The magic of the right price- The Starbucks story

Recent developments triggered by Subway’s growth which have been attributed to a new $5 sub price point in the US. My understanding is that a franchisee simply said ‘to hell with it’ and made all subs $5. Not $4.95, but $5.00.

Double digit growth ensued.

In Australia, Subway followed by launching the $7 price point. I was shocked (not really shocked, but you know what I mean), because that was not what I would have expected them to do. $7 is exchange-rate adjusted equivalent of $5. DO they really think that is why the $5 sub worked?

Pricing is one of those retail sub-disciplines that one would think is subject to more science than it is, but it isn’t and if it were then we would have had the secret recipe. I have my theories about why the $5 price point worked – and they are obviously different to Doctors Inc (the franchisors in Aus).

So I thought I would jot what I know and what I think about pricing, and ask you to add your bit so that we can pool some ideas. (The things I know are based on reading and studying and gradually becoming certain about certain principles – I can’ remember where or when I first read the research though. I think it is called experience.)

What I know.

  • People don’t buy on price, they buy on perceived value.

  • Nobody generally wants to be able to buy the cheapest of anything (there is some shame involved in being able to only afford the cheapest of anything.) But people want to pay less than they think something is worth – which proves how smart they are.

  • The importance of price diminishes as the product and service is less likely to influence your (perceived) status in society.

  • Odd pricing ($4.95) does not work (even though I thought it did for a long time). It was initially an operational tactic to force people make change so that the $10 did not find its way into the pocket of cashiers.

  • Really odd pricing ($4.87) works because of perceived accuracy and honesty.

  • Fewer price points are better than more. (People generally only perceive low, medium and high price points.)

  • Price points are a decision-making heuristic for consumers because they equate price to quality to it helps them decide.

What I think

  • The size of currency plays a role. When people pay $7.75 for something they tend to pay with a $10, then the item has a higher psychological; cost because your ‘broke’ the tenner.

  • The more money (cash) people carry around with them makes people less price sensitive – up to the point where carrying no money (because your lackeys carry the wallet for you.)

  • When people are offered the same product at three different price points, they tend to pick the middle one especially if they have no other basis of judging what the product is worth. (We teach people how to use this strategy in our SellSmart retail selling course. )

Now back to the Subway experience.

What I think happens is that when people are confronted with endless options (combinations) and endless price points at the counter, they are forced to make a considered decision. They weigh up their purchase and calculate the cost of adding the cheese or the avocado or not having a drink etc.

Subway makes it an important consideration because the menu and the presentation will force consumers to consider these variations.

When you simplify it for the customer – everything is $5 – then they can simply choose to eat what they want and there is no anticipated regret (which, by the way, is one of the most powerful motivators in consumer decision-making).

When you make things simple for the customer, they will be more inclined to spend more and/or spend more often.

The $5 price point works well because that is what the customer is psychologically committed to spending (and $4.95 would not make a difference). The same cannot be said of the $7 price point.

The $5 price point works because that represents a fair deal as far as fast food offers go (in most categories) so consumers do not feel or fear over-paying. I am not sure the same can be said of $7.

What do you believe is the right approach to pricing? What do you know for sure and what do you think applies? What are your views about the Subway strategies? Love to hear your thoughts…

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