Marketing Strategy and Leadership Posts by Gerardo A. Dada
What would happen if you doubled the price of your products? How about if you increased them five-fold? Would customers still buy them?
This post tells the story of a company that did just that – by accident. Continue reading “Gold, Music and the Irrationality of Price”
This post originally appeared as a guest contribution on Rags Srinivasan’s Iterative Path blog.
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Like most people in the US, during Black Friday week my inbox received an onslaught of promotional emails from every company I have done business with. All of them, without exception were promoting sales and discounts.
In a previous post on this topic we established “When a marketer’s creativity runs out he defaults back to price discounts. “ Creating a promotion or a sale is the default way to generate sales in the short term. Even though we know, deep down, that short term discounts erode value and train customers to expect discounts as JC Penney learned the hard way.
It was Black Friday and we decided to stop by the Factory Outlet in San Marcos – my daughter had an eye on a pair of UGG Boots that I was hoping to get at a good price. This is what I found: It was not that surprising to find a line outside a popular store, especially on Black Friday, but there were a couple facts that made this experience interesting for me as a student of marketing and consumer behavior:
Continue reading “Marketing, Pricing and Value: what I learned during Black Friday”
The concept of sales going up with a higher price is counter intuitive. It goes against the basic concept of price and demand taught in school. It defies the ‘law’ of demand. But it is real. Here are a few examples:
But the question we need to ask us is Why? Increasing price is fantastic for any business because the additional revenue goes straight to the bottom line. If you have been reading this blog, you know I am a fan of leading with value rather than discounts. Not that I every advocate abusive pricing, which is simply a form of bad profits.
Back to the question – Why is it that customers are willing to buy more products at a higher price? The answer is straightforward: price communicates value. Maybe we can be bolder: price establishes value in the mind of customers.
Imagine I told you I just found a wonderful whiskey that sells for $5 a bottle. It is not credible. Your first thought may be that I don’t even know what is good whiskey (and you’d be right, but that’s another story). Conversely, when you are at a restaurant and you see a bottle of wine priced at $150. you immediately assume it is of very high quality.
You can charge more money for a product and see higher sales when your price and the value you deliver to customers is not aligned. In other words, when you are leaving money on the table.
How do you know if you are in this situation? The first and most common clue is when the price for your products or services is determined using a cost plus model. You have a target profit margin that gets added to your total costs and that becomes the price. This happens often when finance is in charge of pricing. The alternative is value-based pricing.
Building a value-based pricing model requires understanding your customers, what aspects of your product or service they value, and how they quantify that value. Often times, the value customers put in a product or service is determined by pricing anchors. Pricing anchors are prices in the mind of the customer that provide a range of costs for a product, a service or to solve a problem.
Pricing anchors are the reference points customers use to judge the relative price of your products. In a future post, I will explore how you can set these anchors using techniques such as Goldilocks Pricing.
For now, imagine you need to replace the furnace in your home. You may think a furnace is going to cost you somewhere between $700. and $1200. (these are the numbers that came to my mind) Whether those figures reflect the range of prices in the market is irrelevant. When you call the repairmen you will judge the price based on the range established by these anchors.
As in the post about the pricing lesson of the Concorde, when your price and the expected price are misaligned, you can make a correction without an impact to demand. You can also do this with products that don’t have a strong price elasticity.
Understanding your customer segments, their anchors, their values and their price expectations is fundamental for value-based pricing.
Let’s look at another example: As told in the book Playing to Win , when P&G was re-launching the Olay brand they did test on three prices:
Launching at $18.99, Olay became a $2.4 billion dollar business for P&G with double digit growth and fantastic margins.
Pricing can make or break a business. I want to suggest another resolution for the new year (the first one is at the end of this post): understand the value model for your products and services, and use it to review your pricing strategy.
Flying back from San Francisco, I open the in-flight magazine and a half-page ad by Riedel catches my eye. Riedel a German company and one of the best known manufacturers of high quality wine glasses.
It is a premium brand: a pair of wine glasses especially designed for Cabernet and Merlot retails for about $50. Their customers are either wine enthusiasts or people with a lot of money who don’t mind spending $25 for a wine glass.
