Comic of two people musing over bargain prices

Image: Forethought

Surely the greatest myth in marketing is that if your product or service is considered highly competitive on price, then it is also considered poor quality. Marketing practitioners’ misconception is based on the idea that the pricing mechanism inherently conveys information about quality. Advocates of this idea are overlooking buyers’ belief in value for money. That is, an item can be of great quality and priced competitively.

Value for money is the best performing, non-financial lead indicator of consumer choice, and it should be the single greatest pursuit of every marketer to lead their category on that metric.

While we are discussing myths, let’s tackle the other major pricing fallacy. That is, to be considered price competitive, the product or service needs to be discounted. A common misunderstanding about price is that it is all about dollars and cents. Consumers forget their dad’s birthday, yet the brand owners assume the consumer will know their product’s price to the penny.

In one online study with a virtual “menu board” and no prices, Forethought found that patrons of a quick service restaurant brand had no better knowledge of their prices than non-patrons. Frequent visitors to the restaurants were no better at correctly estimating the price of an item than respondents who did not include that restaurant chain in their repertoire. Even for staples such as large fries, the average error was 15.4% for heavy users of that chain.

The generally accepted thinking is that when we refer to “price”, we are referencing concepts directly related to financial cost such as ticketed price, fees, and discounts. However, consumers form impressions of the price of a brand, or retailer before they are even exposed to their pricing information. Consumers’ assessment of a brand’s price competitiveness is not wholly determined by the actual price but also, in part, by reputation for being price competitive. Forethought refers to this reputational element as ‘price brand’.

Building a price brand

In the retail setting, the price brand of the retailer plays a moderating effect on the price image of the brands that the retailer stocks. Studies have found consumers shopping at retailers that have strongly performing price brands (perceived to be inexpensive) are less likely to price check and more likely to buy additional products.

Some shoppers are more deliberate and systematic in their price checking whereas others are more likely to apply heuristics based on both price and non-price cues.

The contention is, businesses often understate the importance of non-price cues.

Consumers tend to use a dichotomous scale for classifying retailers’ price brand. A retailer is either expensive or inexpensive. Achieving a strong price brand (perceived as price competitive) is based on both actual prices and non-price cues such as store location, larger size of stores, larger size of car parks, décor, discount signs, and low standards of service. Studies have found that stores that are cluttered and shabby have a stronger price brand. Price-based advertising using occasional deep discounts on known value items, such as bread and toilet tissue, can contribute advantageously to the price brand. The following exhibit separates the relative importance of price and non-price cues for a department store.

Chart displaying the relative importance of price and non-price cues for a department store

Image: Forethought

The non-price cues can also operate in the other direction. Social responsibility, sustainable ingredient sourcing, liberal returns policy, and high levels of customer service all cue being less price competitive. Supermarket chain Whole Foods has 500 stores across North America and specialises in organic produce, free from artificial colors, flavors, and preservatives, as well as hydrogenated fats. Whole Foods has found that “organic” is a non-price cue for expensive that is, less price competitive.

The financial return on price brand

Forethought asked Americans to score six different retail outlets on how price competitive they believed each retailer was for a 40mm Apple Watch and Series 5 GPS. The observed effect of price brand for Walmart is illustrated below using a hypothetical demand graph. Walmart charges full price yet due to its strong price brand, gains additional demand. This is the return on price brand. (A more complete discussion of this can be found at Stop Ignoring Your Price Brand!)

Hypothetical graph displaying the observed effect of price brand for Walmart

Image: Forethought

Conclusion

Price brand is not just what you charge, but the perception of how price competitive you are. It embodies the reputation for being price competitive. Brands do not need to reduce prices in order to be considered more price competitive.

Price brand builds a brand and retailer’s price-setting discretion through the deployment of non-price cues.

Header Image: Collis, Pexels



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