The 5 biggest mistakes in pricing
Our guide teaches you to avoid price wars, to take full advantage of your customer's willingness to pay, to correctly increase prices, and to use targeted discounts.
Replace your gut feeling with knowledge and facts.
Every pricing strategy begins with the customer
When looking at pricing strategies, one thinks about buzzwords like high-price strategies, price skimming, low-price strategies or penetration strategies. However, these buzzwords are of little initial interest. Good pricing strategies begin with customers.
Building upon principals of Behavioural Economics and our customer segmentation according to purchasing behaviour (GRIPS types), we have designed an empirical study in order to understand exactly how the decision-making process works for your products, and which variables are relevant to the consumer. Often with surprising results.
A discount strategy can be ineffective in a market full of indifferent decision makers, while a focus on advice is not very successful in a market filled with bargain hunters.
Pricing strategy is about more than just cost
Many companies concentrate on the cost when fixing their pricing strategy. They assume that customers always prefer the cheapest product and make decisions from a purely rational standpoint. Behavioural Economics shows us that this is not true. The pricing structure, dynamic pricing and price communication are all more significant than the cost in influencing purchasing decisions.
An identical product at an identical overall price may seem expensive or cheap to the customer, depending upon the pricing structure.
With our help, you can steer customer perception about your pricing structure in the right direction.
Dynamic pricing includes all changes to the price over time, from long-term price increases or decreases to discount campaigns.
We advise customers to base their pricing strategies on empirical evidence and on the decision-making behaviour of their customers.
During projects, we often notice that cost is not the actual purchasing barrier for the customer. Instead it is the way in which the price is communicated.
With our help, you will find the right solutions for targeted price communication.
"... Vocatus’ fee was without doubt a sensible investment which quickly paid for itself"
"Our collaboration with Vocatus triggered some pricing decisions which immediately took effect, because the information from the joint study was plausible and persuasive. Because it’s a considerable lever in terms of revenue, Vocatus’ fee was without doubt a sensible investment which quickly paid for itself. From my perspective, it makes a great deal of sense to examine one’s own pricing systems and the corresponding preconceptions of them in such a systematic and holistic way, and to have them tested."
Managing Director Stern/GEO/art
Gruner + Jahr AG & Co KG
Pricing structure in the case of automobiles
Both cars represented below are completely identical in terms of price and features. They differ only in price structure. With considerable consequences.
Source: Vocatus AG
Car optimisation via pricing-structure change
While the floor mats in car 1 are included as standard equipment, in car 2 they are offered at an additional surcharge of €890. On the other hand, car 2 offers alloy rims as standard equipment. Car 1 offers the rims at an additional surcharge of €890.
Overly expensive individual components cloud the overall picture
Generally, the customer is unable to judge whether or not the car is good value at €42,479. But the customer is certainly in a position to judge whether floor mats for nearly €900 are overly expensive. On the other hand, alloy rims for the same price seem to most customers to be a good deal. It is for this reason that overall car 2 is considered expensive, whereas car 1 is seen as a bargain.
Seeming cheap without lowering the price
Just by changing the pricing structure and without having made the overall price even one cent cheaper, the manufacturer made his offer seem much cheaper to the consumer.
"12 out of 8 people do not like calculations"
As soon as a price structure becomes somewhat more complex, consumers regularly become overwhelmed, and are unable to calculate the cheapest offer.
In the mobile phone industry, the price structure is composed of three components:
- Cost of the phone itself (often subsidised)
- Monthly fee with minimum contract length
- Special conditions for international calls, SMS, etc.
Even in an experimental situation, in which test subjects were provided with all information, such as the number of international calling minutes per month, an incredible number of people were unable to determine the cheapest offer.
In real life, most people do not even make an attempt, but instead use a marker element (typically the cost of the mobile phone) to judge the affordability of the entire offer.
Every form of price reduction (rebates, vouchers, discounts, etc.) should have a substantive reason and also not be predicted by the consumer. Otherwise the purchasing behavior is altered, which can ruin a company.