It is a nice looking ad, but I was surprised to see the ad’s main message is an offer of 20% discount for a purchase of $100 or more. It does not seem to fit the brand. At the same time, it was not that surprising to see a discount oriented message: it is the easy answer. ‘What should be the message? I know, let’s offer a 20% discount’
When a marketer’s creativity runs out he defaults back to price discounts.
Continue reading “Content Marketing as an Antidote to Discounting”
When Microsoft announced the Surface there was a lot of expectation of the market. Since I got mine, almost every time I send an email with the signature “Sent from my Surface RT” or every time I use it in a group setting, I get asked about it – they have the market’s attention, or at least curiosity.
The device is not perfect. No device is. Even the iPad 4 has its own share of limitations and bugs. I love mine and I think it is a much more complete and usable device than the iPad. But this post is not about my opinion aout the device, which you can read here on Quora. My observation is that every Surface user I have heard from has generally the same reaction: “Compared to the Surface, the iPad is a toy.” or “Since I got my Surface, my iPad is in a drawer”. The point is not to say the device is better – every customer has to make that decision on its own. The point is that Microsoft has a real fighting chance.
The device launched just in time for the Holiday season. It still did OK, in my opinion, selling a million units in its launch month against 14 million units sold by Apple. Yet the opporuntity was much larger. The problem (or a problem) is that a 32Gb iPad costs exactly the same, $499. This forces buyers to make a concious decision of buying the Surface versus the iPad. Here is the opportunity:
What would have happened it Microsoft had launched the Surface at a price of $275?
There would be no comparison against an iPad at $499. It would make the competitive decision much easier for customers who were not already sold on iPad. A large chunk of the market made of people who don’t want to spend $499 for a tablet wuld probably jump in. It would be a no-brainer compared to a 16Gb iPad mini at $329.
At $275. the Surface would certainly be a better buy than the Kindle HD, which sells for $299, and was selling at a rate of a million units per week at the peak of the holiday season.
The cost to manufacture a Surface RT with 32Gb of memory, according to iSupply, is $271. Let’s assume Microsoft sells 5 million Surfaces instead of one million, just for the sake of the conversation. If we take $224. of profit from each of these four million units, that would have decreased $896 million in profits for Microsoft.But in reality it only sold a million, so te actual los in profits would only be $224 million.
That would have taken its operating income from $7.77 billion for Q3 2012 to ‘only’ $7.55 billion. hardly a dent, and well above the $6.6B from the same quarter last year. More importantly, it would have added $1.1 billion in extra revenue to bring the quarter from $21.46B to $22.56B, avoiding a miss of expectations (see stock price for the impact of that).
My point: reducing the price of the Surface to $275. would have had virtually no impact to profits and would have had a large impact on revenue. Microsoft could have opted to make this a promotional, limited-time offer, creating a sense of urgency for consumers.
Even at the $275. price, Microsoft would have a profit opportunity in the lucrative accesories market. An installed base of millions of devices creates a large opporutnity to sell keyboards, cases, mice, applications and other accesories. they could have charged a nominal monthly fee for Office.
Besides the neglible impact to profits, the only other downside I can think of is the impact to OEM partners. This is an important point, but one on which Microsoft should have decided on when they decided to enter the hardware business. Would Acer and Dell be upset our would they have been thankful for the creation of a market, acceleration of the application base and pressure to be more competitive?. Yet, the upside for Microsoft could be very big:
When Microsoft priced the Surface at $499 I was very suprised, knowing Steve Ballmer is hyper competitive and a long-term thinker that has demonstrated a discipline to invest in markets for the long term. Microsoft has a lot of smart people, I am sure they spent considerable energy in their pricing startegy.
I believe the Surface will be successful anyway. The 128Gb Pro model sold out in hours. A million units in their first quarter is not bad, even compared to the iPad’s 3.3 million in its first quarter. But I can’t avoid thinking of what could have happened with a more agressive pricing strategy. We probably would be in an alternative future. your thoughts?
For the record, I admire Steve Jobs and Apple and have blogged about it a couple times.
