Strategy : The Price Is Right … or Is It?

The prices of thousands of publicly traded stocks change from moment to moment in response to even the slightest shifts in perceived value or buyers' ability to pay.

Similar market pressures impact consumers' perceptions of the value of virtually every product or service, yet many direct marketers change their prices infrequently, if at all.

The result: Your product may be overpriced, leading to lost sales; or underpriced, resulting in piles of dollars left on the table.

Frequent price tests are the only way to make sure your price is right.

Pricing Up or Down?
Every marketer must raise prices during the long term or face steadily declining margins. So, for most products in most markets, slashing prices is not the path to increased profitability. This is especially true in the current environment of rising costs for direct marketers, when every marginal dollar of revenue is essential.

Yet a down economy also means diminished resources for many consumers, leaving some marketers with few alternatives but to cut prices, at least in the short term.

Many marketers assume that if they increase prices, they will lose significant market share. This is not necessarily true. Creative, aggressive and frequent price testing will reveal profitable exceptions to this general rule.

So, do you need to cut prices in order to win more orders from cash-strapped consumers, or do you need to raise prices to keep up with rising costs?

The answers to these questions are essential to your business and can only be discovered through ongoing price testing.

Testing Price Perception
When thinking about price testing, focus not only on the total price a customer pays, but on the way in which price is presented.

For example, retailers know there's a significant difference in response and profitability between a product advertised at $500 and the same product listed at "$400 after $100 mail-in rebate." The customer perceives the price at the after-rebate $400 level, while the marketer reaps a price somewhere between $400 and $500, due to unredeemed rebates. (Which reminds me, I need to send in the $50 rebate on my cool, new phone before I lose the rebate slip or the UPC, or forget about it entirely as the marketer is hoping.)

Other effective ways to reduce the perceived price include installment billing and, in the case of subscription marketing, per-issue or per-month pricing.

A classic example of reducing the perceived price in consumer marketing is selling automobiles based on monthly payment. I've been guiding my 25-year-old daughter through her first vehicle purchase. The bank can't wait to sign her up for a 60-month loan on a used car. Meanwhile, dear old Dad is trying to tell her that five years from now, the car will have lost at least half of its value and she'll still be paying based on today's price. Yet the lender and the auto dealer have nearly convinced her that the vehicle is a good deal because she can afford the monthly payment.