Part Four: Five Pricing Tactics You Should Dump Immediately
In the last three posts, we explored myth #1, #2 and #3. Today’s topic will address myth #4: Offering discounts or pricing below the market cheapens your brand. This topic is rich with nuance, so let’s dig in!
First off, I’m going to assume people who put this kind of recommendation out there are focusing on a concept called “premium pricing.” Also called prestige or image pricing, this strategy acknowledges that people associate a higher-priced product or service with better quality, experiences, or reputation. When implementing premium pricing, marketers position the product or service’s price at the luxury end of the spectrum, far away from value. The way our brains are wired makes price a quick way for consumers to decide that the brand is in high demand but low supply, and therefore scarce and valuable.
Clearly, charging more for your product is not possible for everyone. If you want this strategy to work for you, your product or service must meet a several requirements:
Incredible quality – Only premium goods and services get premium prices. Period. If what you’re selling isn’t better than 9 random providers in your industry segment, you have no business using premium pricing. Your product/service must be extraordinary.
High demand/Hard to Get – People need to talk about what you sell in their group of friends. The reputation provides “social proof,” and others will think they are trendsetting, in-the-know or wealthy enough to afford it. The demand is seen as even higher when the product/service is hard to get – scarcity creates a sense of urgency and therefore demand.
Big market share – Basically, you don’t have any true competitors. Either you offer something that no one else does, or do it so much better that other brands aren’t even close. Competition breeds pricing wars, which don’t work to premium pricing advantages.
Exceptional innovation – People pay more for products or services that are new or cutting-edge. If your company can keep bringing something new after competitors join you in the marketplace, you will be known as an innovator and will set trends enabling premium pricing.
Pervasive marketing – Most people won’t pay high prices for something no one has heard of. You must show consumers your brand is the leader of the pack, and they need to be reminded often.
One of the best-known examples of premium pricing is Apple. For most of the past 15 years, they’ve been known as one of the most innovative brands in the marketplace, always creating new products with significant advantages over the existing competition. They built beautiful designs that lasted a long time. They were often creating the market in the first place (eg. iPod, iPhone, iPad), so they could charge what they wanted because no one else was ready to compete in the space - and they could do it for as long as others lagged behind their innovations. Apple only retailed their product at their stores, making it hard to try out unless you visited the one or two that was in your city. Lines formed around the block to get the first products, and they made sure you knew all about their success with pervasive marketing and highly anticipated launches.
Apple wasn’t always a success story, though. We all know about Steve Jobs getting fired and failing miserably after his first chance at offering a beautiful product that was cutting edge – and had a very high price tag – in the 1980s. Even now, after all its success, Apple is under fire and seeing reduced sales because it lacks the innovation that got everyone talking about its products. Look at the struggles they’ve had over the past few years as competitors have gained market share, innovated faster and better, and created demand for their products.
My point is that you can’t simply put a high price on your goods or service – even if you’re Apple – and find success. You have to find the right combination of factors to create the recipe that justifies long-term premium pricing.
Now, back to our original inquiry about whether pricing below the market cheapens your brand. If you are a luxury brand, you should certainly be on the higher end of the spectrum for your competitive set. However, as you can see, unless you meet the premium-pricing criteria, you are probably better suited to be priced closer to 5-20% above your comp set average. More than that and you risk losing the value proposition.
Also, even if you are a luxury brand, you’ll have to be flexible on pricing if you’re not running away with market share. Like everyone else, you need to compete on many levels, including price, to attract customers. Luxury brands are not immune to pricing sensitivity – just look at how the wealthy look at houses, cars, hotels, airlines, etc. for freebies or price reductions.
I’d like to put in a quick word about discounts. So many people in the luxury market say you shouldn’t discount your prices. I agree, for luxury brands, it’s not a great strategy, especially if you fit the criteria for premium pricing. New buyers of your product/service will be confused by a high price with an associated discount. It’s paradoxical, and the intuitive psychology that works for premium pricing goes haywire trying to hold these two competing concepts in the mind at the same time. Also, advertised discounts are associated with getting rid of inventory, overproduction and increasing access to a product/service, all of which indicated a high supply and/or low demand.
Lastly, in recent years, there’s been a thinning in support around the price-doesn’t-matter-for-luxury-goods-and-services-purchasers belief. Personally, I think wealthy people appreciate money just like the rest of us, and they’d like to have more of it than less. Thankfully, research is starting to reinforce this position. Recent studies are casting a cloud on the effect of premium and discount pricing on consumer psychology. The internet and availability of information creates a deep product knowledge amongst buyers, and this is slowly changing the way we’re triggered to react to higher-than-average prices. We are starting to respond, not just react to price.
While the saying used to be, Buyer Beware, it is now more than ever closer to Seller Beware. After all, we can check prices on our phone for globally available products and services in a few seconds. There’s no scarcity of information, sellers, locations, or time to make a decision.
As consumers become more aware and able to overcome the hardwiring of our brains, companies that use premium pricing, stray from negotiations, and don’t reward loyalty or risk-taking with a price break will face the hard reality of not adapting as quickly as their customers have. That’s never a good strategy for any company – premium- or value-oriented – to stay in business.
Post-script: Offering lower prices for luxury goods and services can be a successful strategy in two unique situations. I’ll just touch on them, here…stay tuned for more on them in later blog posts.
Starting out in an existing market – When you first start out in a market, you’re likely to gain a foothold amongst your comp set with lower-than-average pricing. If you’re in the luxury segment, you will likely have to consider this, too. I would recommend not offering discounts, but instead giving price reductions the old-fashioned way: through negotiations. This is especially possible with relatively large purchases. Look to luxury cars and houses if you don’t believe me that luxury brands don’t reduce prices via negotiations.
Rewarding loyal customers – the best way for a luxury brand to offer price reductions is to do so as a gift to loyal customers. Everyone loves to get a gift, and often times the initial giveaway is returned by something the customer can give you: a purchase or follow-through on your gift. These promotions are also done without confusing prospective customers, because they’re not advertised. Simply use that mailing list and hit them up directly. Importantly, be sure to offer it as a giveaway, not a discount. “Buy three, get one free” rather than “25% off your next order with a minimum purchase of four” is the same thing said two different ways – and the way you say it is more important than you could ever imagine.