Question: We are glad that you reprinted your past column series on pricing. We talked about this series among ourselves in the office. We found that practically all of those columns were about the pricing concerns of FMCGs (fast-moving consumer goods) or else about consumer services.
We sell consumer household appliances. During tough times such as what we’re experiencing now, we’re one of the first, if not the very first item that consumers eliminate from their budget. We’re not saying that your price diagnoses and prescriptions are not useful to us. They are but they don’t seem to be enough.
We heard that in the senior MRx-er’s pricing strategy seminars, he has somehow mentioned that taking account of the consumer pricing psychology can help even those of us in the consumer household durables with our pricing concerns. None of us has attended any of those seminars. But is it possible for you to summarize for us this pricing consideration and how it can help us?
Answer: Whenever we discuss the subject of consumer pricing psychology in our pricing seminars, most participants are surprised to find that they’ve been practicing most of the pricing techniques we cover. We suspect this will also be the case with you. The learning value that we are able to add is therefore not new knowledge but about how, when and which pre-existing knowledge item to use first ahead of others.
There are many useful pricing strategies and tactics that you can learn from consumer pricing psychology. Considering the nature of your business and the products you sell, we have chosen two such tactical considerations that should be most pertinent to your pricing concerns. These two are about how consumers perceive pricing and how they evaluate your pricing’s terms of payment.
We start with consumer pricing perception. Household appliances are “big ticket” items. Each appliance has a large price tag attached to it. So how can you get the shopping consumer see that “large” price figure as “smaller” than what the price tag says? Here’s the pricing psychology concept that Robert Cialdini in his 1993 book, “Influence: The Psychology of Persuasion,” recommends you consider:
“Consumers perceive the price of an ‘expensive’ product to be reasonable when they learn or are made to learn that the total price is made up of a bundle of benefits each of which is of value to them. Conversely, they perceive the very same total price as rather unreasonable when they are told that the total price consists of product features that each costs the manufacturer so much to put into the product and is therefore passing them on to the buyer of the product.”
Rational businessmen reasonably argue with us that product features and product benefits are the same. Each feature of the refrigerator that your appliance store is selling has one or two, even three, benefits to its buyer and to the other ref users in the buyer’s household. When you argue this way, you’re talking on a non-perception domain. Unfortunately, your consumers do not see and think on that domain. What matters to them is the framing of your pricing, its presentation if you will.
Talking to consumers about price in terms of the product’s technical and physical features is framing your pricing from your end as the marketer. When your sales script takes this price framing formulation, what your consumers are hearing from you is something like this: “Look, here’s what you owe us in this appliance store if we are to transfer the ownership of this ref to you. We incurred expenses in getting this kind of quality housing, motor, frost-free freezer, partitioning materials, paint and other ref features. Our part for storing and selling this ref is included in the price tag you see there.”
Those who leave your store after this price blurb find your pricing justification irrelevant to them. They are silently asking: “Why should I pay for what you wanted to put into the ref? Why should you assume that those are what I want placed in there?”
Sometimes you are lucky to have buyers who verbalize these thoughts and ask: “What do I get out of each of those features?” We say “you’re lucky” because that’s the way they want your sales script relayed to them. Consumers want you to talk to them from their end as buyers and not from your end as marketer and seller. Now, what’s it like to talk to consumers from their end?
Consumers shop and buy product benefits and not product features. If you ever have to talk to buyers about product features, talk only about benefit-related features. But always start with benefits, the “what’s-in-it-for-me” ideas about your product. Consumers will be concerned about product features only insofar as features prove to them that your product can deliver the benefits you’re claiming the consumer will experience from using the product.
As Robert Cialdini has predicted, the usual and immediate result of this kind of price framing is to persuade your ref customer that your pricing is reasonable. If your sales reps know the art of closing a sale, what follows or should follow is the consumer decision to buy.
Another concept in consumer psychology that may be of direct help to you is about the psychology of consumer evaluation not of pricing itself but about the payment terms for your product price. In explaining the concept involved here, keep in mind that for household appliances, we’re talking about a relative large price or bill. It is for large bills that the payment terms for the price really matters.
Here are two cases for this consumer psychology concept.
The first is about offering consumers to choose paying for what she bought either by salary deduction or by outright direct payment. Research has shown that a consumer usually favors paying via salary deduction. Consumer psychologists tell us that the buyer evaluates the choice under this psychology:
“Paying by salary deduction is postponing payment. It’s a future reduction of my monthly gain, that is, my salary. But a direct payment is a loss. The money in my pocket is gone.”
The predictable outcome is more sales in cases of salary deduction pricing terms than in cases of direct payment pricing terms.
A similar psychology prevails in the case of credit card purchases. The typical choice presented to the buying consumer is between the charging of a premium for credit card purchase as against the offering to the buyer of a discount for cash purchase. Consumer psychologists were surprise to find in their research that consumers almost always favor paying via credit card even if the premium charged by the credit card company is higher than the offered discount for a cash purchase.
How come consumers would actually favor the higher cost (from the premium charge by the credit card purchase) over the gain (from the cash purchase discount)? The buyer price psychology that explains this phenomenon hears the consumer saying something like the following:
“For my credit card purchases, I’m okay with the fee. That’s because I don’t have to pay the fee now. It’ll be collected 30 days from now. But in the mean time, I’m already enjoying what I bought. But for a cash purchase, even if there’s a discount offered, once I pay, my cash is gone from my hands.”
The outcome is just as predictable. The premium fee on credit card purchase does not discourage consumer purchases. Instead there’s more buying via credit card use than via cash purchase discount.
In both salary deduction and credit card use, the buying customer has the option to pay by installment. If she so elects to pay by installment, the cash out each time she pays is “small” or is at least perceived to be small. Consumers often look at total price by each of the cash-out payments required. Small cash-out equals small price. This is true even when the total accumulated cash-out payments sum up to more than the one-time payment.
In your case then, even if your prices are going up, you’ll still be able to raise sales by taking advantage of allowing your customers to pay via salary deduction and/or by credit card. For the many other concepts of consumer pricing psychology, read up on the consumer psychology literature especially the many books available on the subject.
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Keep your questions coming. Send them to us at MarketingRx@pldtDSL.net. Visit www.marketingrx.org for past columns or to order a copy of “The Best of MarketingRx.”
