How or when can we raise prices in the economy price segment?

Q: We’re marketing majors and graduating this school year. We now regularly read your column because our marketing professor last year devoted our Monday class to discussing your Friday column of the previous week.

Your column last Friday (June 20, 2014) led to a debate among us during our meeting the day after it appeared.

The issue was about the economy price segment. One of us said that if you’re in an economy price, to raise revenue you have to lower price.  But you can’t go on lowering price.  There should come a time when you need to raise price. But if you increase price, quantity bought will go down and so will revenue.

There were all sorts of pros and cons arguments. In the end, everyone admitted no one had a good answer.  So we thought we’d write you and ask you our question: “How or when can we raise prices in the economy price segment without suffering a revenue fall?”

A: It’s been a long time since I heard from students. Thank you for your question. In answering, I’ll take a specific case so that we’ll come to an understanding of the issue in concrete terms.

I’ve learned from the ad agency of Alaxan that when he was going after his second title, and was asked how he was able to cope with pain, Manny Pacquiao was heard to have said something like the following: “You know, Alaxan ako lagi for body pains. Ang aray ko ay ang galing ko. Maski mag dobol ang price nya, dito pa rin ako at hinding-hindi sa iba. I will stick to Alaxan at wala ng iba. You know.”  (You know, I always take Alaxan for body pains. Where I hurt is where I’m good. So even if it doubles its price, I’ll stay and never will I take some other. I will stick to Alaxan and no other. You know.)

Let’s diagnose this case to tackle your question. Here is a painkiller product, Alaxan, that belongs to the economy price segment. It’s cheap and a top best-seller. It’s a billionaire brand. Then it raised its price. But it did this by coming out with a “premium” variant, Alaxan FR (or Fast Relief). The original and cheaper variant was Alaxan Regular.  This “disguised” price increase instead of reducing consumer purchase quantity raised consumer purchase and demand.

It’s easy to say that the secret was in the disguising. But that’s an explanation that’s hard to believe. It’s in effect saying that Alaxan consumers are so mindless that they can’t see what may be behind a disguise.

Let’s dig deeper by considering what the Alaxan consumer like Pacquiao is saying about an Alaxan price increase to as much as one hundred percent.  Even if this happens, Pacquiao will go on buying and taking Alaxan and won’t even consider switching to some other analgesic brand. Why?  According to Pacquiao, that’s because Alaxan has delivered and continues to deliver its brand promise, its consumer value proposition as a painkiller.

How big a market segment are such as loyal Alaxan consumers like Pacquiao? It must be big enough to persuade Unilab to develop another higher priced Alaxan, an Alaxan FR, specifically for this market segment’s need or value. So what can we learn from this case? At least these two lessons.

Firstly, it is possible that over time the consumers in your economy price segment will self-segment themselves into two market sub-segments: (1) an economy price segment of consumers who will continue to be immediately sensitive to a price increase, and (2) a premium price segment of consumers who will be price insensitive because they have learned to value the brand’s point of difference, its USP (unique selling proposition).

Secondly, if you wish for price insensitivity from your consumers or at least from a good number of them, continue to improve your brand in delivering its brand promise and consumer value proposition. There will always be a sub-segment of your consumers who will appreciate this quality improvement. They will reward you with loyalty. Take note that loyalty means price insensitivity. Price insensitivity in turn, means you can raise your price and they will at least stay with you, and eventually buy your brand more. So the higher the consumer value for your brand, the lower is that consumer’s price sensitivity to it.

There’s another significant marketing insight to take out of our Alaxan case diagnosis. Avoid taking a static concept of the economy price segment. There’s dynamism in that segment. In other words, if your brand happens to be the economic price segment, there’s no permanence in that status. Remember that as a consumer behavior, belonging to an economy price segment is a consumer’s self-segmenting behavior. It is not you as the marketer who placed that consumer there. She chose and decided to belong there. So that consumer behavior can be changed. You can persuade her that she can belong and she can level up to the premium price segment.

And how can this happen? You just saw it in the Alaxan case. To those who were more quality conscious than price conscious, Alaxan’s improved quality served as the driver or the motivator for that transfer to the premium price segment via the product variant Alaxan FR.

Keep your questions coming. Send them to me at [email protected].