A recent post discussed one of the foundations for pricing, which is how to establish the true economic value of your product. Part of the process was getting an accurate “reference” price, or what the next best competitive alternative was.
Today1, the NY Times had an interesting article on how out of whack the e-commerce pricing was. The premise was that while originally, the draw to e-commerce (Amazon et. al.) was to get a lower price, that has evolved to be a more convenience as a value proposition. Yet a powerful message conveyed in the shopping process was the “discount” over list price. And marketers are happy to take advantage of this psychological phenomenon.
The article went on to show some particularly egregious examples of this exaggerated discounting, in particular a sifting cat litter box, original list price of $2,159.00 is marked down to a mere $27.57.
(Image source NY Times – 4/14/2016)
What a deal, save 99%, and get a litter box. Alas, this has the faint whiff of fertilizer.
What is happening here? Clearly, the manufacturer never set that list price of over $2K for a molded plastic litter box. Yet this is but one of many examples that can be found with even a cursory survey of online shopping sites. Amazon is in no way unique in this egregious practice.
Yet, what is surprising is that often when you do due diligence from multiple vendors, you will find the offer price fairly consistent, the actual price being charged. The discrepancy being in the starting point, with the vendors trying to entice people to purchase due to the deep discount.
This is all part of the psychology of pricing, and is particularly effective in the consumer (B2C) world. The perception that they are getting a good deal is often the trigger for a purchase. This works mostly with lower cost items, and things that fall in the discretionary price point (a counter example would be an automobile. Nobody would be tricked into buying a $50K automobile marked down from a fictitious $200K.)
Pricing is a core responsibility of product management, and finding the right price is part analysis, part guessing, and part jiggery-pokery. However, there is no knob more critical in the product manager’s tool box to affect profitability of your offering.
Psychology, both of the buyers, and the competitors, is an important factor to help you frame your decisions.
- Psychology has always been, and remains an important factor in pricing
- The internet, with its myriad methods of comparing and researching still is subject to some classic rules
- While B2B is not as sensitive, the insertion of buyers and selection committees often has similar distortions on your pricing strategy
1 – April 14, 2016 was when the article appeared in the New York Times