By Greg Silverman, Aug 10, 2020
Every marketer has learned about the “Four Ps”: Product, price, place, and promotion. The notion is that by optimizing the appeal of one of these factors, marketers drive sales.
While optimizing the 4Ps has historically been the core of marketing decisions, more and more brands are simply changing one of the “Ps” in order to reach an outcome. Increasing rigidity of silos, results linked to a change in one dimension, and advanced analytics that optimize in real-time have contributed to a distortion of effects. The integrated cause and effect mindset of the “Four Ps” has been lost, and most often, pricing becomes the short term lever that managers pull to right the business results.
Organizations that have come to accept this very narrow view of pricing in the current sea of uncertainty are finding it hard to reach sales targets and nearly impossible to hit margin goals through price changes. The new normal is here to stay, and businesses must embrace a different approach to pricing to maintain their market share with fewer consumers making purchases and reduced budgets.
Businesses likely know a lot about tangible and intangible assets. Their employees, equipment, and products are tangible because they exist in a physical form and bring value to a company. On the other hand, intangible assets include the knowledge their employees hold, patents and goodwill that are equally important to the business - and more often than not, very difficult to replace or replenish if lost.
Price has long been considered to be tangible. After all, a purchase is simply a consumer and business making a fair trade of tangible objects - money for a product or service. Lower the price demand goes up. Increase sales lead to repeat sales. All will be well in the end. The reality is different. One change in price interacts with a hierarchy of needs that cause a more complicated set of considerations that the consumer must evaluate.
For any purchase, price is part of an equation for consumers, and as choices proliferate, the cost of a product may tend to blur. There are several conditions under which price is not a price:
Replacements: From coffee machines, printers, and razors to water filters, many business models are built around a continuous replenishment model that have recurring costs.
After effects: Many products have hidden after-effects that may raise or lower costs substantially. Cigarettes, vitamins, prescriptions, and plastic containers all have hidden costs that show up later.
Repairs: Product usage often causes cost to maintain the utility of the purchased product. Who has not encountered the bill for a car, air conditioner, plumbing, or watch?
Bundles: Introductory offers for a group of services often end. Companies raise the price of the bundle, and the entire purchase is reconsidered. Phone, cable, internet, and entertainment lead the way on this challenge.
Ultimately, pricing is an intangible concept because it is not only tied not to out-of-pocket costs; it also influences perception. Small Business Chronicle emphasizes that not every price a business sets is meant to maximize margins - nor should it. The price of a product or service influences how consumers perceive a brand and quality. It’s a tool that marketers should wield to compete and create different revenue scenarios, essentially adapting their business model to meet the needs of the current market.
Consumers are constantly viewing price in terms of relative, fair, and fixed - but there’s no secret formula to decrease price to X to make sales increase to Y. Pricing is dynamic and relative, and businesses must first acknowledge this fact before molding their strategy.
When companies introduce a new product to the market or are updating their strategy to meet new market conditions, one of the first things they do is to optimize price. Due to pricing being one of the easiest levers to control, business leaders believe that optimizing it is a quick way to grab share and drive profits.
Current optimization models isolate price in a way that hinders businesses from identifying new opportunities and chances for success. Internal teams rely on massive algorithms and historical data to pinpoint the best price for their strategy, but there is little to no context as to why the price works. Taking into account that pricing is intangible, it’s not enough to choose the optimal retail value based on past trends, because when the unprecedented occurs, previous pricing models are no longer accurate.
Lowering price to increase sales is a knee-jerk reaction many businesses have when they experience a decline in sales and need to gain time before optimizing a new strategy to keep shares stable. This is neither sustainable nor practical in volatile markets. Organizations need a flexible, scalable pricing model that takes into account consumer actions without isolating any one variable.
McKinsey recently explained the conflict businesses are facing when it comes to pricing during a pandemic. They acknowledge that with volatile demand and a large portion of consumers limiting their spending, it’s necessary to create a pricing strategy for the long-term rather than making decisions for immediate gain. Historic information and viewing price in isolation simply does not work to a business’s advantage during these times because consumer needs have shifted in new and meaningful ways. By using consumer preferences and understanding competitive offers in the market, decision-makers find the best price to reach their objectives - whether that means increasing sales, attracting new customers, or maximizing the lifetime value of a customer.
This is why lowering prices does not guarantee that consumers will make a purchase. For instance, a cruise line could be giving away free vacation packages, but they would be hard-pressed to find customers who would feel comfortable enough to be in a shared space for a week. McKinsey points out that a drastic price cut during these times may unintentionally destroy value, as customers may not view the quality of the brand as highly when economic conditions once again become stable.
Consumers have different needs that must be met before they make a purchase, meaning price has little to do with their decision in this new normal. Traditional market models become obsolete in just a few weeks or months as behaviors continue to change. Organizations need new pricing-sensitivity models that are flexible enough to be changed with the market and acknowledge the role the consumer plays in business strategy.
The Concentric Model uses prescriptive analytics that helps businesses test their pricing strategies before they bring them to market to assist in choosing the optimal price in relation to the consumer. The scalable system means your company stays competitive even when market conditions change.
Contact us to begin enhancing your business’s pricing strategy today and for years to come.