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Pricing is very important when it comes to marketing. It has a lot of factors that you have to consider when determining it, just for consumers to shrug and say they won’t pay it! That is why you have to get it right, or things may fall through.
This month I am plugging the St. Louis chapter of the AMA. To become a member, you can visit https://amasaintlouis.org/.
Sources: https://pen.org/what-the-dog-saw-and-other-adventures/
Chop-O-Matic Video: https://www.youtube.com/watch?v=FGo7W_mbWCE
https://blog.hubspot.com/sales/pricing-strategy
https://sawtoothsoftware.com/resources/blog/posts/van-westendorp-pricing-sensitivity-meter
Vintage Popeil Chop-o-Matic New Giant Food Chopper No. 30 Original Box.
The Marketing Gateway is a weekly podcast hosted by Sean in St. Louis (Sean J. Jordan, President of https://www.researchplan.com/) and featuring guests from the St. Louis area and beyond.
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TRANSCRIPT:
When I was a kid growing up, I was a huge fan of Weird Al Yankovic. I owned all of his albums on cassette and listened to them pretty much nonstop.
I know, I know, I’m blowing your mind. And here you thought I was cool.
Of course, it’s a lot more socially acceptable today to be a Weird Al fan than it was in the 1980s as a kid, in part because people realize that yeah, the master of the song parody is also just generally a musical genius who can play in just about any style and make some really funny songs while he does it.
And true fans know the parodies are just what get you in the door – it’s his original songs that really make you laugh, whether it’s “She Never Told Me She Was a Mime” or the corporate jargon-filled “Mission Statement” or the incredible Devo-styled anthem “Dare to be Stupid” or the amazing story songs “The Biggest Ball of Twine in Minnesota” and “Albuquerque.”
But one that’s a bit of a deeper cut is called “Mr. Popeil,” a song I really didn’t understand too much as a kid because I wasn’t familiar with Ron Popeil or the catch phrase, “now how much would you pay?”
As I got older and started watching more TV, I realized he was the inventor and marketing personality who dropped out of the University of Illinois Urbana-Champaign – hey, I did too! – and found a different calling as a marketer for his father’s invention, the Chop-o-Matic.
The Chop-o-Matic is still a pretty amazing invention. The problem was that the device was so good that salespeople couldn’t effectively demo it because it required them to carry around too many vegetables, so Ron Popeil, who was already doing demos in stores like Woolworth’s for spellbound crowds, recorded a video promo showing off the device.
And after demoing it for a couple of minutes with some spellbinding chopping, Ron Popeil, who at this point was a young, handsome man with an earnest yet soothing voice and very prominent lips, said:
“I know you’re all wondering what this machine sells for. Well, Chop-o-matic will be nationally advertised for $5.98 and it’s well worth it. During this special television presentation, if you order right now, the price is not $5.98 but $3.98. That’s right, just $3.98 ladies and gentlemen.”
This is still very muted compared to how he’d pitch his own Ronco products later on, like the Pocket Fisherman or Mr. Microphone or the Showtime Rotisserie & BBQ or even spray-on hair.
Eventually his pitches for these amazing products would include additional add-ons included “absolutely free” or he’d be sure to tell you “look what you get!”.
And to make it sound even better, he’d start at a high price like $400 and tell you that you weren’t going to spend $375 or $350 or $325 or $300 and he’d just keep bringing the number down until he got you to something like those four easy monthly payments of just $39.95.
What a master! And he was always selling with the confidence of a practiced huckster any time the TV cameras were on for any reason.
But I bring up Ron Popeil because a big part of his schtick was amazing products for low, low prices you couldn’t pay in stores. In a direct sales model, of course, you get a good sense of how well things are selling because the phone either rings or it doesn’t. But how did Ronco settle on those prices?
And how did they know that people would actually pay them?
Today, we’re gonna talk about pricing, one of the most difficult areas of marketing, but also one of the most important!
I’m Sean in St. Louis, and this is the Marketing Gateway.
So let’s take a moment to remember that in marketing, one of the four classic activities defined by the 4 P’s is “price,” along with “product” “Promotion” and “place.”
Of these four, price is definitely the hardest to set because it’s based on so many factors. You have the cost of the product itself, your overhead, distribution costs, the margins you want to achieve and of course your promotional costs, among many other things.
Making a product for a buck and selling it for $20 sounds like a great deal, but there are a lot of costs that eat into that $19 differential, and it’s pretty unusual, outside direct sales anyhow, that the person making the product is also the person or organization who’s selling it, which further adds to the cost.
There’s also another problem – products exist within a marketplace where people have upper and lower boundaries for what they’re willing to pay, and you have to hit that target pretty carefully if you want to have a credible product. Often, those boundaries are defined by what your competitors are doing, but they’re also determined by a concept called price inelasticity of demand, which basically works like this.
Let’s say you need gas sometime during your commute today to be able to get to and from work. You notice gas costs $3.40 on your way in, but by the time you’re heading home, it costs $3.60, which means you’ll be spending three extra dollars filling up your 15-gallon tank. And at the same gas station, a 32-ounce fountain soda cost $.79 cents yesterday, but today it’s $1.69.
Which product are you more likely to feel has gotten too expensive?
For most people, it’ll be the soda. “I can’t believe you more than doubled the price!” they’ll say, and they will either pay it begrudgingly or go without. That’s because their demand for the product is elastic, which means the demand changes as the economy changes.
As for gas? You’ve gotta buy gas, right? And 20 cents extra per gallon is a lot, but it’s really just a 6% change in price. Demand for gas is inelastic, at least in the short term, because people will still buy gas so long as they have somewhere they need to be.
