How do your customers know whether your prices are a good deal for the value they are receiving?
JC Penney hired a new CEO in 2012 that ended coupons and discounts based on what he called “fake prices”. He switched all prices to everyday “fair and square” prices. Sales plummeted and they lost $985 million. Long story short, that CEO was fired. JC Penney reverted to their prior pricing. List prices rose 60%.
Customers can get hooked on the “thrill of the hunt” for deals. How do they know when they’ve found a deal?
When we can’t easily assess value, we use comparisons. We use an easy comparison, like price. People like to compare a price to a “regular” price rather than to a true measure of value.
JC Penney did it with their "regular" prices of clothes versus the sales price (and these clothes were almost always on sale). Here are other common examples:
- The manufacturer’s suggested retail price (MSRP) of a car versus the price they are currently selling the car for.
- Infomercials that say things like, “All of this would normally cost you $500 but you can get it today for only $99”.
- “Value stacks” where the estimated value of items in a package are totaled up to a large number and then compared to a much lower sales price. One expert says to use a value number that’s 10X the price.
Another strategy is to offer three variations on a product with three prices. When given three sets of options, people tend to pick the middle price option. A restaurant consultant said high price menu items increase revenue by causing more people to buy the second most expensive item.
What are the takeaways from all this? Explain the value of your products the best you can. Still, people may need pricing structures to help them see the value. You can get too cute with this, but you’ll end up with price-sensitive customers addicted to your perceived “deals."
I wish you wisdom in finding the right long-term pricing choice for both you and your customers. I wish you well.
- Rob Stephens
CFO Perspective Resources
Get all the CFO Perspective resources with a FAST (Finance and Strategy Toolkit) membership.