While setting prices we must put ourselves in the shoes of our customers. How do they make decisions? How can we help them decide to purchase from us? With almost every purchase, your customers make two decisions: Will I? And Which One? Will I buy something in this product category? If yes, then which one will I buy? “Which one?” includes both which product and which retailer. Here’s the important part: Pricing has very little influence over the “Will I?” decision, and tons of influence over “Which one?”
My brother bought his first flat panel TV in 2009. (He’s technically disinclined). Prior to 2009, it didn’t matter if a TV went on sale or if the prices came down a little each year. He just didn’t pay attention. In 2009, when he finally decided to buy, he scoured the Internet for a great deal. He studied the Best Buy weekly ads. All of a sudden, price mattered a LOT.
Pricing wasn’t going to sway his “Will I?” decision, but it was a critical part of “Which one?” for both the model and where he would buy.
The same is true with your customers. You should not use price to influence customers to buy in a product category. But carefully set prices to help customers make the choices you prefer they make.
Like everything, there are exceptions. For instance, you may be able to use limited time offers to induce impulse buying and completely skip the “Which one?” phase of the consumer decision. There are products that have no real competition (think small boutique retailers like Etsy.com www.etsy.com), so the company can price based on the “Will I?” decision. But these are the exceptions.
Here’s another example: Most movie theaters in a community show the same newly released movies and charge the same prices for admission. They have to be competitive with the other theaters. If one priced higher, then fewer people would choose that theater. However, once inside the theater, the customers no longer have a choice on where to go to buy popcorn. Popcorn at the movie theater is a “Will I?” decision. Customers are less price sensitive on “Will I?” decisions, so theaters charge high prices.
You should take away from this example the lesson that it is critical to have a product portfolio of complementary products. Your customers may choose to shop with you because of pricing of select items. For example my brother purchased his flat panel TV from Buy.com because that’s where he found the best deal. But he also bought cables (somewhere else) to hook up his new TV without shopping around much for price. This is where Buy.com could have made more profit, by also effectively selling the cables.
Just like in the movie theater example, the shopper (my brother) decided where to go buy the main item as part of the “Which one?” decision, but there was opportunity to make additional money with complementary products (cables), where the decision was only “Will I?”
As a retailer you should clearly know which products sway whether or not customers shop with you. These are your “Which one?” products. Price them aggressively. Equally important though, is to know which products DO NOT influence the customer's choice of retailers. These are your “Will I?” products and you should price them for profit. Then, make a strong effort to attach these “Will I?” products with every sale.
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