The Best Market Price Approach For Your Business & Customers 🏬
Does your current market price approach drive frequent and profitable shopper purchases? Are customers satisfied with the offers and prices you give them or do they always seem to shop around for better deals and cheaper prices? Do you find yourself giving away large discounts and freebies to either win disloyal customers back or ‘delight’ frequent shoppers?
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Finding the right market price approach to suit different customer groups isn’t easy, especially when you’ve got:
- Thousands of products
- Add-on-services
- Pricing approaches in marketing
- Fierce market competition
- Several types of customer groups
But did you know that, sometimes, offering customers only 1 standard price for your offers encourages them to shop from your competitors, overlooking the value of your offer?
The no. 1 thing to remember: people love personalised offers, bundle pricing, marketing price options that can give them the best deals, and more upgrade options when they are ready to buy them.
When a company guides and nudges their customers with different price points in a range, they are attempting to influence customer perception of price and value by using framing and anchoring techniques. This is called the market price approach GBB or the Good, Better, Best pricing approach. It is also known as tiered pricing.
Table of Contents:
I. The Best Market Price Approach For Your Business & Customers
II. The Value Propositions of Pricing Tiers
The Best Market Price Approach For Your Business & Customers
In this article, we will explore the various market price approaches to GBB. We will give a quick snapshot of GBB and key market price approaches and principles. Then, we will close with some tips on integrating GBB within your pricing strategies, structures and operations.
The main contention here is that a one-price-fits all can often mean losing customers. For example, using the one-price-fits all as a high price strategy example in luxury items or points. This will result in cheapening the luxury brand and drive away those who can afford it.
It is our belief that GBB can give consumers the best options to meet their needs. GBB is also a practical way for businesses to start implementing value-based pricing in a very real sense.
When GBB was introduced
GBB started almost a hundred years ago when Alfred Sloan used a “price ladder” to gauge people’s response to different prices for automobiles. As a way to test his new car pricing strategy, he first surveyed customers and asked them what they liked about their cars. Contrary to their initial assumptions about their value, he found that people were much more willing to pay more for a comfortable car and upgrade their present car. These findings were a game-changer. In effect, adding price premiums to their cars that were worth billions of dollars for the automotive industry.
Since then, all automotive pricing strategies have been revised. Car manufacturers have widely adopted basic, middle, and premium scale pricing for both the pricing strategy and price setting.
Willingness to Pay Market Price Approach
Prior to GBB being introduced, many companies did not believe that their customers were willing to pay more money for their goods and services.
For the majority of business history, the underlying assumption driving pricing decisions was that customers were logical buyers and very price-driven (i.e., they were only interested in the lowest price or large discounts).
Today, however, some businesses realise that they were wrong about their customers on many levels. Some customers buy products based on how they value them, while others are very price sensitive. But again, they can be price sensitive for some items but not others.
So what is customer value?
“Value pricing” doesn’t mean value for money. Customers are actually prepared to pay much more than most businesses assume they will. However, they’ll only pay higher prices when businesses offer deals that address specific and mostly immediate pain points and needs.
Three approaches to GBB
GBB is a great way to give customers more choices to address their needs. Tiered pricing not only meets a specific budget, but also gives customers what they want when they understand what they want.
The offensive approach. This approach is suitable when you want to attract new clients and spur capital and business growth. Using this approach, companies tend to offer the best features in their premium packages to lure existing customers. They separate offers into good, better, best to charge a high price premium for the ‘best’ package and to appeal to different segments of the market.
The underlying assumption of an offensive approach is that customers will first try out the basic option to know more about their products. It is also assumed that customers are more willing to pay higher prices when the premium package is fit-for-purpose.
The defensive approach. Companies use this approach when they want to protect a brand’s established place in the market (i.e., relative to their competitors). In essence, the business creates a ‘fighter brand’ to compete in an increasingly competitive market. This could translate into pricing a new product cheaper than the previous one to win a share from their competitor. Or, it could be to counter a competitor during a price war.
