Pricing can lead to massive improvements in profits over time. And yet Pricing is an incredibly complex topic. Whenever we think of pricing, what immediately comes to mind are Customer acquisition issues. Will a customer buy the product or service at that price? Managers rarely think about “consumption or Usage” when they set prices!
Dilip Soman has this very interesting take on the effects of
Consider this example. Two friends, Mary and Bill, join the local health club and commit to one-year memberships. Bill decides on an annual payment plan – $600 at the time he signs up. Mary decides on a monthly payment plan–$50 a month. Who is more likely to work out on a regular basis? And who is more likely to renew the membership the following year? Almost any theory of rational choice would say they are equally likely. After all, they’re paying the same amount for the same benefits. But our research shows that Mary is much more likely to exercise at the club than her friend. Bill will feel the need to get his money’s worth early in his membership, but that drive will lessen as the pain of his $600 payment fades into the past. Mary, on the other hand, will be steadily reminded of the cost of her membership because she makes payments every month. She will feel the need to get her money’s worth throughout the year and will work out more regularly. Those regular workouts will lead to an extremely important result from the health club’s point of view: Mary will be far more likely to renew her membership when the year is over.
However, executives may be discouraging consumption when they apply those pricing practices. People are more likely to consume a product when they are aware of its cost-when they feel “out of pocket.” But common pricing practices such as advance sales, season tickets, and price bundling all serve to mask how much a buyer has spent on a given product, decreasing the likelihood that the buyer will actually use it. And a customer who doesn’t use a product is unlikely to buy that product again. Executives who employ those pricing tactics without considering their impact on consumption may be trading off long-term customer retention for short-term increases in sales.
Here is an interesting paper on Pricing: SKU rationalization GMA_Pricing__Deloitte(1)
Here are the issues that come to my mind:
- To accelerate adoption of analytics, companies need to create analytics skills across different functions. Unless managers across function learn analytics, it may be hard to drive the gains. Running a Pricing Analytics workshop for Marketing & Finance together may also be a good way to drive consensus & new ideas.
- Is Usage or consumption more important for some categories? For example regular usage of a credit card vs regular usage of a Lifestyle retailers loyalty card. In the case of a credit card, every purchase occasion is a point where the credit card can be used. In the case of Lifestyle retail there are fewer occasions and are consumption is also linked to other events-marriage or the party season. Marketers must carefully create the context for increasing “consumption or Usage” in these different industries. Creation of the context is what “Relationship marketing” is all about.
- Who drives pricing in the Marketing structure? Often in a subscriber-based business, eg a Magazine, there is an acquisition team which creates these unique bundled offers(which mask pricing) and a retention team which separately tries to get the subscriber to renew his subscription?