The Science of Marketing

Setting price in the high tech marketplace, where solutions are new and value is not clear, is always a challenge. And I’m often asked, "how should we price this thing?" Well, I have to admit that I am far from being a leading expert in this area. But, I have had the opportunity to work with some very good product and financial managers who are experts. So, I asked them. Below are some snippets of what (I think) I heard, most of which were advice on how to get to pricing.

To be clear, I’m not talking about consumer products here. These people work in high volumes, sell to a multitude of consumers, and probably live and die thinking about pricing. I’m talking about high tech B2B, where the sales cycles are long, the customers are usually few and the price tags are always large.

Market Position

• If you are not the best, you have to be the lowest priced.
• You can get a 5% premium if you are the best with not more than three or four competitors.
• If you are trying to break into a new market, you probably have to undercut the competition or "give away the handle to sell the blade".

Competitive Offerings

• Know what your competitors are pricing for similar features and functionality. (Note: often times I hear "we have no direct competition", so think of competition as who loses if you win.)

Deal Analysis

• Always review each lost deal to see if you lost on price.
• Always review each won deal to see if you won too easily.

Value Selling

• In high tech oligopsonies (for all you MBAs), it is critical to build relationships at all levels (see Buying Cycle: In Their Shoes) in order to sell value to individual stakeholders.
• And above all, sell on value rather than cost plus. This means that you have to work hard at articulating and testing your value proposition (and constantly repeat the process).

So, there is no clear answers when pricing game-changing technologies, products and services, but rather different methods and processes of navigating the waters.

Do you agree or disagree with any of this advice? Can you share something that worked for you?

Jay Ehret wrote a good post on Starbucks "loyalty" programs. I say "loyalty" because, as Jay points out, most of these benefits - cards, free WIFI - are more of a pain in the java bean than anything else. I’m not a huge Starbucks fan, anyway, so reading Jay’s post won’t make me go to Starbucks any less (which is zero times a week). But, it did get me thinking about my coffee joint, why I go there and if B2C loyalty tactics can successfully be adapted to the B2B world.

Unlike Starbucks, the BeanTowne Coffee House has meanigful customer loyalty programs: buy ten coffees and I get one free, a drawing to win a free lunch after you buy ten coffees and free WIFI that just works. These benefits, along with a constant, friendly staff and good coffee, make the early morning choice easy. Now that’s the B2C world, where, it seems to me that customer loyalty programs are straight forward (if executed properly).

But, a lot of us live in the B2B world where, beyond providing great products and services, customer loyalty seems a little more complicated. So, have any of you adapted customer loyalty tactics of the B2C world to the B2B world? If so, What has worked brilliantly and what has failed miserably?

In April, I wrote a blog post on pricing microviews. The post discussed some University of Florida research that discovered consumers think of value in the least significant digit of price. The conclusion was that the more precisely an item is priced, the more likely a seller will realize what he or she is asking.

As a follow-up to this blog post, I’ll share some information on pricing anchors that I recently Stumbled Upon.

A blog post by Ankesh Kothari discusses the use of pricing anchors to persuade consumers to make a desired purchase decision. There are three anchor examples in the post (and it is worth the read), but I’ll only focus on one here.

According to Kothari’s blog, The Economist magazine offered three subscription choices: $59 web only, $125 print only, and $125 print and web. David Airey, a behavioral economist, was puzzled and decided to discover why The Economist offered two options at the same price. Airey found that if the print only option was removed the majority of a test group chose the lower priced, web only option. With the print only option in play, most of the same group went for the higher priced, print and web option.

Airey concluded that the print only option was offered to sell the higher priced, print and web option.

With a little forethought and purpose, consumers’ choices can be managed with the right pricing anchors. Thanks, Ankesh, for a great post.

How have you used pricing anchors to manage buying decisions?

Most high tech marketing professionals look at pricing from a macro level (at least that’s what I did back in the day). Typical things to consider in setting a price include: competition, value, elasticity, market position and entry. But not many look at the implication of the actual numbers on the price tag in terms of customer perception - the MicroView. Over the last couple of weeks I have read two pieces (an article and a blog) that get down to the digits. Both are worth a read if you are responsible for setting your company’s prices.

In the April 2008 issue of Scientific American, Wray Herbert reports on some pricing research conducted by the University of Florida in "Why Things Cost: $19.95". The research says that when considering the starting point in a pricing negotiation the consumer is more likely to perceive the value in terms of the least significant digit. For example, if the asking price of a widget is $50, the consumer may perceive the value to be $40. But, if the asking price is $49.95, he will probably perceive the value as $49.55 or $49.25. The bottom line is that the more precisely a vendor prices a product, the more likely the customer will pay a price that is close to asking. Interesting.

In his blog post, "How sharp is your pricing strategy?", Drew (is there more than one?) discusses the impact of pricing on your brand. He notes that Walmart doesn’t price items with the standard $9.99, but, instead, uses prices like $9.83. This "odd" pricing helps reinforce Walmart’s brand promise of low prices. As Drew says "Those pinpoint prices speak volumes."

So, high tech product managers, do you have a MicroView? If so, please share.