A customer-focused approach. Companies tend to use this approach when they have a more mature pricing capability. In essence, they have set up a price architecture that is flexible enough to accommodate differentiated price points for their products and services. The underlying assumption of this approach is that consumer buying decisions are influenced by frame and anchor techniques.
For example, research shows that consumers and shoppers like to have clear options presented to them to help them make a choice. But too many bundles, features, and price points, however, can confuse customers. They’ll lose interest in the offer or become sceptical about the price point. In a way, research indicates that customers have this buy/don’t buy attitude when choosing bundle prices.
It is possible, however, to override customer indecision. The best way to improve rapid consumer decision making is by putting structure in your price architecture and more flexibility into your discounting and promotions. Sephora and Philip Kingsley websites are both good examples of value-based offers and good, better, and best price points, and personalised care and grooming associated with perennial health care issues. They know their customers pay good money to fix very specific health and beauty issues.
Tips on how to structure your market price approach
Generally, the GBB responds to the psyche of the consumer. According to the latest research, three options is the ideal amount to have in your price structure. Any more is a distraction; any less is too restrictive.
On the good, better, best market price approach scale, the first is the basic option. The basic ‘good’ offer gives customers the standard features (no frills but still good value). It can upgrade to the other scales.
Fence Attribute
Building a price architecture that meets the criteria of a ‘good, better, best’ approach is not easy.
Just what is in the basic option?
Will it give customers an insight into what’s to come if they upgrade?
Does it pique their curiosity?
What is the common complaint when they use the basic option?
A good place to start is to use fence attributes in your price architecture. A well thought through fence in your price architecture will discourage your customers from downgrading their package options. A fence is basically a way of fencing off or protecting value so you don’t give away too cheaply to customers that don’t really value it. This fencing off concept can apply to value customers used to enjoy or would like to enjoy. Fencing off value helps you segregate additional value to better and best options.
Never try to give too many freebies away or discount the basic ‘good’ package. In effect, discounting ‘good’ options, even more, will only make shoppers demand more discounts and freebies. You’ll end up depreciating the entire range. When you discount on good options, you’ll devalue the better and best options as well.
Another way to improve your price architecture is to explain clearly what customers will be missing out on if they downgrade. Try spreading the features through all three packages. The best features should be in the premium level along with the middle and basic level.
Using the Market Price Approach Test Pilot
Another way to test your price architecture is to use a test pilot pricing approach. Pilot tests help you see what features your customers prefer and categorise offers to specific customer groups according to the value of your products or services (i.e., price-sensitive, average shopper, high-value shopper).
As the test progresses, use a chart or table to analyse the patterns of their preferences. You should be able to see a more detailed picture to then draft your 3 tiered good, better, and best options. Just remember though to price evenly within the three packages (i.e., the lowest to the highest package) with the premium elements. This is the good, better, best-merchandising strategy retailers use to attract new customers to new brands.
Implications
Fixed pricing coupled with blanket promotions can drive consumers away from businesses, even if their offers are very good.
Consumers often use a single fixed price as a benchmark for comparing it against the competition and completely forget, in turn, the reason for the buying.
Implementing GBB is not easy. A world-class pricing team is essential working on customer price bands, parameters, and fences before implementation.
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Conclusion
GBB is ideal to attract customers at different levels of service. People are willing to pay more money for an offer but only if the offer is of value to them. It doesn’t really matter if you say something is premium and your customers don’t the same way.
Pricing your products using a one-size-fits-all price strategy often leads to over or undercharging situations. In effect, it reveals how much a business knows or doesn’t know about its customer base.
People do love bundles and price options, but not if they are presented to them in a confusing way. In effect, when your price architecture is not set up with the correct floors, fences and attributes, customers will find it difficult to understand your pricing and just not to buy anything.
A pricing team can help you analyse price and customer data to improve your segmentation and price architecture design process. From here, a pricing team will be in the position to give you evidence-based input in the best price bundles. A pricing team in place will give you more confidence that a good, better, best approach is right for your business and customers.
The Value Propositions of Pricing Tiers
Let’s go into some detail on pricing tiers and value propositions of attending a cinema, renting DVDs versus watching a movie on Netflix, downloading on iTunes or God forbid – getting it for free from a Torrents site! Of course, you could wait a while and see it on subscription TV like Foxtel or for the truly patient, check it out free to air on TV a couple of years later.
