Death of discounting

A few truisms about PRICE are in order:

  • Nobody likes to have to or indeed wants to buy the ‘cheapest’ – and for a wide range of products, consumers actively avoid the ‘cheapest’.

  • Continuous discounting has the effect of raising customer expectations for even bigger discounts in the future. (Weber’s law about perceptual thresholds apply.)

  • When given an option of 3 prices, 68% of consumers select the middle price.

  • Price is used as a heuristic for ‘quality’.

  • As retailers, we have trained customers very well to consider price as the most important buying consideration.

  • There can only be one price leader.

Price is often used by consumers as an objection – when in fact they have other objections which may be more difficult to articulate or which they just don’t bother to share with the retailer. (And retailers believe this because it is easy to believe, and the response to the objection is simple and straightforward.)

But most importantly, price should not be confused with value.

The right approach to pricing is to develop a sound value proposition.

To illustrate, let’s consider a cup of coffee. How often do you walk away from the takeaway counter because the coffee is too expensive? Let me guess…never? Truth is, nobody knows or perceives a difference between a cup of coffee at $2.50 or $2.70 or $3.00.

But customers are not stupid (she is your wife, your child etc). If every shop is selling at $2.50, then, over time, customers will tend to avoid the shop selling at $4.00, unless the value received for that extra $1.50 is very clear.

I won’t bore you with the mechanics of how you create the value proposition, but in essence you have to understand ‘what’ your core product offer is. It is not ground beans and hot milk. If you think it is then you will only be charge $2.50 like everyone else. The value received (ambience, service, social opportunity, a break from everyday or whatever the ‘value’ is that you offer), must add up as equal to the extra $1.50. It is as simple as that.

The KEY is this: A $5.00 watch may have more features than a $5,000 watch, but people buy the $5,000 watch because the perceived value is at least equal to the price. As a retailer you must understand that you are not selling a timekeeping device – but something else. The ‘something else’ is the value proposition that you must identify and the answer lies in the definition of your core product.

One might argue that the proliferation of FREE STUFF - particulary as an internet model runs contrary to what I have just said - but I will save that for another post.