Category Archives: price framing

Why marketers play with price

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When advertising agencies brainstorm client solutions, pricing rarely comes up, because “price” is perceived as both dangerous and boring. Dangerous because get it wrong, and sales will plummet. Boring because, hey, who cares about pennies when we could be discussing brand positioning?

So when a friend recently asked us whether an airline-related client should adjust price, we dug into the research — and realized, yes, this lever is critical. Here are two frameworks for price strategy: One based on logic, the second tied to emotion.

Economic logic: The price elasticity of demand

The “price elasticity of demand” is a classic model that rekindles visions of boring Econ 101 classes, but it is fascinating when put in human terms. Think of this fancy phrase as how elastic, or stretchable, demand will be if you change the price. If you lower your price, will demand “stretch” up much higher, with many more people clamoring for your service? Or is demand inelastic or “unstretchable,” with shifts in price barely moving sales?

This elasticity concept is important for marketing, because it tells you whether you can justify a high price. Consider our friend’s question:

“I’m working for a travel-related service, and they charge about $80 for a unique [service offering X]. The client wants to know, should they lower the price by a few dollars to spur more sales?”

At first, the puzzle seems unanswerable. But the theory of price elasticity of demand has an answer: Demand will respond most to price changes if the product and service has (a) readily available substitutes or (b) if it is a big chunk of the buyer’s income. Demand fluctuates least if your offering is (a) unique and (b) a small part of the buyer’s income.

Consider milk and houses. Milk is an example of a product with many brand substitutes — if one brand charges $2.10 a gallon and the other brand in the store cooler costs only $1.90, consumers will readily shift from Acme Farm Milk to purchase the cheaper Beta Farm Milk. Same product perceptions; lots of substitutes; thus a price shift makes a change in demand for a given brand. 

Houses are an example of something that’s a big chunk of your income. If you are moving to a new city and find one home priced at $500,000 and another similar house for $490,000, you’ll go for the lower price — even though the difference is only 2%. Same product perceptions; high share of your income; thus a price change also makes a quick shift in demand.

But let’s think now of this unique travel service. It’s only $80 and the service is unique. Should the marketer drop the price to say, $75? Nope. A small change in price would do zilch to stimulate demand. There are no substitutes, and it’s a small part of a frequent traveler’s annual budget. To back up our recommendation, we researched how airlines charge for other up-selling services and found that, indeed, travelers pay $38.1 billion annually in surcharge fees to U.S. carriers for things as odd as more legroom, booking by phone, changing flights, or bringing extra bags. Apparently, in the crush to get on a plane, people will pay something for almost anything that makes the trip easier.

Behavioral emotion: Playing with price framing

That’s the logical way to look at price changes. But, as our election debates show this year, consumers are often illogical and emotional, too. In 1980, Richard Thaler wrote the landmark paper on behavioral economics outlining how consumers often use a “mental accounting model” to decide if prices are good or bad. Thaler’s central argument was that shifting a price point is not the only way to stimulate demand; instead “framing” the perception of price could be more effective.

Consider, which offer is more appealing?

1. A dress that costs $60.

2. A dress that costs $70 marked down from $140 (50% off sale).

Thaler noted, in several studies, that choices such as No. 2 above are often preferred by consumers, when in reality, the second dress is just more expensive. His explanation: People are inherently bad at judging value, so use “reference points” see if they are getting a benefit or loss. Because in option 2, the dress is positioned as being far below the “real” price of $140, it feels like a better deal. This illogical-but-compelling mental accounting is why most retail stores offer goods “on sale,” or why candy at movie theaters that costs $5.00 comes in oddly shaped boxes. We feel great when we get something that looks larger than usual, or is bundled with other things, or is “marked down” in price, when the reality is each of these experiences is a bit of manipulation from a marketer creating an artificial reference point.

So there you have it: With logic, moving a price point makes sense if there are few substitutes or the total cost is a low overall risk to the buyer. With emotion, you can keep prices as is, and even increase them, by positioning the cost against a “reference point” that makes the buyer feel better about her or his mental accounting.

We all want to win. Prices are numbers that, if used carefully, can make every buyer feel a winner. Sorry if this sounds manipulative, but we have to run — there’s a great sale at the hardware store we want to hit on the way home.

