The importance of setting prices optimally has evolved into a discipline applying advanced methods and solutions.
THE IMPORTANCE OF SETTING PRICES OPTIMALLY HAS EVOLVED A DISCIPLINE APPLYING ADVANCED METHODS AND SOLUTIONS
Among all the marketing P’s—Price, Product, Promotion, Place, and additionally People, Process, and Physical Evidence— Price is likely the one with the most significant impact on the bottom line of a Profit & Loss statement, particularly in the short term. For a business with an Operating Profit (OP) of 10%, a modest average price increase of just 2% can enhance profitability by 20%, or 2 percentage points.
Given this substantial impact, it is unsurprising that brands meticulously manage their pricing strategies. This can range from sophisticated dynamic pricing and yield pricing, which involve continuously processing and modelling large data sets (often utilising AI) to determine optimal prices based on stock levels, competitive pricing, and consumer willingness to pay. In more discretionary categories, primary research plays a critical role in modelling and predicting consumer responses to pricing.
For product categories with uniform price points, commonly found in FMCG (Fast-Moving Consumer Goods) and CPG (Consumer Packaged Goods), techniques such as Gabor-Granger methods (and their advanced variants) are employed to gauge reactions to incremental price changes. In categories with multiple price points, commonly found in Services (with its tariffs), Automotive or B2B (with its packages or extras), more complex techniques such as Conjoint analysis are used to capture and model consumer behaviour through trade-off exercises.
In our regular work with clients, we observe that managing prices optimally has become a common standard. However, we also identify one aspect that is frequently overlooked.
THE WAY PRICES ARE COMMUNICATED HAS A SIGNIFICANT IMPACT ON SALES AND THE BRAND RELATION
Effective communication is a well-established principle, validated by both practical experience and scientific evidence. This holds true for price communication as well.
Consider the example of itemised feature-price menus. Rational human theory suggests that this approach is optimal because it allows consumers to select precisely according to their preferences. Customers can purchase exactly what they need at an acceptable price and omit what they do not need or find too expensive. However, this method can be mentally taxing for some consumers, requiring a high level of cognitive effort to process and make decisions. Consequently, buying decisions may be postponed or diverted to products with simpler choices.
To address this, bundling product features and structuring them to simplify decision-making can be beneficial.
Additionally, positioning these bundles with a clear and compelling proposition can facilitate easier decision-making for consumers, ultimately enhancing the purchasing process.
Consider some of the well-documented behavioural effects, such as those discussed in Daniel Kahneman’s acclaimed book “Thinking, Fast and Slow.” One notable effect is how the framing of alternative prices influences consumer behaviour. The presentation of reference prices or the comparison of your brand product variants priced differently can significantly affect consumer choices.
Additionally, the physio-psychological aspects of price communication—such as the use of colours, fonts, font sizes and pictures—play a crucial role. While communication specialists are well aware of these effects, it is surprising how often they are overlooked in price communication, such as in proposals for cars or insurance contracts. This oversight may stem from the division of labour within companies, where those responsible for optimal pricing are not involved in executing the communication, and those in charge of communication may not focus on pricing as an important aspect.
Our research projects have shown that in some categories, the way a product and its prices are communicated can even create a greater impact on sales volume than a price variation of up to 20%. Given this significant effect on the bottom line, it is surprising that so little attention is paid to the structure, mental effects, and psycho-physical impact of price communication.
Finally, consumer perception of how prices are communicated influences their relationship with the brand as prices normally cause negative emotions in consumers. The question though is, in which way and how intense these emotions are, which in the end depends on how they are communicated.
So, besides the sales activating objective of good communication, its impact on brand equity is important to be considered and provides another reason why to carefully think about the best way to communicate prices.
