PRICE AND VALUE

COMMUNICATION
STRATEGIES TO INFLUENCE WILLINGNESS -TO-PAY
SESSION 4
ELKANA EZEKIEL

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IMPORTANCE OF
COMMUNICATION
Except for critical, high value products, customers generally don’t know the
value of the products they buy

The lack of knowledge leaves higher value differentiated products vulnerable

to competition who play on price

 Crucial to inform & educate customers about the real value they receive

Two examples

 “Surf Lalitajee ad”

I am a Mac

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 VALUE COMMUNICATION
Is needed when your offering creates value that is not
obvious to potential customers, but is important to
them

Is effective only when customers see the price as

being important in making their purchase decision

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VALUE COMMUNICATION
Factors that influence the importance of value in a purchase decision
◦ size of expenditure
◦ Who is paying - office trip vs. personal trip
◦ switching costs - training & change management costs of switching from one
software to another
◦ perceived risk
◦ importance of end benefit - spending on a photographer for your wedding vs
for an office function
◦ price-quality perceptions - technically unsophisticated customers using price
as a proxy for quality in TV purchase
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DEVELOPING A VALUE
COMMUNICATION MESSAGE
Relative cost of search
Low High
Simple “search” goods Complex “experience” goods

Relative cost of Management consulting

Econom

Household groceries The relative search

search is the Investment advice Experience goods
ic

Home loans cost is low when the

financial and Hotels have differentiating
Flight tickets customerAuto can repair
easily
benefits
Type of

non-financial attributes that are

Commodities e.g. palm oil determine
Life insurance
cost relative to more difficult to
differences before
the expenditure evaluate before
Sports cars purchase. Search Fitness equipment
that is planned
Psychologi

purchase. They
goods allow
to determine
High end mobile phones require substantial
cal

customers toWeight find loss courses

differences in time and money to
Cosmetics information and
features and Holidays evaluate prior to
Designer across
clothes choose among them
benefits purchase
before purchase
alternatives
Definition: Search goods - those that can be
9 evaluated before purchase
VALUE COMMUNICATION STRATEGIES
Relative cost of search
Low High
Simple “search” goods Complex “experience” goods

Strategy 1 Strategy 2
Economic

Economic Value Communication Economic Value Assurance

Type of benefits

Communicate objective information Communicate assurances

that differential economic value that differential economic value
justifies pricing justifies pricing

Strategy 3 Strategy 4
Psychological

Psychological Benefit Associations Psychological Value Assurance

Communicate linkage between Communicate assurances that differential
performance & subjective benefits performance affecting subjective benefits
to justify pricing justifies pricing

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Ways in which customers
evaluate price and their impact
on communication strategies

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 PROPORTIONAL PRICE
EVALUATIONS
You have gone out to buy, say, a text book for your course. It’s late
evening, the shops are about to close
◦ In the shop, you find that the price is Rs.350
◦ On reaching the shop, a friend informs you that another shop just 200m
away is selling it for Rs. 300
◦ Would you run the 200m to buy the book before the shop closes?
◦ If the price of the book you were looking for is Rs.2500, & again you find
out that a shop 200m way was selling it for Rs.2450, would you run the
200m for this price?
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THE WEBER-FECHNER EFFECT
Research shows that we evaluate price differences
proportionately, not as absolute values
◦ If a car seller gives 2 options –

(a) 100% free financing for one year &

(b) a 5% rupee discount

Buyers tend to take the free financing - 100% discount > 5%
discount!

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THE WEBER-FECHNER EFFECT
One important implication:
◦ There are upper and lower thresholds of price at which
price changes are either noticed or ignored
◦ Consumers respond better to one large price cut below the lower
threshold vs. a series of smaller cuts
◦ Consumers don’t really notice a series of small price increases below
the upper threshold, while they would react negatively to a large price
increase
◦ E.g. A brokerage house raised prices in small steps every 6 months for 3
years with no negative impact. A competitor tried to match this with
one large increase and lost many long time customers
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J. C. PENNEY
1. What are the business challenges facing JCP?