In the Mayweather Pacman blog – the PPV pricing tiers business model has been the mainstay of monetising championship boxing for the last 30 years. That world is changing as live streaming, YouTube, and of course, Torrents sites change the value proposition and price management of studios and distributors. There are many overlaps in watching a Hollywood blockbuster.
In this article, we will take a look at the key avenues to watch a movie as well as consider whether the current advertising really captures the value each method offers in pricing tiers.
At the end of this article, you will learn about pricing tiers and the value propositions of going to a cinema, renting DVDs versus watching a movie on Netflix or downloading on iTunes.
Pricing tiers: How you select your movie delivery method using market price approach
1. Going to Cinema
Attending a cinema in Australia costs around $17 and is generally accepted as the best way to see a film, the best sound, and the big screen shows the movie in the intended setting. There are other benefits from attending the cinema – a night out from the house, a cheap form of escapism, enjoyment of watching the trailers, a great “date” option, connotations with glamour, romance, family fun etc. You can enjoy the snack bar beforehand and generally, the atmosphere of the cinema lets you focus on the movie without distractions from the modern world such as mobile phones or worries.
The reason most movies seem to be aimed at brain dead teenagers is that in the US they represent the majority of the audience and they tend to consume more popcorn. Apparently, the profit margin is so significant that cinema chains prefer to show teen-focused movies so they can make the profit margin on the snack bar. It also helps explain why Hollywood movies are so dumb in recent years.
Of course, “dumber” movies are more likely to be franchised and easily advertised. There is also the opportunity to sell associated merchandise lines like toys and the like.
Parents of young kids tend not to visit the cinema as much as singles and older people (when the kids have left home). They tend to view the movie in other formats as below.
Main selling point: The best way to experience movie, night out concept and escapism. Cinemas do offer reduced-price tickets for matinees, midweek tickets and season multi tickets. However, the segmentation does not seem to be as big – i.e., no dynamic pricing, you pay the same no matter where you sit (unlike theatre and opera). In Australia, you also tend to pay roughly the same price no matter whether you visit a CBD multiplex or a suburban outlet.
Gold and Platinum class:
Gold class is a hit with many people. The pitch seems to be, “you can have bar service and more privacy”. The appeal is for a romantic night out and it is a clear luxury pricing strategy.
In some way, standard class is actually too good to make you upgrade to Gold class. Unlike the famous French railway example (3rd class with no seats and no roof, 2nd class with a roof and wooden benches but no luxury & 1st class with thick red carpets and silver service) – where the segmentation strategy makes you want to pay as much as you can afford.
Main selling point: Little bit of luxury, booze at your seat, more privacy for a cuddle.
2. DVD rental
A bit out of fashion. Main sales points are good quality, ability to browse the shop (lesser extent with the newer box machines), ability to get advice from staff and see things you would not otherwise have checked out.
There’s an intangible plus from actually having a tangible DVD in your hand – a bit like reading a real book rather than a book on a Kindle. The other big negatives were the fines if late and the quite high chance a scratch on the DVD would really ruin the viewing pleasure.
Main selling point: Probably the expert advice of people in the shop. However, the market has proven this “value” to be quite low. But people might miss this value and ask for it back in one way or another. We might see something like Movie Libraries or some sort of movie destination appear again in a couple of years. Also, we might see movie experience shop in shopping centres – after all, shopping centres are becoming more experience destinations than actually shopping locations. We go to the centre for coffee and to try on close, then we go home and buy it online.
For technophobes – there’s no need for a computer, broadband or a credit card. Does this make DVDs marketable to older, poorer and less technophile customers?
It’s interesting that the advertisement on rented Australian DVDs is the “Good on yer” one where various Aussie celebs thank viewers for not “stealing” intellectual property. Not sure though whether this really is a key value that DVD renters care about. Maybe.
