Hi!
I read this piece in the NY Times today about comparison shopping for college students.
That made me think about price framing and how people don’t use it nearly enough.
So this morning, I wanted to lay out some of the things y’all need to know to effectively use price framing in your business.
Let’s start with a graphic. (BTW, do y’all find the graphics helpful in explaining things?)
You see there are four categories with two different axes:
- Price: high to low.
- Reference point: You vs. the Competition.
What does this mean?
In price framing you have to consider two things:
- Your price. Are you a high price or low price?
- The point of reference that exists in your market’s mind. Ultimately, how are you positioned?
Thinking through the position, it is key to think about what you want to be positioned as?
- Are you high value? Unique?
- Are you happy being low cost and making up sales on volume?
- Have you gotten stuck somewhere that you don’t want to be?
Let me explain the areas with some examples:
Low Price/Competition’s Reference Point:
You are a commodity.
You aren’t really influencing the decision at any point.
A key here is that you can see commodity’s have wild price swings like on the secondary market for tickets around hot games, the sneaker sales on StockX, or crypto was a good example for a while.
But the key is that eventually you come back to the low price/low influence point where you fill a role and that’s it.
In this area, you aren’t framing your price at all.
The competition may be framing their price, but in most cases the price is being allowed to be framed by outside influences.
You never want to be in this situation.
You’ve lost complete control of your marketing and your sales.
High Price/Competition’s Reference Point:
This is a real danger zone because it is typically the first step into the commodity trap.
When you have a high price, but don’t frame your price using your points of reference, you are in danger of having to take action that is destructive to your brand like discounting.
What’s the fastest way to lose brand equity and pricing power?
Discounting.
Where have we seen this a lot lately?
Tesla.
I have a Tesla: amazing car.
But Elon and the Tesla pricing strategy is erratic at best.
In fact, they’ve thrown away their pricing power by chasing sales by lowering prices and changing prices rapidly over the last few months in hopes of “stimulating” demand.
You don’t stimulate demand with discounts.
You do:
- Pull sales forward in some cases.
- You do suppress demand in later months because the spike was from buyers that would have paid full price anyway.
- You teach the market that there will always be a better deal.
Again, this is a danger zone.
Low Price/Your Reference Point:
You are a value leader here.
This is the territory where you can run your competition ragged because you have a price that is competitive in the market and you’ve established the frame of reference.
What does this mean?
It means that a lot of times you’ve trapped your customers in the danger zone and they are likely going to have to discount to attempt to beat you or they are going to lose market share because they aren’t seen as the valued brand in this part of the market.
IKEA is a good example in home furnishing.
They have low prices on many common furnishings. The quality at the price point is amazing. And, they control the frame with which you make your decision.
You aren’t comparing IKEA to Herman Miller. But you might be comparing IKEA to furniture you might find at Target, Wayfair, or World Market…and, I’m guessing that the frame is always favorable to IKEA.
High Price/Your Reference Point:
You should strive for this.
This is where you are in control.
Remember: the price is relative to your market.
If you have established the reference point and created an environment where you are the leader, you can create pricing power for yourself here and the benefits are many:
- More market share
- Higher profits
- Stronger brand
A couple of places to see this in action:
McKinsey in consulting.
No matter what you might think of McKinsey after some of the bad press they’ve received over the last few years, McKinsey controls the reference point and has established itself as the name in big consulting firms.
They get the price they want.
American Express in the market for premium credit cards is another example.
It is more expensive to have an AmEx. It is more expensive to take an AmEx.
It doesn’t matter.
AmEx is still seen as the premier card for high net-worth individuals and despite having only about 7% of the credit card market, around 20% of credit card sales in the States happen on an AmEx.
What’s the point?
Strive for the point where you are in control of your reference point and your brand stands alone at the top of the heap.
You might not get there, but the more you work at getting there…the greater opportunity you’ll have at setting the right price.
This is why price framing matters because it allows you to set the price you need or want by controlling the narrative in the decision making process.
Don’t give that leverage to someone else!
What do you think?
Dave