 

 

The top 10 ideas anyone ever had for marketing (or why Apple doesn’t use a Twitter account)

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If you plan campaigns, you’re likely awash in data, reports, presentations, requests, vendors, staff issues, email, deadlines and ideas. It’s all so damned complex. If only you had the right framework to coherently forge a path through it all.

Well, you do. Here are 10 of the greatest business frameworks we’ve discovered for planning business growth. We lean on one at least every day. Consider this a refresher on valuable logic tools to help you clarify your marketing strategy.

1. The Pareto Principle — The basis for understanding that in business, like life, not all things are created equal. Vilfredo Pareto was a late-1800s economist who noticed that about 20% of the population of Italy owned about 80% of the land. This “80-20 rule” occurs in most groups of resources, where a small fraction contribute the greatest value. About 20% of people at a party have 80% of the fun. About 20% of your customers give you 80% of your profits. Once you accept the tragically undemocratic fact that “not all customers or products or employees” are created equal, you can begin focusing on the smaller group that drives real value to your business.

2. Five Forces Model — Pan out to all of your business, and you face much more than just competitors. Michael Porter, business guru of Harvard Business School, has posited there are five forces in the business landscape: industry competitors whom you fight with daily; upstream suppliers; downstream buyers or customers; substitutes; and new entrants. You have to watch the entire landscape of these “five forces” to compete. Kodak, for instance, was blindsided by the “new entrant” of digital cameras that, despite Kodak inventing the technology itself in 1975, 30 years later made its old film business fade away.

3. Competitive Advantage — This was Porter’s second big idea (he wrote a book with this title) and while the term “competitive advantage” is tossed around today lightly as business jargon, what it really means is finding a profitable, sustainable position against the five forces above. Porter suggested there are four competitive advantage positions: on the customer side, you can go after (a) narrow or (b) broad targets, and on the product/service side, you can either focus on (c) lowest cost or (d) differentiation. Pick (a) or (b) and add it to (c) or (d), and you have a competitive plan. But you have to pick one spot; if you try to do everything, you end up “stuck in the middle,” the competitive version of warm porridge. Apple Inc. has a competitive advantage today in that it goes after a broad customer target with a clearly differentiated line of products. Walmart has a different focus, offering the lowest possible prices to a broad audience. Don’t kid yourself that speaking the words “competitive advantage” does the trick; you must focus your entire business on staking out a real competitive position.

4. Discipline of Market Leaders — This was an evolution of Porter’s competitive advantage concept by Michael Treacy and Fred Wiersema. These authors suggested there are actually three areas of competitive focus: Product innovation (think Apple); operations excellence (think Walmart or USPS, offering low costs due to efficient supply chains); and total customer solution (think ad agencies, who will do almost anything for clients). By “discipline,” Treacy and Wiersema meant your business needs the guts to stick to one of these strategies. You can’t build the most incredible product and drive down all costs and focus on incredible customer service at the same time. This explains why Apple, a product wizard, doesn’t have a Twitter account — it doesn’t need to worry much about fawning customer service.

5. Positioning — Moving to advertising, “Positioning” was the greatest brand book ever written. It grew out of a series of articles by Jack Trout in the late 1960s that noted consumers, awash in advertising, can only remember a few brands in any product category in their head. How many watch brands do you know? Hm, Rolex, Victorinox, Timex… unless you’re really into watches, you might not be able to name more than six brands. Consumers stack these few brands up on mental ladders, and a marketer who wants to capture a consumer’s attention must grab a “position” on these rungs. A classic example was Avis who in the 1960s chased car-rental leader Hertz by stating in its ads “Avis is only No. 2. We try harder.” The Coke-Pepsi marketing wars of the 1980s were a classic positioning battle. Political candidates constantly strive to “de-position” opponents. Positioning involves numerous tactics for grabbing mindshare or pushing competitors aside; if you haven’t read the slim book, go get it.

