The Price is Right!

Did you put gas in your car this week? Most likely yes. And if yes, what did you fill your tank with? Regular? Plus? Premium?... or better yet, have you bought a plane ticket lately? What did you buy? Coach? Premium economy? Business class?

This pricing methodology is what is known as GBB (good, better, best). There is absolutely nothing new to this. Usually using something called conjoint analysis, different attributes of a certain product are created in order to establish the best combination of features and most adequate price. By creating variably priced bundles companies can target customers of varying economic means or those who value features differently.

The psychology behind this is quite interesting. All those who are parents, know that by directly asking your child to do something will most likely result in resistance. Therefore, what we try is to place clues along the way so that the child will take decision by him or herself. Now, guess what? GBB methodology is just the same… Companies transfer the responsibility of choosing to the customers, while encouraging customers to opt for the most expensive feature- which most likes is not the option they would’ve chosen to start with.

Also, when considering the trade-offs, consumers do not go with careful thinking and consideration of the options at hand. From all the disciplines of marketing, pricing is one of the most emotional ones. When we set our minds on buying something, we are an easy prey for salesmen to persuade us and very often we end up changing our minds at the point of purchase. So, trading up your features will be easy-peasy. Let’s take airline ticket as an example: wouldn’t you like to have priority boarding? or faster passage through security lines? Most people do, and they pay $10 to 30$ more per ticket for such privileges according to pricing expert Rafi Mohamed.

When we look at companies, and consider the “Good” option; this will represent the bread and butter of the company, be it coach class plane tickets, the base version of a car, the standard room of a hotel, or the no-frills credit card. These are considered the core products, and chances are that companies are reluctant to touch the pricing methodology of these items as any cent will directly have an impact in the bottom-line. Yet, when we look at “Better” and “Best” options, the rules of the game change dramatically. People actively choosing these tiers are not as price sensitive and most likely are willing to spend the extra bucks on something that brings them “emotional comfort”.

Despite its simplicity, not many companies dare to venture into tiered pricing approach, basically because if it is wrongly implemented, it might generate a contrary effect and customers instead of trading up will start trading down their options.

The structure of GBB is based on simple competitive options:

a)      If a company is interested in boosting its growth it will play offensively.  

b)     if the company just wants to keep the territory conquered under sweat and tears, it will move to a defensive strategy and mostly counter competitor prices. 

c)      But the more subtle ones, will dive into behavioral and emotional dimensions and draw efforts from consumer psychology, no matter the competitive landscape.

No doubt, option A will help companies grow revenue. Companies can play with the margins by simply creating high-end versions of their base offer and convincing customers to spend more while attracting high spenders. Also, by tier up the price, companies will make products accessible to price-sensitive customers and nudge the dormant ones with options. This offer also decreases the need for promotional discounts and work as a tool to reduce the erosion of long-term pricing power. And last, but not least, such tier model can be used to push specifically brands which are losing effect in the market by adding up different ancillary revenues from add-on to the offering.

Nevertheless, choices are not always about making more, but rather defend what we already have it. Here is where option B rises. With new entrants coming to market every day, your position -more specifically your pricing position, will be hit by a tornado sooner or later. Usually when cheaper-than-cheap offers arise (i.e.: budget airlines), the first reaction of companies are to reduce price to remain competitive or launch a product with a brand designed to fight in the same spectrum of pricing. Neither options are easy routes, and timing is definitely of essence. Price-wars are not beneficial for neither company nor can it be sustained for long.

The best option here is to revert to the basics. Consumer psychology! I recently wrote on value perception, and this is in my view the way to move forward when pricing comes to the table.

Your pricing methodology should help customers and potential buyers to understand the features and options at hand.

Bring the values forward, increase the perception of each feature by addressing the hierarchy of needs. The three-tier GBB model gives you the power to draw from consumer psychology and give the customers the chance -and choice, they were craving for.

When we decide to buy something, choice, time, pricing, brand and most important of all value perception, will be the levers which companies will have to pull to attract and retain customers. Too many choices will drive consumers into paralysis. If the customer takes to long to make a decision, the impulse to buy something -especially if we are talking nonessential, might disappear and the customer will leave empty handed. If branding and value are not aligned, they will jump ship to competitors.

As we can see, we deal with very sensitive information, and in order to influence the decision making, it will most likely require from companies to design their pricing strategy around a combination of “emotional comfort” and “value perception”. The recipe is very individual and although not mentioned, there are other pricing levers such as supply and demand which also influences the process. What we cannot forget, is that is lesser or greater extend we are all consumers -companies also need suppliers, so perhaps stepping out of the management role and slipping into the consumer's shoes will provide a different perspective into why a customer should buy a product at the pricing level which is being offered?

In my view, GBB presents the best combination of psychological drivers which effectively influences the decision-making process, at the end all we want to hear the customer says is: “The price is right”.

Cheers

Marcos