Understanding pricing and packaging can be complex, especially when customers lack awareness of price points. How should businesses approach this challenge, and what innovative methods can be employed to transcend traditional approaches? Our experts delve into the keys to resonant pricing and enhanced profitability.
Reflecting on the fundamentals of economics, price elasticity – the measure of demand in response to price changes – is paramount in determining optimal pricing strategies. The conventional understanding of price elasticity suggests that customers are fully aware of product prices. However, recent research by Simon-Kucher has uncovered instances where this assumption does not hold true.
In a study we conducted for a chain of sports bars in Sweden, only a mere 20 percent of respondents demonstrated confidence in recalling the prices of items they had recently purchased. Remarkably, these confident respondents were, on average, 30 percent off from the actual prices. In total, a staggering 87 percent were mistaken in their recollection (off by at least 5 percent), indicating pervasive price ambiguity among consumers.
Furthermore, we found that a significant portion of customers consistently underestimated prices, highlighting a prevalent lack of price awareness among consumers.
Mastering new pricing strategies in the absence of price elasticity
Similar findings emerged from surveys we conducted in other sectors, such as parking facilities and fuel stations, underscoring the widespread nature of this phenomenon. These revelations challenge the use of traditional metrics like price elasticity in situations where customer price awareness is low.
In response to this challenge, alternative strategies beyond conventional price elasticity and willingness to pay approaches are required:
One approach involves leveraging ‘lighthouse products’ – items with high price recall among customers. For instance, in the electronics retail sector, pricing the latest iPhone competitively (even at a loss) serves as a beacon for customers, influencing their perception of the entire product assortment. Conversely, peripheral items with lower price recall, such as charging cables, can be priced at a premium to alternatives without significant repercussion. In the case of the sports bar mentioned above, recollection for the cheeseburger was relatively high but almost non-existent for desserts.
Additionally, the concept of ‘fair price’ or ‘peace of mind pricing’ emerges as a compelling strategy to enhance customer awareness and loyalty. For instance, Shell retail fuel stations in Germany implemented a ‘fair price’ initiative, assuring customers of competitive fuel prices within a narrow premium compared to the cheapest nearby competitor. This not only fosters trust but also encourages repeat business and customer loyalty, as it saves the consumer both time and effort searching for cheap fuel and figuring out what a reasonable price would be, especially if they are initially unsure.
While the concept of fairness in pricing is undoubtedly logical, we posit that trust plays an even more fundamental role. Trust not only alleviates customers' concerns about being taken advantage of but also simplifies their decision-making process. When customers trust that a company or its representative will prioritize their needs and offer fair prices, they are willing to pay for this assurance.
This principle is exemplified by the sports bar chain that not only provides dining but also offers additional activities such as bowling, dart, and shuffleboard. When customers were asked about the acceptable price for bundling two of these features, such as bowling and a meal, nearly half were willing to pay a premium for the bundle compared to the sum of the individual parts.
In essence, by offering bundled options, the sports bar chain simplified the decision-making process for customers, providing them with peace of mind and convenience. This sense of assurance prompted customers to willingly pay a premium for the bundled experience, as they were spared the effort of considering each purchase individually. This places some of the conventional bundling principles on its head. Should the Big Mac menu be priced higher than the sum of the individual components?
Embracing relationship selling for commercial excellence
Ultimately, the cornerstone of successful pricing strategies lies in cultivating trust and transparency with customers. Fair pricing, bundled packages, and a seamless purchasing experience is a portion in the proposition that adds value in its own right. Essentially allowing you to monetize trust. In the current landscape, where customer trust is paramount, embracing relationship-driven selling practices is essential for sustained commercial success.
Reach out to us today to discuss how you can integrate trust and transparency in your business practices to improve profitability.
With contributions from Sebastian Persson.