Disclosure: I worked for Microsoft from 2004 to 2008, I am no longer affiliated with the company but still own some stock. As with all post in this blog, this post reflects my personal opinion. I own a Dell PC, a Surface, a Lumia 920 and a Zune. We have an iPhone, multiple iPods and an iPad at home. I have used Macs since the 1980s and sold a few of them when I was in the digital imaging business.
Most companies that want to charge more simply raise the price and hope the market doesn’t notice. It notices. A premium position isn’t a number on an invoice — it’s a set of decisions about who you serve, what you make them feel, and how consistently you prove it back to them. Get those decisions right, and price stops being the thing customers argue about.
Here’s the framework, expanded from a talk I gave to the American Marketing Association in Austin, with a bit more mileage on it since then.
Building a premium product starts with a choice most companies avoid: which customers you are willing to lose. A premium position comes from focusing on the segment that gets disproportionate value from what you do — and pricing to match that value, not your cost structure. Add-more-features is a commodity strategy wearing a premium costume; real premium positioning narrows the target before it raises the price.
When I repositioned Catchpoint’s internet monitoring product, the unlock wasn’t a longer feature list — it was picking the segment (digital experience-obsessed enterprises) that valued what we already did more than anyone else did, and building the message around them specifically. I go deeper on that repositioning in Creating a Category: How Catchpoint Repositioned Itself for Leadership, and on the broader mechanics of positioning in The Fundamentals of Effective Positioning.
Nobody buys a Peloton because of the specs on the flywheel. They buy the version of themselves the purchase represents, then use the specs to defend the decision to their spouse. This is uncomfortable for marketers trained to lead with proof points, but it’s the honest sequence: emotion opens the wallet, logic signs the check.
Practically, this means your top-of-funnel content should sell identity and outcome — who this makes you, what changes for you — and save the feature comparisons for the bottom of the funnel, where the rational justification actually gets used.
Starbucks isn’t selling coffee at four times the diner price — it’s selling twenty minutes of a particular kind of calm, a laptop-friendly seat, and a cup with your name spelled wrong on it. The product is often the least differentiated part of a premium offering; the experience wrapped around it is where the margin lives.
This is why premium brands obsess over the parts of the journey that have nothing to do with the core product: the unboxing, the onboarding call, the way a return is handled. Those moments are where “premium” gets proven or disproven.
A low price is a signal too, just not the one most companies intend. Pricing something aggressively low to “compete” often tells the market the product isn’t worth much, which then requires more selling effort, not less. Premium pricing, held with confidence, does some of the positioning work for you before a salesperson ever opens their mouth.
The mistake I see most often is discounting during the demo. It undoes in five minutes what months of premium messaging built — a version of the same discipline I write about in The Trust Equation: The Foundation for Value-Based Selling. For the most extreme version of this principle in action, see how a watchmaker with zero heritage out-priced Patek Philippe on day one in Richard Mille: How a Marketer Out-Positioned Two Centuries of Watchmaking.
“Packaging” is broader than the box — it’s every surface where the customer forms a judgment before they’ve used the thing. Website design, proposal formatting, the weight of the paper on a print piece, the polish of a login screen. Enterprise software is just as guilty of shabby packaging as consumer goods, and it costs just as much in perceived value. A brilliant product with a sloppy interface reads as a mediocre product.
Premium experiences are delivered by people, and people who feel disposable deliver disposable service. This is the point that gets cut first when budgets tighten, and it’s the one with the longest memory in the market — customers remember the employee who went out of their way far longer than they remember the ad that got them in the door. Southwest and Ritz-Carlton are different price points telling the same story: invest in the people, and the premium experience takes care of itself.
None of these six points work in isolation. Segment focus without emotional storytelling is just narrow targeting. Great experience without confident pricing leaves money on the table. Premium positioning is a system, and like most systems, it breaks quietly wherever one part is neglected rather than dramatically all at once.
That’s the part most “premium positioning” advice skips — and it’s the part worth getting right. (For more on refusing to compete on the market’s terms, see Think Like a Grandmaster: 7 Strategy Lessons from Garry Kasparov.)
This post is a refresh of a talk I originally gave to the American Marketing Association Austin chapter back in 2012. The core ideas held up better than I expected — the original slides are still worth a look: Taking a Premium Position in the Market.
Here are my slides:
Are you pricing your products right or are you leaving money on the table?
