Price is often the last thing considered, and then only briefly, inconsistently, by the wrong people, and for the wrong reasons. This is a huge mistake many, if not most make.
The pricing architecture you put in place is a foundational driver of strategy implementation. That statement assumes you have a well thought out, documented strategy.
Irrespective of the standard of your strategy, sticker price can be a determining factor in a purchase decision. It may not be the first thing they see when contemplating a purchase, but it is usually the ‘pepper stroke’ in the process.
Failing to consider the strategic implications of both strategic and tactical choices surrounding your price will result in suboptimal outcomes. Price is the single biggest contributor to profitability over which management has complete control.
The fundamental mistake many businesses make is to set prices on a range of parameters that have little to do with how customers assess value. Customers do not care how much a product costs, how you cover your overheads, or how much profit the owners demand, they only care about what it delivers for them.
A customer sees a price and instantly makes a judgement. Most often this judgement is subconscious, automatic and unappreciated, similar to the ‘fight or flight’ response to danger we all understand.
Daniel Kahneman gave us the best starting point in Thinking, Fast and Slow. We do not meet price first as rational calculators. We meet it first as animals with memory, fear, ego, habits, shortcuts, and a deep reluctance to feel foolish.
System 1 reacts first.
System 2 arrives later, when and if it is given a chance.
In a commercial context, the ticket price seen by a potential customer is the beginning of the process of determining if a transaction will occur. That process is the assessment of a range of behavioural drivers of the purchase, followed by a more quantitative assessment that leads to the conversion, or not. In a supermarket, these two elements of the whole process may take place in an instant, or it may be a bit longer as a consumer assesses the value of their regular purchase against that of an alternative on special. In a situation where the purchase is much more expensive, so comes with greater consequences, the process can take months, or longer.
The supposition implicit in a sticker price is that you have built a solid strategy and have made the usually challenging choices surrounding the five elements of the pricing architecture: the strategic priorities, the business model, level of market power, price packaging, and the behavioural drivers you will engage.
