It’s difficult to picture a time when consumers didn’t know that the advertised price is not what they will be paying. Automatically they try to add in taxes of course, but they also know that there will still be more to pay. It seems like using price as a hook to reel in customers has become an outdated method, one that starts off the customer relationship on a bad step, or even guarantees that it never starts. Cost is still a major influence in how people decided what to buy, but how you present value should be updated and used in a different way.
The price of something is usually never dictated by the cost of producing and distributing a product. That is not to say that a product’s true cost isn’t known and taken into account. The final price, the cost to buy that thing on the shelf is a calculated decision made using marketing principles. These strategies are based on human behavior and thinking and while the fundamentals of marketing are relatively old, they are no less powerful than they were when conceived.
Take the main four categories of price marketing: economy, penetration, skimming, and premium. The decision to use one or the other is based on the perceived quality of the product compared to its final cost. The basis of the categories and how to use them is founded on human urges, needs, and wants. For example, you wouldn’t use premium pricing – charging a high price for brand, quality, etc. – for an ordinary package of pencils. You could get a higher price if they had a famous architect’s name on the package and were made of wood from rare African trees. You could charge more even if the true cost of both packages of pencils were exactly the same! We humans will pay more if we feel we are getting more, and that includes the intangibles.
The point of all this is to produce something at one cost, discover the maximum price that consumers will pay for it, and make a profit from the difference. This is nothing new, however. In fact, your average customer knows they pay more for branding, logos, and such, and don’t mind it too much. Where consumers get upset is when they feel that businesses believe the consumer is a sheep with money and try to take advantage of them.
Take for example the pricing hook from above. A consumer will get irritated when they are led to believe that they will pay one price for something – plus taxes of course – but find that to actually get what they wanted, they have to pay extra for this, that, and the other thing before it’s all said and done. This too is nothing new, so why do companies put their customers and potential customers though this old song and dance?
The first reason that springs to mind is the company is going through a budget crisis. Sales are down, costs are up, and the accountants are set loose to find a way, any way, to get the spreadsheets back in the black. Look at the airline industry. What was once a “pay this price and that’s it” industry now has changed for the worse. Airlines want their customers to buy a ticket, then pay for everything else as well. It started long ago with paying for prime seating and alcoholic beverages. That’s fine, those are luxuries. Now, if you want to listen to something, you’re charged for headphones. If you want a “comfort” set, you have to pay to get a pillow and blanket. Yes, these little sources of income will help offset some major budget shortages, but in the end, they won’t make that much of a difference except to alienate customers. All airlines being equal and going to the same place, customers will choose an airline that doesn’t see them as walking, talking little incomes sources.
If airlines had started off charging for the little things then all would be well. It’s the change for the worse that is disconcerting for the customers. Charging for extras that don’t really have anything to do with the main purchase is not the worst thing you can do. You can really alienate people when you charge extra for something that is an integral part of the purchase. Whole Foods Market is currently going through a budget crisis and their sales strategies show it. If you were to purchase an iced tea from their in-store deli, you would pay for a tea with a huge markup. This is okay; you are paying for the convenience, atmosphere, branding, etc. What is a shockingly bad idea is that if you want ice for your iced tea, you have to pay extra for it.
Another industry notorious for squeezing their customer’s nickels is the cellular network companies. Not only do they charge for extras and charge for things integral to using a cell phone, they also add in their own charges on top of everything else – yes, including tax. These extra charges are costs that the company incurs while going about the business of business, and are not specific to the customer. To put it another way, it’s like a plumber adding $20 to your bill because he bought a new office computer and needs to defray the costs.
For your average consumer, charges like this make them never want to do business with a company again. Customers don’t like being surprised, tricked, or manipulated. Especially if they don’t really have a choice in who to give their money to, customers will put up with a lot for a long time. However, as soon as a better option shows up, they will bolt from you; taking their friends and family with them.
What can you do to keep them happy and prevent a rout? Create your pricing strategy with the customer’s perspective in mind. If you have to take care of little costs, include them into the one price. Make the little options standard on all tiers of your product line. If you find yourself in a situation like Whole Foods Market, do what noted business author Seth Grodin suggests: give your employees the option to waive the tiny charges whenever they see fit. This means giving away ice for free to friends, repeat consumers, customers who voice objections, etc. You may lose a little money from this – money you shouldn’t have gone after in the first place -- but the good will and repeat business will more than make up for the losses.
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