Arbitrary discounts are a risk
For years, the hardware store chain "Praktiker" had regular, high and totally arbitrary discount offers, which systematically undermined their own price image.
With awkward regularity, Praktiker offered 20% discounts every few months on the entire product range. The frequency of these offers kept increasing massively: while in 2003, a maximum of two sales promotional periods were planned, by 2007 there were already 110 days of "20% off everything" (except pet food).
Fatal shift in reference prices
Up to the point where they declared bankruptcy in 2013, Praktiker continued to raise their discounts. Price became even more important to the customer and the reference price was displaced by the sale price. Outside of discount periods, hardly anything was purchased.
"The market research (…) really hit the spot!"
"The collaboration with Vocatus provided us with crucial information about the pricing of individual product components, about the optimal bundling of offers that customers considered to be ideal, and about communication that was appropriate for the market.
The primary market research as well as the subsequent exhaustive discussion of the findings with Vocatus employees really hit the spot."
DuMont Net GmbH & Co. KG
Discounts do not always help with sinking sales
When sales begin to sink, companies often offer discounts as a knee-jerk reaction. The theory is that low prices lead to higher sales. During the automobile crisis of 2009, nearly every car manufacturer offered massive discounts.
The problem was not the cost
Only one manufacturer (Hyundai) had the courage to understand the purchasing process of their customers. Most Americans were actually afraid of losing their jobs and therefore didn't wish to purchase, no matter the discount.
The problem was insecurity
Hyundai recognised this and offered its cars without a discount at the regular list price, but with a guarantee that the car could be returned if the buyer became unemployed. Customers were even allowed to continue driving the car for 3 months while they looked for a new job.
9% higher sales figures in the middle of the crisis
The success was resounding: while all other manufacturers lost up to 55% of their sales during the financial crisis despite massive rebates, Hyundai increased their sales figures by 9%. The number of cars actually returned as part of this guarantee was negligible.
Source: Vocatus AG
Strategic price communication
A good example for the use of behavioral pricing in price communication is mental accounting.
People book accounts in their minds
For the majority of people, it is not all about money. They save their change in an interest-free piggy bank, while at the same time paying interest for automobile financing. There are usually unspoken budgets and limits for each of these accounts.
Booking to a different account in the minds of your customers
When companies are able to book other accounts in the minds of their customers, accounts for which no budget is available or for which the criteria for spending are less rigid, the probability of purchase is higher.
It is for this reason that the Swiss luxury brand Patek Philippe advertises their watches with the slogan "Begin your own tradition." The photo shows a father with his small son and the text explains that a watch from Patek Philippe can never really be owned, merely protected for the next generation.
The "family tradition" account still has budget available
Even people who are well off have a mental account for watches, but this only goes up to €1000, not the €5,000 you need for a watch from Patek Philippe.
What about the mental account for family tradition? In such categories, larger sums of money can be more easily justified. After all, one can't expect to start a "family tradition" at a bargain price.
"... when it came to pricing research it was important to us to work with THE experts in that sphere."
"We were determined to discover what role price plays when people make decisions in the 'low awareness' area, and when it came to pricing research it was important to us to work with THE experts in that field. Our confidence was entirely justified: Vocatus consistently provided an excellent service, from conceiving the project right through to analysing, interpreting, and presenting the results. And our hypothesis was totally confirmed too."
Ard Jen Spijkervet
Vice President Marketing Europe
Esselte Leitz GmbH & Co KG
"Collaborating with them gave us the courage to make some clear decisions."
"Pricing decisions are all too often based merely on a gut feeling. Vocatus helped us to make them more rational. Collaborating with them dispelled some unfounded fears, sensitised us to previously underestimated aspects, and gave us the courage to make some clear decisions."
Managing Director, Hamburger Abendblatt, 'Welt' Group, Berliner Morgenpost
Axel Springer AG