the thing of the future and if they could price it cheap and have the most features they would win. They didn’t.

The problem is, to most people the question was “What is an MP3 player?” It was perceived as a geeky nerdy thing. The competition was perceived as other MP3 players and being nerdy.

How did Apple achieve such great success? With a simple message “A thousand songs in your pocket.” This combined with a U2 and an artistic message sent the message that the iPod was not an MP3 but a better new alternative to a home stereo system. The perceived competition was a home stereo, which were thousands of dollars and complex. The $199 for an iPod, a portable home stereo system seemed like a deal.