Inelastic goods tend to be things we use every day, like utilities, prescription medications, paper products and so forth. They’re not easily substituted and people are stuck with them until they can find a cheaper option.
This generally means the market pushes prices down as low as possible because demand is always there, but it also means that the government watches these sorts of goods and services carefully because they can become monopolies when nobody’s looking and then raise prices because of it.
Elastic goods tend to be things we can go without for awhile, like Starbucks coffee or fast food or new electronics or luxury goods. There are usually cheaper alternatives to these things and we can often make do with what we have until prices come back down.
You can substitute Folgers for Starbucks, or sandwiches you make at home for burgers. These sorts of products tend to exist in highly competitive categories and have to persuade customers that they’re getting value beyond the product itself.
So our gas station fountain soda has gotten more expensive, but it hasn’t changed the quantity you get. You’re paying $1.69, or 111% more for the same amount of soda you could have bought for 79 cents yesterday. What was once about two and a half cents per ounce is now over 5 and a quarter cents an ounce.
The question of whether or not that price increase will decrease sales isn’t even worth asking. It absolutely will. People are generally less likely to buy goods and services that cost more than what they expect to pay. The question is, how many people will still make the purchase even when the price goes up?
Because to a lot of people, $1.69 isn’t a dealbreaker for a cup of soda. It’s not as good of a deal, but it’s not going to break their bank, either. And they’d easily pay anywhere from $2-5 for the same amount of soda at a restaurant or in a bottle.
And so this is where demand estimation comes in. Pricing analysts generally utilize models that plot curves based on incremental changes in price, attempting to match pricing to the product or service’s position in the market relative to competitors.
For inelastic products or services, pricing tends to be most heavily influenced by cost of goods sold plus margins, or what’s generally known as “cost plus” pricing.
And for more elastic products or services, there are a whole lot of strategies, including:
- Competition-Based Pricing, where you match competitors
- Dynamic Pricing, where you change prices based on demand
- Psychological Pricing, where you utilize tricks such as subtracting a cent to make $20 “$19.99” or divide total price up into payments
- High-Low Pricing, where you introduce products at high prices and then discount them as they begin to age
- Penetration Pricing, where you start out with a low introductory price and then raise it as you build market share
- Skimming Pricing, where you start off with a high introductory price to capture early adopters and then reduce pricing to capture the early and late majority
- Value-Based Pricing, where you articulate price in terms of savings or benefits
- Bundle Pricing, where you attempt to upsell customers to multiple products to raise your total sales, with the discount hopefully being made up by the efficiencies of serving that customer multiple times in on transaction
- Geographic Pricing, where you vary prices by region or nation
- Premium Pricing, where you charge a high price but offer a superior experience or some luxury characteristics to justify it
- Freemium Pricing, where you give a part of your product or service away but then require customers to pay to receive the full experience
- Hourly Pricing, where you charge by the hour for a service
- Project-Based Pricing, where you charge a flat fee for a service
- Subscription Pricing, where you charge a recurring fee for a service
There are other strategies, too, and often, two or more of these approaches are combined in a pricing strategy anyway.
But once you settle on a strategy, you’re still left wondering, “did I pick the right one?”
It happens all the time. Just this week, I was talking to a colleague who made a big sale but realized they didn’t charge enough for their services to make a decent profit. Many businesses struggle to hit pricing exactly in the sweet spot.
And so they might turn to research to give them some guidance. And hey, this is my wheelhouse! But let me tell you something:
Pricing research is actually quite tricky, and just asking people what they would pay is rarely reliable because they will not always tell you the truth. In fact, count on them telling you they’d pay less than they actually would, because most of us are not actually very good at knowing what things actually cost.
We are much more sensitive to feeling like we got a good deal than we are to paying attention to the amount of money we spend on everyday items, and we also tend to remember prices as being lower than they actually are.
You can definitely ask consumers if a price feels too high or low, but your pricing strategy shouldn’t solely be guided by that because you will be tempted to believe the price floor or ceiling are more realistic than they actually are.
You can use that sort of feedback to determine viability. If it costs you $4.50 to make a product and an average consumer would only pay at most $5.00 for it, you probably aren’t going to make money. The perceived value isn’t high enough, and you need to either find a way to make it cheaper or find a way to enhance its value.
Even then, you have to be careful. There was a time when coffee was one of the cheapest non-alcoholic beverages you could buy. Now it’s one of the most expensive thanks to Starbucks redefining the product category.
I’m sure they had plenty of research saying they’d never get someone to pay $6-8 for a cup of coffee. They found a way to increase the value and were able to push the floor and ceiling up.
What a lot of researchers instead rely on is a model called Van Westendorp Pricing, which measures price sensitivity and helps to define what pricing is too expensive and too cheap to the majority of consumers in a quantitative survey and then to set an acceptable price range between those two points.
This is a really good tool, and it can be used quite effectively as part of a broader price analysis. But it’s also not very predictive of purchase intent and requires an added component called the Newton-Miller-Smith Purchase Intent Extension to provide that.
And even then, the emphasis is so strongly on price that other aspects of the marketing mix are not being considered.
If you want my advice? The best pricing strategy is often to conduct multiple pricing analyses using different methods like Van Westerndorp, marketplace demand curve modeling and competitor analysis and then triangulate your findings to recommend a price range you can validate and further refine through research with your channel partners, stakeholders, sales team and customers.
Or, you can just take a wild stab in the dark and see where things take you. You might be surprised at how well it goes, but the long history of products that have gone to market with too high – or too low! – of a price to fit demand and deliver margins means it’s something I’d consider carefully before you do it.
At the end of the day, pricing is often as much an art as it is a science. And anyone who tells you differently is selling you a line.
I’m Sean in St. Louis, and this has been The Marketing Gateway. See ya next time!
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