3. Netflix or equivalent
Seems to be the concept of an affordable torrents concept – i.e., we know you want to download a huge number of movies without really making up your mind. Netflix lets you do it cheaply (i.e.cheaper than DVD), in some way replacing the need for subscription TV, and removing the perceived risk of illegal downloads i.e. legal implications and malware.
Time will tell whether the quality of the picture is positive or negative i.e. is it on average better or worse than iTunes.
Main selling point: It has a cool cache at the moment, removes risk, reduces the need for the cost of pay-TV. If you cannot make up your mind on what to watch etc, then Netflix is the best option. However, the pitch of Netflix and equivalent may be a bit short-lived i.e. will the studios and other vested interests really like it.
4. iTunes
Linked to AppleTV – iTunes and Google Play are a strong offering in the market. They seem to represent a halfway house between Netflix / streaming options and the classic DVD. It is really a more high-tech way to rent a DVD.
Negatives are the selection is sometimes a bit limited, like a Google search result you often see the same selection of movie. You also have no advice from a store assistant. You also do not get to / have to leave the house to rent one (a plus or minus depending on your individual circumstances). The quality is usually excellent – as long as you have the correct TV /monitor. The transaction is usually pretty easy and reliable.
Main selling point: Reliability, high-quality picture, just like a DVD without risk of fine, scratches or hassle of leaving it back. Plus, the kids will not stand on it /drop goo on it / lose it down the back of the sofa.
5. Illegal streaming
The risk may involve malware and personal data getting stolen and the quality of image and sound may be low. It is a bit like buying a coffee – where you can pay $3 for a nice cup even though you could get one at home (Blend 47) for much less.
Streaming lets you see movies not released yet, or still in cinemas. The cost is zero. However, there is a “Value at Risk” concept (such as a fine for the illegal activity or your computer will get infected). Kim Dotcom seemed like such a trustworthy upstanding chap after all.
But people may get an intangible benefit from paying nothing. It lets them feel they are beating the system and would feel foolish paying when they know they can get it for free.
Main selling point: Free, early access to movies, infinite selection, instantly available.
6. Good ol’ TV
Sometimes, it’s good to watch movies on TV. Especially for the times when you do not want to watch a movie and cannot stand the news, property porn or Spicks and Specks.
Most people have very little time to watch movies. Oftentimes, they are doing one thing, reading, cleaning, ironing etc whilst the TV is on in the background.
TV movies are a very passive way to watch a movie. It is clearly a very poor way to watch a movie – commercial breaks, editing for the time slot, old movies, generally nothing challenging or non-mainstream, etc. However, not having to choose what you want to veg out to can sometimes be a positive.
Main selling point: You are lazy and cannot think of anything else to do. You really should read a book or something.
Implications
Streaming lets people watch movies not released yet, or still in cinemas. The cost is zero. However, there’s a “Value at Risk” concept including a fine for illegal activity or getting a virus on your computer. But people may get an intangible benefit from paying nothing. It lets them feel they’re beating the system and feel foolish paying knowing that they can get it for free.
iTunes and Google Play are strong offering in the market. It is really a more high-tech way to rent a DVD. The downside is that the selection is limited like a Google search result, you’ll see the same selection of movie. In addition, you also have no advice from a store assistant.
Cinemas are the best way to experience movie, night out concept and escapism. And they do offer reduced-price tickets for matinees, midweek tickets and season multi tickets. But the segmentation does not seem to be as big – like, there’s no dynamic pricing. You pay the same no matter where you sit (unlike theatre and opera).
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Conclusion
DVD rentals are a bit out of fashion. Main sales points are good quality, ability to browse the shop (lesser extent with the newer box machines), ability to get advice from staff. Also, see things you would not otherwise have checked out.
As discussed, TV movies are a very passive way to watch a movie. It’s clearly a very poor way to watch a movie, considering the commercial breaks, generally nothing challenging or non-mainstream, etc. But sometimes, it’s good to watch movies on TV. Especially for the times when you do not want to watch the news, property porn or Spicks and Specks.
If you cannot make up your mind on what to watch, then Netflix is the best option. It has a cool cache at the moment, removes risk and reduces the need for the cost of pay-TV.
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