80% choose the premium option

understand what the consumer is prepared to pay

Recent research found that 60% of retailers view higher margins as a top priority. This may not be surprising for retailers, or perhaps any business, given how tight margins are in 2018 and the direct relationship between margins and profitability. The question remains, however, how do businesses increase their margins? One option is to cut costs and another is to increase prices. This is the first of five thoughts addressing the latter.

A great deal has been written about just how difficult it is to set the optimal price for any good or service. In the first instance, at least, there is often an element of guesswork.

To minimise the level of guesswork, it is advantageous to understand who the target market is, what they expect to pay and the basis for that expectation, what they are willing to pay and the basis for that willingness.

A study completed by researcher William Poundstone recorded the preferences of consumers for popular beers. When asked to choose between a premium beer for $2.50 and a bargain beer for $1.80, some 80% of respondents selected the premium product. In a second round, consumers were offered the original two beers along with a third, bargain basement beer, priced at $1.60. This time, 80% of those surveyed selected the beer priced at $1.80.

According to Poundstone, these findings suggest that:

  • Our intuition regarding what people will pay is often wrong
  • Anchoring and context have a significant impact on purchase behaviour
There is frequently a misconception that consumers are looking for the cheapest option, or that when offered two roughly equivalent products the majority of consumers will select the cheaper option.
For me, this research highlights:
  • Just how unreliable intuition is in setting prices
  • Just how important it is to understand exactly what consumers will pay
There is much research to suggest that, often, consumers do not know what they should expect to pay, especially with a new product, and even more so with a new product category.
This suggests to me that:
  • There is an opportunity to create new product categories and tell consumers what they should expect to pay.
  • The very best research techniques (and there are some very good ones) should be used to better understand what consumers will pay.
The first step towards increasing margins is to stop assuming that it is all about price or that consumers will not pay more.

In 2018 – understand what the consumer is prepared to pay.

Every year – put the facts ahead of intuition and guesswork.

Sources of core statisticsAttitude Advisory, Wiser, MYOB, Entrepreneur, Huffpost, Help Scout, INC, Marketing Week, Insight Squared, CXL, WM, Psychology Today, Linked IN, MBA

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