6. 1to1 Marketing — In 1993, former ad executive Don Peppers wrote a book with Martha Rogers that was the opposing viewpoint to “positioning.” Peppers suggested that customers, not products, should be managed, and thus the goal for marketers was to build a one-to-one relationship with each customer. Instead of market share, Peppers and Rogers wrote, businesses should go for “customer share.” They outlined an entire philosophy on how to do this, noting that different customers have different values to a business (Pareto’s old idea), and different customers need different things. The payoff is when a business learned enough about a customer to customize a product or service in response, thus locking in loyalty. This idea took off thanks to the new computer databases of the 1990s that held reams of information on customers, allowing marketers for the first time to interact with customers, record their history, and provide mass-customized service response. (Amazon.com with its radical personalization emerged in this period.) The 1to1 theory infused the Customer Relationship Management software craze that led us to Salesforce.com databases today. Peppers and Rogers missed the 2000s’ advent of social networks that changed the business-customer dynamic from one-to-one to many-to-one, but their ideas were ahead of their time.

7. Price Framing — Go to the movies this weekend and buy candy, look closely at the strange box, and you’ll see price framing in action. In 1980 Richard Thaler invented behavioral economics by publishing the paper “Mental Accounting Matters,” suggesting consumers are really bad at judging value, and so make mental accounting decisions in their heads that can be guided with “price framing.” This explains everything from product “sales” to Omaha Steaks packaged with mashed potatoes. If you see a dress on sale for $50 marked down from $250, you might jump to buy it … not considering the initial “$250” price point is an illusion. The clever retailer has simply given you a reference price of $250 to “reframe” your perception of the $50 real price. Cost savings, product bundling, and price obscurity are all tactics to reframe pricing to make it more appealing. That box of candy in the theater comes in an unusual shape for good reason: by “reframing” the packaging to obscure the price for the candy inside, the movie theater has made it hard for you to determine if it is a good deal.

8. Gartner Hype Cycle — The analyst group Gartner has built a practice around a simple idea: new technologies are met with increasing expectations, followed by a trough of disillusionment, until eventually we all settle down and realize the truth is somewhere in the lukewarm middle. If you had an iPhone two weeks after launch, kids would line up around the block to see it; now, it’s just another ho-hum phone in your pocket. Gartner taught us not to get too excited by new technology or media, but not to scoff too hard, either. Think of this next time someone tells you to buy a 3-D printer.

9. Lean Startup — A relatively simple but revolutionary idea from consultant Eric Ries, who says toss out the business plan and instead launch your business with rapid prototypes, fast feedback from customers in the market, “minimally viable products,” and an ability to “pivot” to new ideas that will really take hold. Ries posits that it is pure arrogance to assume your initial product idea is good, and instead you should include customers at every stage of product development to ensure success. Give them rough drafts; listen; change based on what they say. This clever idea seems logical until you realize how few businesses do it.

10. Whatever You Think — Let us know, we’re open to new frameworks, too.

So there you have it. Not all customers are created equal. There are more forces than just direct competitors at work. Your business needs to stake a clear competitive structural position, and your marketing must also capture a brand position in customers’ minds. You can play with pricing to influence people, and you should include customer or market feedback at each stage, especially early stages, of growth. And through it all, be careful about believing the hype.

It’s not an MBA, but it’s a start.

Stop & Shop’s mesmerizing 1% gasoline giveaway

Stop & Shop, the northeastern U.S. grocery chain, has created a fascinating loyalty program tied to gasoline. If you use a loyalty card to buy groceries, you can later swipe that card at participating gas stations for supposedly big savings. Here’s the pitch:

“Save 10 cents per gallon for every 100 Gas Rewards points.
Earn 1 point for every $1 you spend with your Stop & Shop card.”

I love this (and, confession, I use this), because nothing feels better than pulling up at a gas station, flashing my Stop & Shop card, and seeing the price per gallon fall. But one day, I did the math … and realized all of this effort was saving me only 1%. In aggregate, I calculate Stop & Shop only gives away 0.25% of all its grocery revenue to fund this program.

What gives? This tactic is called “price obscurity,” a version of price framing in which the true value of a bundled product and its price is obscured by making it complex. This Stop & Shop program feels like a huge savings, when really it’s tiny.

Here’s the math. Look closely at the promotion, and you’ll notice the discount is broken into two lines:

Save 10 cents per gallon for 100 points …
… earn 1 point for every $1 you spend (on groceries).

Hm. Humans aren’t good at mentally calculating currency exchanges, and a double exchange is even trickier. It’s no mistake that the marketers broke this promotion into two lines that are hard to connect. So let’s move the equation into one line. We’ll also need to revise the second line to $100 in spending, so it will match up with the first. Finally, we’ll reverse the order, starting with your grocery purchase so it makes more sense:

Spend $100 on groceries = 100 points = 10 cents off per gallon. 

