In this second post probing the importance of pricing in purchasing behaviour, we examine the role price structure plays in establishing a market advantage. 

By Sean Ashcroft
In his report called How To Stop Customers From Fixating on Price, co-author Marco Bertini explains  how to use pricing to reduce price sensitivity.

Bertini, assistant professor of marketing at London Business School, says that pricing should always draw attention to the value a product or service delivers, “and ideally to the one dimension that most meaningfully differentiates it from those of competitors”.

Achieving this, he says, will almost certainly require a price structure revision, and gives a real world example to illustrate the point: “Goodyear’s problem for a long time was customers were unwilling to pay a premium for the innovations it introduced to extend tread life. Without a clear reference price for tyres, buyers gravitated to the lowest price.

Pricing structure in marketing 1. Goodyear charge by the mile
Bertini explains how Goodyear solved this problem by pricing its various models on the basis of how many miles they could be expected to last, rather than their engineering complexity. “This highlighted the advantage of those innovations for customers and taught them a new way to compare offerings that was perfectly aligned with the company’s value proposition,” he says.

Revisiting pricing structure is something far too few companies tackle, writes Bertini. “When managers worry about pricing, they typically focus on determining the optimal price point for a given product.”

Managers, he says, readily drawing upon market testing or research techniques -- ranging from simple surveys to full-scale conjoint analyses -- to discover how much demand would be generated at different prices.

They will also factor in variables, such as advertising or merchandising budgets -- or the lack of them -- as well as analyzing different customer segments.

“But what they fail to do,” says Bertini, “is examine the larger framework in which such questions reside”.

Pricing structure in marketing 2. Case studies
He cites case studies of businesses who have examined this larger framework:

- Industrial explosives firm, Orica, which escaped commoditization with pricing that charged customers according to the fragmentation of the rocks extracted rather than the amount of explosives spent.

-- General Electric, which changed its airline engine pricing to deliver ‘power by the hour’. 

-- Pultry health firm Embrex, which offered poultry breeders inoculations ‘by the egg’, aligning pricing with the value breeders seek from healthier animals.

“All these companies realize that pricing based on units sold does little to set them apart from the competition,” concludes Bertini. “In fact, it promotes price comparison by establishing a simple common denominator that customers seize on.

“Telling customers they’ll be charged according to the value delivered encourages them to reassess their preferences in line with that value, and sends a powerful message that the seller stands behind its offering.”

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