One of the key messages I’m trying to inform General Managers about is that when it comes to consumers, we have to be expert psychologists. Nothing is ever as simple as it seems. And when it comes to consumers price is as much a perception as in any other area of consumer engagement.
And that’s good news. There are no universal standards that dictate whether a price is high or low — it all depends on the consumers perception of that price and how consumers learn about how pricing works.
Your job doesn’t end when a customer purchases from you. Whether you want repeat purchases or a continuation of your subscription service, healthy businesses generate multiple streams of revenue from existing customers.
This section will teach you a few pricing strategies that play a role in your long-term revenue. You’ll learn (1) how to make price increases more undetectable and (2) which pricing strategies can damage your reputation.
Avoid Harmful Pricing Strategies
Certain pricing strategies can leave a bad taste. This section will teach you which ones to avoid.
TACTIC 30: Don’t Use Bait-and-Switch Pricing
When I was searching for apartments, I noticed an incredibly good deal on Craigslist. I visited the complex the following day, and I was blown away by the luxuriousness.
Unfortunately, my starry-eyed naiveté didn’t last long. The deal was too good to be true. The price from the listing was a blatant lie — the cheapest apartment in the entire complex was an additional $250/month. Yep, I was a victim of bait-and-switch pricing.
Bait-and-Switch Pricing – Marketers promote an extremely low priced product to pull people into a store. When people arrive at the store, the product is unavailable (e.g., sold out, nonexistent). Marketers then try to upsell those customers to a more expensive product.
Bait-and-switch pricing is not only unethical, it can also be illegal in some cases.
Even if it were legal, that deception triggers a negative response, which can often lead to lower sales (Ellison & Ellison, 2009).
TACTIC 31: Be Cautious With Dynamic Pricing
Over the past decade, more businesses have been dynamically adjusting their prices for different customers. Based on a variety of factors, their algorithm spews out a price that should lead to the highest amount of revenue.
That trend is known as dynamic pricing. Even though it seems appealing, you should usually avoid it. While it can boost sales in the short-term, Dai (2010)found that it can lower sales in the long-term:
“Although dynamic pricing is attractive because it has the potential to maximize a seller’s profit, the results of this study indicate that charging different prices for the same product can trigger negative price fairness judgments which lead to negative behavioral intentions.” (pg. 86)
Is dynamic pricing always bad? Not necessarily. Dynamic pricing can be effective when adjustments are based on supply and demand (e.g., stadiums trying to fill remaining seats).
Dynamic pricing becomes harmful when adjustments are based on a customer’s willingness to pay. You should avoid charging different prices based on past behavior, demographics, or any other factor besides natural supply and demand.
Related Resources:
- Five Dynamic Pricing Issues Retailers Should Consider — Patricio Robles