That’s better. But wait. What is $1 in grocery spending worth then? If we factor it all down by 1/100…

Spend $1 on groceries = 1 point = 0.1 cent off per gallon.

Hm. That’s not quite as sexy. For every buck spent, I save 1/1000 of a buck on gasoline? Stop & Shop is giving me 0.1 cents off per gallon? Well, to be fair, the average car fill up might be 10 gallons, so that means my 0.1 cent off per gallon would save me 1 full cent after 10 gallons. That is, our final math:

Spend $1 on groceries = 1 point = 0.1 cent off per gallon * 10 gallons average = 1 cent saved!

A dollar spent is a penny saved. That’s OK, about in line with every other rewards program out there (see: credit card cash back offers). But a penny is not a huge savings, and it sure isn’t as sexy as the promotions offering 10 cents, 20 cents, or 30 cents off per gallon … or more!

This brilliant promotion is giving Stop & Shop major buzz all for 1% savings. The grocery store likely benefits as well from slippage, the half of customers who won’t care about participating and then the portion of the remainder who likely stop by a participating Shell or Stop & Shop gas station only every other fill-up … meaning its true cost for this promotion could be 0.25% or less of all grocery revenue. Points also expire in 30 days. You get the idea.

So, 1% total potential return on grocery spending, for the fraction of customers who remember. That’s chump change … but I confess, it still feels great. I’ve swung by and “saved” 30 cents off per gallon in a recent fill-up. Tied, obviously, to $300 in recent grocery spending for my 1/1000 return per gallon price savings, which at 10 gallons saved me 3 bucks, or 1% back from my groceries … er. Logic be damned. Stop & Shop, you made me feel good with your clever math, and odds are I’ll keep driving back.

The Daily’s clever price decoy


Quick, which of the “subscribe now” offers above is a good deal?

Neither. It’s all a game of price decoys from The Daily, Rupert Murdoch’s flashy news magazine designed specifically for the iPad. Decoys are a form of price framing, in which consumers are given a somewhat bad-feeling deal that is meant to steer them to the second-best thing.

Decoys work because most of us want to feel smart, and yet all of us are inherently bad at judging value. Is a leather jacket worth $400? You don’t know … until someone tells you it’s marked down from $650, then it feels great! And if you haggle the price down more to $350, you walk out of the store a self-proclaimed hero. But you just shelled out $350 for a piece of stitched animal skin … perhaps truly worth only $70. When consumers are offered a “better deal than X,” or “20% off Y,” they can more easily satisfy the childish Id’s need to negotiate at every possible turn whether or not that process achieves true value.

Let’s watch how The Daily does it. If you download The Daily’s iPad app, you’ll get to read the magazine for about a week, and then a window pops up warning you, oops, you’re going to have to subscribe in seven days. Two green boxes give two choices:

Option 1: Only 99 cents per week to subscribe! That sounds low, so people bad at math might leap at that. (Bonus revenue for The Daily, cleverly raising rates on the portion of their audience self-selected for low IQs.) Like an ugly house a Realtor shows you before taking you to the house she really wants to sell you, this subscription offer is the price decoy.

Option 2: Only $39.99 a year! This is actually $12 less a year than Option 1, so people good at math will take this as the better offer. A-ha, you think, I’ve outsmarted The Daily, and I will go for Option 2, a better deal!

Of course, the pricing for either option is absolutely arbitrary. The Daily has already gotten you to download the app, and it has no incremental cost to distribute one more copy daily to your iPad, since you are paying for the Wi-Fi or 3G signal that delivers it. But by giving you a choice, The Daily has slowed you down enough to check out each offer, and to try to determine which is the better value. Since one price must be better than the other, you’ll feel good no matter which you pick. Right?

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Online consumers say: Make me an offer


A recent Ad Age/Ipsos Observer survey of 1,000 online consumers found the No. 1 thing they want is discounts on products or services. 65 percent of respondents asked for coupons, outranking better customer service, games and entertainment, or news. At first glance this seems depressing for marketers who try to decommoditize their service by focusing on brand aspects, aspirational values, or service quality offerings … so let’s explore.