2. Who is the JCP consumer and what are her needs?

3. What are the elements of the new pricing strategy? How well does the
strategy address JCP’s business challenges?

4. What has worked and what is not working?

5. What would you recommend JCP do to revive its performance?

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Reference prices
The order of presentation of prices also affects the reference price assumed by the
consumer –

- Starting with higher prices makes consumers peg the reference price
higher
◦ Implication for sales - “Top Down Selling”
◦ Put higher price brands at eye level, and the more profitable store brands just below

Caution –
 For a new product launch, important that the consumer does not assume a lower
reference price

 Even if you launch with a lower price, make sure it is mentioned as a

“introductory offer”, ideally cross out the MRP .
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 Perceived Fairness
Cold drinks on the beach experiment

Many assumptions influence the perception of fairness

◦ Uber surge pricing during the shooting in Sydney was widely seen as unfair

◦ Oil companies in US are perceived to have very high margins, so any price
increases by them are perceived to be “gouging”, even if the actual profits are
lower

◦ Assumptions about the seller’s motivations influence fairness perceptions - a

higher price for your coffee cup due to “fair trade” practices is considered fair

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 Perceived Fairness
◦ Companies with good reputations get the benefit of doubt regarding their
motives - Reliance vs. Tata

◦ Increasing the price for a necessity is considered unfair(onions!), while

increasing the price of a luxury car is not considered so

Managing fairness perceptions is important

◦ Set the regular price at a high level - can “discount” at times when needed vs.
increase prices

◦ Explain price increases well - rising costs, additional surcharges for the good
of the country

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Gain-Loss Framing
Which of these petrol-pumps would you prefer to buy from?

◦ Petrol pump A sells petrol for $2.20/gallon, but gives a discount of $0.20 for cash
payment

◦ Petrol pump B sells petrol for $2.00/gallon, but takes a charge of $0.20 for card
payments

People put more psychological value on avoiding losses vs. capturing equivalent gains.
“Prospect Theory” explains this - Kahneman/Taversky

In identical transactions, changing how people think about their gains or losses results in
the altering their behaviour

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 Strategies to tackle gain-loss framing
Opportunity costs (theoretical gains forgotten) vs. out-of-pocket expenses

◦ medical insurance deduction from salary vs. having to pay every month

When product is priced differently to different people, set the list price at the highest level & give discounts to many
people.

◦ Even those people who pay full price find it less objectionable than having to pay a premium above a lower list price

UNBUNDLE GAINS & BUNDLE LOSSES

◦ If a company offers various services, set charges for each along with a base fee for the basic product/service.

◦ Then offer a package for the services relevant to the customer, that is lower priced than having to put each service
individually - thus bundling the loss

◦ If the customer is still not satisfied with the price, can reduce it by taking away services, which the customer will feel to
be a loss to avoid

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 Other influences on pricing
decisions
Psychological aspects

◦ Reference price - based on their processing of information from various sources and experiences,
customers attach a reference price to the product/service
◦ If the actual price is higher, then this becomes a barrier

◦ If a brand is on promotion for a long time, there is a danger that the reference price will become the
frequently discounted price

◦ The expected future price - in industries that experience significant price changes over time - e.g.
don’t buy flagship phones at launch

◦ Odd-ending price- “Bata price" https://www.nickkolenda.com/psychological-pricing-strategies/

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 Other influences on pricing
decisions
Industry conditions

◦ Threat of new entrants

◦ Power of buyers/suppliers

◦ Industry rivalry

◦ Pressure from substitutes

◦ Unused capacity

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 Mind your pricing cues:
pricing in the retail environment
1. In subtle & not-so-subtle ways, retailers signal to customers whether a price is relatively high or low

2. Sale signs - the word “sale” beside a price(without actually varying the price) can increase demand by as much as
50%

1. But over-use can be counterproductive - if more than 30% of merchandise has sale signs, then the effectiveness
of the sales sign reduces dramatically

3. Prices that end in 9

1. in a study, demand went up by 1/3rd when the price was increased from $34 to $39. A change from $34 to $44
had no impact.

2. Women were mailed 2 versions of a clothes catalog, one with prices ending in .00 & the other with 0.99.
Customers receiving the latter placed ore orders with a resulting 8% increase in sales

3. Prices ending in 9 are less effective when the item already has a “sale” sign

4. 2 hypotheses - 1. Rounding down, or feeling that 29.99 is in the twenties vs. thirty 2. The specificity of the
number 9 seems to signal a bargain to us

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 Mind your pricing cues:
pricing in the retail environment
4. Signpost items

4. Most of us know benchmark prices on items we buy frequently

5. Customers use the prices of these “signpost” items to form an overall opinion of a store’s prices

6. Many stores therefore price these signpost items (e.g. can of Coke) low, sometimes even at a loss, to signal to
the customer that the store is not expensive
4. But customers shouldn’t get signals that these low prices are due to special circumstances

5. 4. Pricing guarantees - a promise to meet or beat any competitor’s prices

4. Research shows that such guarantees gave customers more confidence that the store’s prices were lower
than its competition’s

5. But sometimes stores use this method to do some indirect price collusion, and can eventually lead to higher
prices

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Thank you

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IBM

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Psychological benefit assurance - Raymonds

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Psychological benefit assurance - Raymonds

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