Why price matters and how it is tied up with marketing, service and customer experience

In a recent post, I wrote:

“Bob Thompson shared the results of research he had been involved in some years ago.  When customers were asked what constituted ‘customer-centricity’ they came up with:  product quality/fitness for purpose; customer service excellence; being treated fairly; and price.  Bob made a big play, as do others, about price only being fourth on the list.  I will be writing a post on the price myth soon.”

Can you count on customers to tell the ‘truth’?

Before we can grapple with the ‘price is not that important, other stuff is more importantmyth we have to grapple with the customer/market research myth.   Why?  Because the people who make customer related claims – including on the matter of price – almost always refer to the results of customer surveys and market research.

Research simply discloses how a specific bunch of people responded to/answered a set of questions given the way that these questions were worded/framed and how/when the research was conducted.  ‘That is it – that is all it tells you!  You cannot use it to make declarative statements of ‘truth’ about what matters to customers nor what they actually do when they are shopping in the real life shopping environment. Even if we assume that all bias has been stripped out of the surveying/research process we are confronted with this:  people deceive themselves whilst being convinced that they are espousing the truth – neuroscience suggest that this is a fundamental feature due to the design of the brain, which is really many brains in one.

Asking about price, and how much it matters or not, is like asking about sex.  Why?  Because the question is laden with meaning which puts one’s identity, self-esteem and ‘social face’ at stake.  If you are a woman and answer that you have had many partners and love sex then you are likely to be thought of as being ‘loose’ and looked down upon.  And you, the woman that is being asked that question know that and so you modulate your answer – you lie.  Now imagine that you are a man.  How likely are you to say that you have had no sex at all in the last three months?  I recently took part in a speed awareness course where only 2 people out of 23 claimed not to be ‘better than the average driver’  Was it because most of us in that room (including me) are deluded or is it some of us were not willing to admit that we are not good drivers in front of our fellows?  Possibly and most likely both.

First the price question will be answered differently by different segments and you cannot average it out – to some people it might matter a lot, to others not at all. Second, there will be a ‘right’ answer (socially desirable) given the current circumstances – have you noticed how thrift is in and conspicuous spending out?  Third, what people say (and even think they do and what matters to them) is often very different to what is so.  And even when you educate them on what is so they tend to ignore it – they were blind to it for a very good reason.

In short,the scientifically correct thing to do is to be skeptical about what people say: you simply cannot count on human beings to have accurate insights into themselves or their behaviour.  And you cannot count on them to tell the ‘truth’ as it shows up for them if their ‘social identity’ is at stake.

What is our relationship to price?

Take a look at what is happening on the high street. We go and try out products and get advice in stores and then go home and buy it online because we can get the same product cheaper.  Is this why so many stores have closed in the UK and why high streets are littered with empty or boarded up shops?  Remember Gateway?  The  online PC seller who opened stores and designed/delivered a great shopping experience?  It ended up closing the stores.  Why?  Consumers tuned up at the stores got great advice and then they went home and bought online from Dell because Dell was cheaper.  What was the fear with the internet?  Ease of finding/comparing prices.  Why?  Because it would enable buyers to buy from the cheapest seller.  Why do offline retailers fear smartphones?  Because they enable shoppers to compare prices and either buy it online (cheaper) or head for a store down the street that supplies the same product at a cheaper price.

Look at Ryanair and Easyjet – these low cost airlines exist because they have come up with a low price value proposition for air travel that speaks to people whose first and foremost requirement is price – cheap.   Look at IKEA – it had done the same for furniture.  Then there is WalMart in the USA and Matalan in the UK – doing very well by selling merchandise at value prices.  In short these players are doing well because they are playing the price card well.

Price can also be an indicator or quality and thus assuage our concerns about being swindled/making the wrong choice.  For example, experiments show that if you have a high end product and a low end product then you can do better by introducing a ‘in between product’ in terms of price.  When you do that what happens?  You make more money because you help people to buy.  Most people will buy the ‘in between’ priced product – these people fear buying the ‘cheap’ products (quality concerns) and are not up for buying the top priced product.  Note: it is essential that the shoppers is uncertain about the quality of the products for this behaviour to show up.

What is my point of view on Price?

I say that price does matter especially in the current economic climate.   We are all sensitive to price – our sensitivity depends on our sense of our financial well being.  It depends on current savings, current income and how we see the future. If our income/savings are low then we will be price sensitive.  Last summer I spent some time in the New Forest and in particular in a locale where only the rich can afford to live – property price are high.  Yet, I was shocked to see busy ‘cheap stores’ nestled in amongst the expensive stores. Then I got that there are plenty of old folks who have retire in this locale.  They have used their savings to buy their homes and their incomes are limited and so they use the ‘cheap’ stores.  Finally, the future matters, if the future looks bleak then we are more price sensitive than if the future looks bright.

I say that we will not willingly pay more than we have to for the same product if all things are equal.  A great example of this is insurance – most people buy on price as they assume that all companies, all policies are alike.   Only those that have made a claim, become wise to and factor in what the policy covers and the claims experience.  That means that if store A wants to charge us more than Store B  for an identical product then the people at store A have to invent differences and communicate these differences so that the customer can justify paying the higher price.

