How Whole Foods Uses Price

Price Transformed Us From Struggle to Success

Is Ignorance Your Real Competition?

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.

3 Ways to Build Happiness

We can lead happier lives. While we like to believe that happiness is a choice, it isn't. If happiness were a choice we could snap our fingers and be happy. We could simply think the right thoughts. We could simply move to the cheapest place on earth and give all our money away and live on meager food. However we can't, and even if the idea of being happy enough to be able to do that sounds idyllic, most of us couldn't do it. That's because we depend upon family, friends, food, shelter, and jobs, and many of those things also depend on us.

True Causes of Happiness

In reality our happiness depends mostly upon our circumstances. The real causes and conditions are the meat and potatoes of our circumstance, and if we can work towards improving them then we can find lasting happiness. As Maslow first pointed out, our happiness depends upon five major things:

1. Physiological Needs
2. Security Needs
3. Social Needs
4. Self-Esteem Needs
5. Self-Actualization Needs

We serve ourselves best when we focus on doing things that will meet those needs. The following basic guidelines useful in helping us get there: invest in quality, invest in community, and minimize major expenses.

Invest in Quality

Quality is one of the best things you can do to improve happiness. Quality is not to be confused with simple luxury or durability, although it does contain those elements. Quality things last longer and therefore reduce your overall expense. This makes it easier to save money and meet more of your physiological needs. Further you can count on it more, and this increases your security. Thirdly, it will increase your self-esteem because quality is aesthetically pleasing. Often quality also promotes socialization because we are more motivated to share quality things than lower quality things.

Invest in Community

Do things that will help you be social and connect more to others. If you have a choice, live closer to a town center. It is harder to be happy when you are isolated from friends, family, and people. Try to help others when possible, and accept from others as well. Build relationships and care.

Minimize Major Expenses

Try to minimize your major expenses. This may seem at odds with quality, but it is not. For example it is generally better to buy a nicer home that is small than a bigger home which is low quality.

When you can minimize major expenses you improve your ability to meet your physiological needs because you are spending less. You also improve your security because you can more easily afford your lifestyle and save money. Being more secure you are less likely to do things like impulse buy or overeat. By reducing your expenses you have less to stress about and this makes it easier to socialize. It also makes it easier to be spontaneous and this helps with your self-esteem needs and with self-actualization.

While it is useful to minimize your smaller impulse buys, like the latte at Starbucks, this will generally have a smaller impact on your happiness. Fretting about every minor financial decision adds a great deal of stress.

Understaing the Basics of Pricing

In business understanding pricing is a very important part and perhaps the most critical part of your business model. Below is another excerpt from the book Growing Happiness that provides an introduction into pricing. Much of what I know comes from the book the Strategy and Tactics of Pricing.

 
Capitalism also tends to focus on supply and demand curves and the idea that prices find a point that balances the supply and demand. This is important because part of capitalist theory falsely rests on the idea that market forces will dictate supply and demand, and the services offered. In other words, if something sells cheaply, more people will buy it, and if it is higher in price, fewer people buy it. Simultaneously, suppliers will be less interested in producing something less expensive and be more interested in something they can sell for a higher price and better profit. When these two impulses combine the price of something will reach an optimum point that balances the needs of the suppliers with the needs of consumers. This is what we traditionally call the market.

This sounds reasonable, but unfortunately this theory is not true. Consider the leading companies in quantity of sales, companies like Apple, Sony, Starbucks, Oracle, Verizon, and Microsoft. Then ask yourself for a moment if they have the lowest price. There are cheaper phones, MP3 players, database solutions, cell phones, and coffee.

The relationship between price and quantity sold simply does not exist. What is true, however, is the relationship between perceived value and price. The higher the difference between perceived value and price, the greater the sales will be. To this end, clever marketers spend a great deal of time emphasizing value.

To better understand this concept, we first have to understand some basic points about pricing theory. The goal of selling a product or service is to maximize profits. How much profit is a combination of the price and the quantity sold. When customers determine a fair price, they make the following mental calculations. We usually do this quickly and subconsciously.

1. What is the alternative?
2. How does this choice compare and constrast with the alternative?
3. Is the price justified based on this comparison?

For example, a thirteen-ounce tub of Vaseline costs about $4.50. A tiny 0.35 ounce tube of Vaseline Lip Therapy is about $1.99. In other words, Vaseline Lip Therapy is about sixteen times costlier than Vaseline in a jar, even though they are essentially the same product. Why don’t consumers protest? Why are sales of Vaseline Lip Therapy high? This is because the perceived competition to Vaseline in a jar is a store brand that costs about $3.99. The competition to Vaseline Lip Therapy is Chapstick, which is about $1.40. By packaging Vaseline more like a lip balm, they sell more and at a higher price for a much greater profit.

Even with commodities such as oil or gold, business people are quick to point to differences in price, and they will often note where the commodity comes from. For example, American versus foreign oil. Or Iranian gold versus Egyptian.

At retailers like Walmart, where price seems to sell, if you look closely at what is really attracting consumers, it is the perceived value. They sell products with a relatively high perceived value at lower prices. It’s not that the cheapest DVD player is selling best, but that a Panasonic DVD player costs less at Walmart than at many other retailers and that, in turn, draws consumers.

Suppliers are not motived by price to increase volume. They are motivated by profit—both financial and emotional. Suppliers that have other motives will not last long. This difference is key. Starbucks could sell coffee at cheaper prices, but they enjoy providing a quality experience in their stores. Starbucks employees are highly motivated because the company respects them. The chain has higher prices than many competitive stores, and they outsell everyone else.

Suppliers are interested in maximizing the difference between perceived value and price. There are many ways to increase the perceived value, including advertising and positioning. The perceived value of a product no one knows about is zero. One of the reasons companies like Apple and Oracle have done well is they have focused on communicating value to people who did not know that these products existed or did not think that these products had value for them. Competitors of these companies abounded, but most people were unaware of them.