The Concorde was one of the most innovative machines ever built. The first and only supersonic commercial aircraft capable of flying at twice the speed of sound is also one of the most beautiful machines ever built. The Concorde story provides an interesting lesson on pricing.
During the first 6 years of operation, the fantastic Concorde lost money for British Airways. Losses were so bad, in 1982 BA’s boss Sir John King gave the responsibilities of the newly created Concorde division to Captain Brian Walpole and gave him two years to turn Concorde losses into profits. If he failed, BA would terminate operations, shutting down Concorde for good.
The Concorde team decided to do some market research. They asked businessmen how much they thought a Concorde ticket cost. The answer, “Most of them didn’t know. It was their secretaries or travel companies doing the bookings. When they were asked to guess, because they were senior, very important people, they all guessed that the fare was higher,” explained Captain Jock Lowe, Concorde resource & Planning Manager.
This insight led to a new pricing strategy. Captain Lowe described “So very simply, we said, we’ll charge them what they think they are paying. And so, we put the fares up”. There was a discrepancy between what the company was charging, and the value customers saw in the product. Have you asked your customers how valuable your product or service is for them?
Concorde ticket prices were doubled to over $7,000, one way, in today’s prices. As a result, Concorde was repositioned to provide a super-elite class for bankers, the rich, and the famous. Concorde became the place to be seen.
Despite the high price, sales were very strong. For one particular day, half the tickets for its first fare-paying London-New York flight were sold out in the first two hours of booking, (source).
Concorde started making money. Lots of it. Estimates point to £50 million in profit per year. “We made about £500 million in net, clear profit.”. This is the estimated cumulative profit over 20 years of operation. Despite having only about five aircraft actively operating. That’s significant, even for a company the size of BA.
Many companies build their pricing strategies based on cost + margin. Often, there is a predetermined margin based on an overall pricing strategy or on a corporate profitability target. The story of Concorde shows us the power of market-based pricing and the importance of understanding the true value of the products and services your company offers.
The lesson is not simply that British Airways could charge more for Concorde. It is that price is part of positioning. Customers already perceived Concorde as an extraordinary product—a faster, more exclusive and fundamentally different way to travel. The original price simply failed to reflect that perceived value. By raising the price, British Airways brought the economics of the product in line with the position it already occupied in the customer’s mind.
The result was a powerful virtuous cycle: higher perceived value supported a higher price; the higher price reinforced Concorde’s premium positioning; and that positioning helped produce sustained profitability.
Sometimes the biggest pricing mistake is not charging too much. It is charging less than your customers already believe your product is worth.
Price elasticity measures how much demand changes when price changes. For many products, you expect raising the price would push enough customers away so that total revenue suffers. Concorde was different. Its customers were relatively price insensitive, and the reason comes down to what they were actually buying.
They were not purchasing transportation from London to New York; they were buying time, convenience, exclusivity, and status — an experience that could not easily be replicated elsewhere. For a business executive whose time was extremely valuable, saving several hours could be worth far more than the incremental cost of the ticket. The price didn’t need to make sense against a coach fare, because a coach fare wasn’t buying the same thing.
That is also why Concorde is such a good example of value-based pricing. Cost-based pricing starts with what a product costs to provide and adds a margin. Competitor-based pricing asks what alternatives charge. Value-based pricing starts somewhere else entirely: what does this actually buy the customer, and what is that worth to them? Comparing Concorde’s price to a first-class airline ticket understated its value, because Concorde wasn’t competing on the same axis. First class buys comfort. Concorde bought time, arriving before you left, and the ability to say you’d flown it. Once BA understood what customers were really buying, the old cost-plus-margin math became irrelevant.
British Airways eventually priced to match that value, and in doing so demonstrated an important principle: the right price is not necessarily the price that maximizes the number of customers. It is the price that captures a fair share of the value you create. When customers perceive your offering as meaningfully differentiated, and alternatives are poor substitutes for what they’re actually buying, demand can be far less price-sensitive than conventional pricing logic would suggest.
Source: “Concorde, Flying Supersonic” – Smithsonian TV, 2010
Additional source: https://www.heritageconcorde.com/concorde-british-airways