The central challenge of business continues to be inventing differences – real and imagined – so as to get the customer to pay a higher price than s/he would otherwise pay.  The factors that companies have to play with are: product and product development; marketing and the art/science of impression/perception management (notice the interest in neuroscience and neuromarketing); service (not the function called Customer Services) and in its broadest/modern sense Customer Experience; and business model design – what you charge for, how you charge….  Apple does it through great products.  Zappos does it through great service. Amazon does it through the ease of the purchasing process.  USAA does it through the ‘community’ and ‘integrity’ and ‘service’.  Zane’s Cycles does it through the customer experience and ‘community’………

Put differently, the justification for investments in marketing, in service, in the customer experience are based on counteracting the buyers propensity to buy on price if all things are equal.  That means that the purpose of marketing, service, customer experience is to ensure that all things are not equal in the minds of buyers.  Manipulating perceptions – the role of marketing – used to be enough because only marketer had access to media. Media exists to shape minds – always.  Marketing no longer works that well due to the democratisation of voice. Which is why there is pressure to actually be different: stand out products; stand out service; stand out customer experience. This requires a fundamental change in organisational behaviour: investments have to move from marketing (impression management) to the product and/or the operations that enable buyers to buy, own and use the product.  Few organisations have made that shift in priorities and spending.  Which is why so much customer talk is simply empty talk.  Now compare that with the companies that stand out in terms of product-service-customer experience: do you notice that they don’t spend anywhere near as much on marketing as their competitors?

What is the good news?  Whilst price matters it is not the only thing matters.  Our dignity matters to us - we are selves who are aware of ourselves and who are driven to relate to ourselves as worthy/important/as mattering.  And this need is as important as the need for a ‘good deal’.  As such this provides an opening for organisations who honour our need for validation, for dignity, for wanting to feel there are good guys out there and that we live in a ‘good’ world.  Which is why companies like Zappos and Zane’s Cycles are doing well – they charge premium prices in turn for honouring us ‘as the best of ourselves’ .  And enough of us are willing to pay the premium price and talk about these companies as if they are our friends.  Because they show up for as being our friends.  Amongst friends, price is not the most important thing, it is trust, it is looking after one another, it is acting equitably/fairly.  It is giving a helping hand now, in the full knowledge that our friend will be there when we need that hand in return.  As and when that expectation is violated by our friend/s then we speak out – think Netflix.


Posted on June 24, 2012, in Case Studies, Customer Insight (inc VoC), Customer Service, Customer Strategy, Marketing, Sales and tagged , , , , , , , , , , , . Bookmark the permalink. 4 Comments.

  1. Well put. Great piece.

    But it turns out, if you ask people who have ALREADY purchased your product service this question: “Do you think our prices are fair?” They will tell you what they were thinking about price as they were making the purchase decision – the tradeoffs in their mind (such as: “Well it was a bit expensive, but it was worth it, because I got X.”).

    Interestingly, if you ask the price this way, the price they think is “fair” includes a profit margin! If you ask them, “What did you think of the prices,” their answer never includes a profit margin. (They will say, “I would have liked to have paid X.”) So the way you ask the question makes all the difference.

    The problem with standard customer research is that it always focuses on prospective customers, not customers who have already purchased – and, more importantly – who have experienced your product and service (or lack of it). If you interview them AFTER they buy, you are learning what REAL customers did, what they were thinking as they did it, and WHY they did what they did, and what they now tell others about their decision/experience. And, if you interview 5 – 10 customers of any given type, you will see the patterns in their thinking, and will be able to adjust your own decisions and actions accordingly.

    Again, great piece.

    kz

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    • Hello Kristin

      You and I are in agreement on so much including the issues about standard research and asking prospective customers.

      Whilst at one point I would have been in agreement with you and say you can learn about price by asking existing customers about price I do not find myself in agreement with you today. What is the ‘issue’ for me?

      It occurs to me that if I ask existing customers then I am learning what existing customers tell me. I cannot take that to mean that I am learning about prospective customers and their thought process or their orientation on price (or any other feature). To me what you are proposing is the equivalent of surveying Republicans and assuming that the population at large have the same views as the Republicans that you have surveyed.

      I am also present to the experiments done by Kahneman et al. Ownership makes a differerence. People shift their attitudes and reasoning to justify their decisions. Put differently once you have bought something even if you had doubts about it when you bought it you tend to lose sight of those doubts. There was the experiment where students were given the option to buy tickets and they proposed a certain price. Later they were given these tickets (to a music concert) and after a period of owning them they were asked to name a price for selling them. Now the students were asking about 3 x the original price that they were willing to pay.

      Please note that i do not claim to be sharing the ‘truth’. I do not have access to ‘truth’. My point is that we should be skeptical about a) customer research and b) claims that price doesn’t matter that much. It matters a lot – I have even seen people buying a £30,000 car haggling and going to a dealer that is willing to reduce the price by £500.

      I thank you for entering into the fray and creating a conversation between us.

      At your service / with my love
      maz

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  2. Several years ago I worked for a large FMCG manufacturer. They were big in soap powder. All their adverts showed pristine white sheets blowing in the wind against blue skies.

    Customers told them in research that they washed their sheets every week.

    A lady I know who worked in Market Research came to the conclusion that she must have been a lazy dirty cow (her words not mine) because at best she washed her sheets once every three weeks.

    She changed the research, instead of asking how often they washed things, she asked them to keep a diary of what they washed and when.

    It turns out she wasn’t nearly as dirty as she thought.

    If you look at soap adverts now, you won’t see nearly so many sheets, but lots of socks and pants.

    Your point is well made

    James

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  3. Hi Maz,
    If I think about myself as a market research group of one (small sample size, I know) here’s some of the steps that I am likely to go through if I was buying something new:
    Do I like what I see?
    What is the price?
    Can I afford it? / Is it within the bounds of affordability?
    Is it something that I want?
    Now, who’s here to help me think about this?

    Simple, perhaps, but for someone to say that price doesn’t matter completely ignores the finite nature of money as a resource for most people.

    Adrian

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