How clever price positioning influences perceived value

In this exclusive extract, discover key ways to influence the perceived value of your products with clever price positioning

When customers first encounter a new product or service, they usually have only the vaguest idea of what it is worth to them.

In a few cases the product may have quantifiable material benefits – this is true of some financial services, and some business purchases.

This gives a clear rationale for the price of the service – if something will make you £10,000 in profit, it is probably worth paying up to £9,000 for it.

Mostly, though, it is hard for us to know what we should pay for a product. It is intrinsically difficult to predict the enjoyment we will get from consuming it, and even if we can, it doesn’t naturally translate into a sum of money.

Instead, we are likely to compare it with something similar we have encountered before and use that as a benchmark.

Imagine your friend from Estonia is visiting, and discovers that one of your neighbourhood pubs serves her favourite drink, which is made in Tallinn from local ingredients. You offer to buy her a glass of it. How much would you expect to pay?

Consider these four scenarios:

  1. Imagine it is poured from a bottle into a wine glass. You might compare it with wine, and expect to be charged £4 for 175ml.
  2. If it’s poured into a champagne glass, it might be £7 for the same amount.
  3. If you instead discover that it is sold by the half pint, you are likely to compare it with beer, and £2 for the half pint will seem reasonable.
  4. If it is served in a shot glass, you would probably think of it as a liqueur and be happy to pay £2 for 25ml.

That’s a price difference of 11 times, just based on how the drink is presented.

Of course the alcohol content is also a factor – but not a factor of 11. Whichever products we most closely associate a new purchase with are the ones we are likely to use as a price guideline.

Most products could potentially be compared with a number of different alternatives. The supplier therefore has the opportunity to shape our expectations by creating an association with a more expensive product.

The benefit matrix

Every product benefit can be seen in terms of something deeper. Think about your product or service and all the benefits it provides.

You should think hard to work out all the reasons somebody might buy from you. Then look in turn at each of those reasons and see if there is something more basic behind it.

For instance, the taste of a drink might provide sweetness – which is a basic biological desire – and it might also provide familiarity, comfort and reminders of pleasant memories. These memories in turn can be broken down into something even more basic.

Ultimately, every benefit is based on two fundamental emotional drives, pain and pleasure, and two fundamental material benefits, time and money (you can ultimately consider money and time also to be enablers of pleasure, but adding this extra level is not much help in practice).

Here’s an example for an accountancy firm:

 Primary (Level 1) drivers

 Level 2 drivers

 Level 3 drivers

 Basic drivers

Compliance with regulation

Reduced likelihood of fines and penalties

Direct cost
savings

Money

Reduced stress

Reduced pain

Doing the right thing for society

Sense of community

 

Management information

Increased sense of control

Reduced pain

Better planning

Profits

Money, Pleasure

Improved firm strategy

Reduced tax bills

Cost saving

 

Money

Cashflow improvement

Reduced stress

Reduced pain

 

Greater ability to grow the business

Money Pleasure

This matrix of values shows all the different reasons – conscious and unconscious – that influence somebody to buy your service or product.

In any given situation the customer will only consider a small number of these reasons, which is a powerful opportunity for you.

For each of these buying reasons, you have a different set of competitors. A customer has a number of choices they can make to satisfy each of these needs. Each different set of competitors has its own price spectrum.

If you make the right choice of competitor and choose your positioning accordingly, you can choose a completely different price point. This will transform your profitability.

Low profit: The accounting firm described above might choose to focus on one key group of values: compliance (which largely covers doing the annual accounts and tax returns for small firms). If it did so, it would be stuck in a low-value market, being compared with self-employed bookkeepers and high-volume accounting ‘factories’ that have a low cost base and can undercut a traditional accounting firm. This is likely to be a low-profit option.

Mid to high profit: Alternatively, it could focus on tax consulting: a higher-value market and one where the price charged is easier to tie to the value generated. Tax consulting perhaps calls for more creativity, and as a result is a less price-competitive market.

High profit: The firm could position itself as a business adviser, offering strategic input into its clients’ commercial and investment decisions. This decision can unlock high value, because some business decisions can make a difference of many millions of pounds in value; and if the firm plays an integral part in helping its client make the right decision, it can charge a price commensurate with the difference it makes.

Higher profit = higher risk positioning

However, this last option brings with it a different set of positioning considerations. The market for business advice services is much smaller than that for compliance services.

The way a business advice firm needs to present itself to earn confidence from clients is very different from the way an accountant should behave. The firm needs to show the right kind of experience to gain credibility to provide such a service. And most businesses will resist the high fees that come with this service – at least they will if those fees are quoted in the traditional way.

Thus, a firm following this route should instead choose a pricing strategy that does not confront the client immediately with the cost of the service. The best way to do this is to charge a share of money the client doesn’t yet have: the benefits of future growth. Firms should look at structures whereby they enter into a joint-venture or revenue-sharing arrangement with a client; where the firm’s advice contributes to the success of a new growth market, the firm will end up with a stake in a far more valuable asset than they could ever have persuaded the client to pay in cash.

Many accountants hate this idea. It is more risky to enter into an equity-based or revenue-sharing relationship than to charge a fee in advance, since many client ventures will fail, or stagnate, and will not make much money for the accountant. It requires an investment of time up front while the return, if it ever comes, will be far in the future.

It is an unusual approach, with few examples to copy from, and requires an entrepreneurial commitment from the professional that may not come naturally. But those who do it will make far more money than they could have done in the traditional way.

This exclusive extract is taken from chapter one ‘Pricing as positioning’, in The Psychology of Price: How to use price to increase demand, profit and customer satisfaction, published by Crimson Publishing. To read the full chapter and the rest of the book, pick up your copy available on Amazon now.

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