1. Absent a relationship, price matters. Most consumers don’t have relationships with most brands; think about the brands you care deeply about, and you’ll likely stop at a handful. So any online marketing contact is likely to be superficial, akin to a first date, and of course to get customers to flirt with you, you may have to make an attractive offer. Price framing, in which you set a reference price and then discount sharply beneath it to convey value, is one way to help consumers new to your service judge whether you offer good value.

2. Immersed in clutter, offers matter. Online marketing touchpoints are wildly littered with banner ads, video, Google search results … creating a commoditized communications space. A typical U.S. consumer changes his or her web viewing window 17 times an hour, thus being exposed to thousands of marketing cries each day. No one can possibly digest this many messages, so consumers may expect an offer in exchange for their limited attention.

3. Online touchpoints are just the beginning of a customer relationship. Customers who evolve into loyal fans, every marketer’s dream, make repeat purchases and word of mouth referrals often far away from online communications. Life happens in the real world. Loyalists end up in a store, on the phone, perusing catalogs, perhaps with clicks for future purchases, yes, but those are often the “last click” after considered intent.

So brands have many opportunities to promote their deeper values as they grow share of customer. It just may not be online.

Via Ian Schafer.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Cavemen, Camel cigarettes and Christmas sales


This is a story about how holiday sales don’t really exist, but that’s OK, because you need the fiction to survive.

Communications designer and caffeine addict Hal Thomas found this classic Camel cigarette ad in a July 1952 edition of Life magazine. Ethics aside (for the record, our agency does not work with tobacco companies and has led anti-smoking campaigns), it reminds us of the basic strategy of framing value for your customers. If you have ever bought something on sale, marked “40% off” a higher price, you’ve been the recipient of framing. All those red tags with discounts in this holiday shopping season are simply attempts by marketers to follow Richard Thaler‘s advice: “frame” the price against another benchmark to convince consumers they’re getting a good deal.

Customers, as we’ve written before, are bad judges of value. We don’t know what a diamond should cost — but if the engagement ring is $3,000 marked down from $5,000, it feels fair. We’ll pay $3,000 perhaps if we see an illusory $2,000 above it in “savings,” even if that higher price point never really existed. This old Camel ad does the same thing to consumers of the 1950s, framing a cigarette choice as a safer alternative by juxtaposing it against images of doctors. Businesses fall for this all the time, too; take the marketing director who demands “30% in value-add” from any media buy; she’s likely getting the same amount of ad space within a given budget, but feels better because the vendors restructure the pricing of ads to give “some” away for free. (Hey, not that we negotiating don’t try.)

We shade truth because we need nuance

Why do people insist on this? It’s human nature. We all tweak communications in a way to make them more appealing to the recipient. If you call home late from work tonight, you will likely explain you’re on deadline or stuck in traffic (late due to outside forces, beyond your control, not really such a bad thing). The message arrives inside a context, and if we set the context appropriately, it sounds better. The dissembling tactic likely has an evolutionary benefit; no one survived in the wild by collecting all the data carefully and analyzing it — a wild lion would eat you before you ran the odds of where to run — so we had to make snap decisions based on what others told us about our environment. Comparing options to other choices also helped humans evolve; the caveman Ooga might not have been handsome by today’s standards, but if cavewoman Booga thought he was the hottest in all the tribe, she passed on the best genes.

Framing is everywhere, when you look for it. Are you buying stuff “on sale” for Christmas? (Suckers.) Does your business judge new potential vendors by their case studies? (If they succeeded there, they may help you here.) Do you get upset when your child gets a B at school? (If others get an A, then he is slipping by comparison.) Is your Twitter follower score above 2,000 yet? (If so, you must be really clever, because other clever people have lots of followers.)

Or — in the most obvious framing device of all — how is that fictitious number with zeros after it in your bank account doing lately; is the personal score we call “money” moving up or down?

So here’s a provocation for your marketing team’s next meeting: Explore all the ways you can compare your product attributes to something else to make it more appealing. Tactics include communicating discounts from other price points (think clothing sale), or bundling your product in an unusual configuration (think candy boxes at movie theaters or auto dealer option packages), or even framing it against other brands (Coke vs. Pepsi). If you focus on the product itself without putting it in context, customers may not get what you mean … or want what they’ll get.

(Thanks, Hal, for inspiring this holiday spirit.)