The Dangers of Price Transparency When Trying To Use A Customer Value Pricing Strategy 👑
There’s no doubt that finding the right pricing for your product is key to maximising your margins and ensuring that price sensitivity does not grow too high. However, there are many roadblocks and challenges your business can encounter. Especially when trying to utilise a customer value pricing strategy. We’ll be focusing on price transparency and why that can be hurting your business, especially with rapid digitalisation and movement towards e-commerce.
Customer Value Pricing Strategy – Dangers of Price Transparency
A customer value pricing strategy or value-based pricing is a common method of pricing where the price of your product or service is based on customer perceptions. In other words, the price of an item reflects what the customer believes it is worth, regardless of the exact cost of production.
This is a common practice for businesses trying to build prestige around their brand, like Starbucks for example. However, this is also common for businesses where it’s impossible or impractical to know the exact cost of a unit sold per customer. For instance, movie tickets, mobile plans, or computer software (such as SaaS or Software As A Service, also known as cloud-based software).
In fact, there are probably more businesses than you think that employ a customer value pricing strategy. Unfortunately, with the advent of e-commerce and the abundance of information online, price transparency has become something of a hindrance or challenge.
Since so much information is available online, buyers have naturally started researching what it costs to produce what they are buying. This has created challenges for businesses trying to increase their margins by shifting to value-based pricing.
Pricing Transparency Vs Pricing Opacity
Buyers naturally want price transparency. Sellers naturally want price opacity. Both notions pose challenges for one another. For businesses, this means extra effort will have to be made to convey the unique features and benefits of your products.
When marketing is done well, customers stop looking too deeply into why items cost so much. Brands that are incredibly successful at these include powerhouses like Nike or Apple. People believe their products are superior and stop questioning the price.
Why Price Transparency Can Hurt Business – Customer Value Pricing Strategy
The public has been known to demand transparency from corporations in terms of costs. For large corporations, transparency may be useful to convey a sense of ethics and authenticity. However, there are a number of ways that price transparency can hurt a business. These are four main pain points surrounding transparency:
Prevents Higher Margins
The first, as we have mentioned, is that it prevents higher margins. For businesses with pricing that is not reliant on production costs, this can be tricky. An airline, for example, can’t exactly factor in every single cost it takes to run the business.
Calling for price transparency could erode higher margins, leaving less profit. Customers can claim to understand prices and don’t see the value in pricing higher and you would be forced to compete with the lowest prices in the industry. This could create more high-competition markets, commoditisation, and high price sensitivity.
Commoditises Products and Services
When products and services get turned into commodities, they become indistinguishable from one another. This can pose big challenges, especially for businesses without an incredibly unique feature.
Lower cost items become interchangeable, making marketing less effective, and putting even more pressure on maintaining prices in line with other competitors. Larger corporations also tend to dominate smaller businesses in this case.
Weakens Customer Loyalty
Customers, armed with research about how much something costs to produce, may likely begin to infer that your prices are too high. This problem could be further exacerbated by discounts. Customers may believe that the company is still earning from price points during temporary discounts, and become distrustful of regular prices.
This has happened to large companies like Procter & Gamble who began to rely heavily on sales in the 1980s. Consequently, their customers started to see their regular prices as excessive. Instead of drawing in new customers, they pushed loyal ones away. The damage caused by price transparency and bad discounting practices can be tough, even impossible to repair.
Promotes Perceptions of Unfair Pricing
Price transparency could also promote perceptions of unfair pricing. Customers see high prices and call them unethical and accuse them of overcharging. This can be especially difficult when businesses have to raise prices to account for updated input costs, labour costs, and inflation.
In reality, pricing strategies are complex and production costs don’t equate to market perceptions and don’t factor in other aspects behind the offering. For example, this number may fail to consider marketing, distribution, employee salaries, store rents, website maintenance, etc.
External factors, like inflation or input costs, can also be challenging, coupled with price transparency. Oftentimes, companies will try to absorb costs as much as possible to prevent price increases. However, at a certain point, this is no longer possible.
There are, however, some plus sides to price transparency and availability of information that is equally important to consider with this topic:
- The internet and availability of information and data have eroded “risk premiums”. Previously, customers only had limited knowledge of products and would gravitate solely towards well-known brands. These days, with more access to research, customers are more likely or willing to purchase from smaller businesses
- Searches become more efficient, making industrial procurement more efficient as well.
- The internet promotes rational shopping. Customers are smarter and less likely to fall prey to attractive marketing schemes. Rather than playing to the senses and making things visually appealing, brands have to market smarter.
Bottomline – Customer Value Pricing Strategy
In conclusion, pricing strategies are complex. For your strategy to be a success, you need to consider all challenges possible. For a customer value pricing strategy, it’s important not to neglect the impact of the internet and price transparency. But not to worry, a competent pricing team can help you navigate through all of these potential hurdles.
For a comprehensive view on building a great pricing team to prevent loss in revenue,
Are you a business in need of help to align your pricing strategy, people, and operations to deliver an immediate impact on profit?
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