Nothing communicates value like price. A price signals how you frame the quality of your product or service to fit with your target audience’s expectations. Study after study tells the same story repeatedly about pricing expectations and can signal value with a few numbers on a price tag.
Whether you are shopping for shirts, shoes, or sandwiches, most of us approach a purchase with a range of what we want to spend. Recently, I needed a pair of new sneakers and thought that $75 seemed reasonable for what I had in mind.
I needed sneaks for walking. There wasn’t a marathon in my future. Of course, a quick hop on Zappos, and I found many choices in my price range in eleven colors.
But when their AI suggested a pair for $250, I wondered – how they could make these sneakers that much better to warrant such a premium price?
Would they last longer, be more comfortable or give me the ability to leap over tall buildings? What signal did the more expensive sneakers send about expectation.
What I learned shifted my thinking slightly, not enough to persuade me to purchase them. But their explanation made me consider buying one pair that will last for a year versus another that will need to be replaced in six months.
I wondered how Nordstrom would market sneakers.
Advising a Client
Last month, when I advised a client to double her rates for her services, she thought I was crazy. I asked her, “what signal is your price sending and who is it attracting?”
She complained that she kept getting clients for her accounting services who didn’t want to pay her rates.
Her marketing materials said how she was better than her competitors with more than ten years of experience in her field. Yet, her price was the same as the average competitors.
Price is a signal. It tells someone a critical marketing message about the value and about the promise your brand is making. Whether it is a bottle of wine or the cost of accounting services, the price is the frame that begins the journey of defining value. If something is more expensive, the initial response is that it must be better if they charge a higher price, even if I don’t know why.
Several months later, I heard back from my client about her experiment raising rates for her accounting services.
She found an unusual thing occurred . By doubling her hourly rate from $50 to $100 per hour, she started to attract the clients she wanted. Her new clients wanted a higher quality service and were willing to pay. They weren’t shopping for a bargain-basement accountant but someone who could provide added value to their business.
People who wanted cheap or average levels of service stopped calling her for quotes. Now people who wished to quality were more interested in working with her because her price list reflected the value she was communicating everywhere on her marketing.
Price was the new signal to reinforce that she provided a superior product.
Are you sending a mixed message?
Hey, I’m better than average but charge average prices? It is doubtful that you’ll attract the type of customer you want to entice.
What would Nordstrom charge if they opened up an accounting service?
Beemer Me Up
When BMW entered the U.S. market initially about 40 years ago, they were failing. The price of their cars didn’t reflect what they said was this extraordinary German engineering. As their raised prices, they started to drive success because the price reflected the value.
BMW realized that consumers expected an import to be far superior to American-made cars, yet the price they charged didn’t remember the value expectation.
Pricing Products
I got a question from a reader about pricing several months ago and thought I’d share my perspective on the topic.
The wrong way to price a product or service is to take your cost and add a percentage of profit that you want to make on that product. This approach is often called cost-plus pricing. Sam was in a competitive market for dry cleaning services and wanted to gain more business from his competitors, so he figured he could add 20% to his cost, and he would make plenty of money by undercutting the competition.
The problem was that he was offered a very high-end cleaning service for dirt low price. He told me he wanted to give Nordstrom service and charge Wal-Mart prices.
After a few months, he saw that he was losing money, and he couldn’t understand why. So, we deconstructed what he was doing.
- First, he didn’t understand all his costs. He was focused only on direct expenses but forgot that he wanted to hire people eventually to do some of his work. He had to build into his pricing a reasonable hourly wage to hire employees and build that into his pricing model.
- Second, by offering a gold standard service, his customers didn’t expect to get such good results at such cheap prices, so he attracted a lot of customers. Unfortunately, with every customer, he kept losing more money. And his brand was confusing to his audience.
- Third, he hadn’t thought about what signals a price play in attracting the audience you want to reach. He wondered what Nordstrom would charge if they opened a dry cleaning service.
The Experiment
We created a small market test for his stores.
He had four stores in one city. At one location, he changed the name of his store as if it was under new ownership. And he tripled his prices.
He learned over six months that he started to attract customers who cared deeply about the care of their garments. They wanted to buy this service from someone who took exceptional care and paid close attention to detail. Although his traffic dropped in half, his profits grew by 90%.
He realized he was attracting the wrong audience with a cost-plus approach at his other locations, so he switched to his new brand at the other stores and learned a powerful pricing lesson.
Matching Price to Expectation
Consumers anchor a price based on the good, better, and best model. You don’t walk into Wal-Mart and expect to pay $1,000 for a blender. But if you walk into William Sonoma, that wouldn’t surprise you to see a blender at that price.
Markets have segments, and some shoppers are looking for deals while others are looking to solve problems with a commensurate service.
Consumers also make shopping comparisons quickly. A new tech gadget gets compared to something else, and that something else can be an anchor.
I recently heard the story of a new high-end digital picture frame that is elegant in design and built with the latest technology. All your iPhone photos show up on this frame through a simple app.
In pricing research with consumers, they found that many people were anchoring this product against an iPad. An iPad can do many things, whereas this product only had one function. The product was at a price in the research that was so high that consumers were turned off by contrasting it with a referenced product. When the product was anchored near but below an iPad, things clicked and sales took off.
What is your product or service is compared to?
In the case of the dry cleaner, Sam was being compared to other stores in his community. But he quickly realized that he wanted to anchor the experience like a higher-end department store like Nordstrom’s or Anthropologie with a level of service and product quality that could command a higher price.
In the case of this expensive picture frame, the marketers needed to find other referenced products to help frame the consumer’s price expectation. Where and how they sell it can help – maybe the name can alter that image too.
The advice I give on price to clients is to understand who you are targeting with your product or service and price accordingly. Don’t try and sell discount caviar to people who want high-end products. Your pricing strategy should meet their expectations.
When you get this part of marketing right, your efforts are priceless.
You can set up a time to chat with me about your marketing challenges using my calendar. Email me jeffslater@themarketingsage.com Call me. 919 720 0995. The conversation is free, and we can explore if working together makes sense. Watch a short video about working with me.
