Reality Pricing

Let's talk about one of the classic P's of marketing: pricing. The power of choosing the right pricing strategy is often underestimated.

Much has been written by people much more knowledgable than I about some of the basic pricing topics - understanding costs, competitive pricing, pricing to create value perceptions, and so on. What I'd like to talk about is something else: how your approach to pricing can foster (or hinder) customer loyalty, for reasons apart from the important price/value proposition of your product or service.

How transparent is your pricing? It's interesting to look at the various approaches taken in different industries. We're all familiar with the simplest kind of pricing: give your product a price and charge that. We see this for a huge number of everyday transactions, from buying groceries to other consumer goods such as clothing, movie tickets, and restaurant food.

Because it's the most commonly-experienced kind of pricing, it's also the kind that makes customers the most comfortable. There's no ambiguity; the price is marked, and the buyer pays that price plus any applicable (and usually well-understood) taxes, such as local sales tax. Sellers set their price based on all of the relevant factors: cost of goods, overhead, and market factors.

In some markets, price negotiations remain. The best known examples in our personal lives are cars and houses. For housing, it's almost entirely market-driven; house prices rise and fall dramatically based on the specifics of a particular housing market. For cars, pricing is somewhat confusing but still generally transparent; the buyer has access to plenty of information about the actual costs of a car, and can quickly find out what the market bears in his or her location, and if he or she has the right negotiating skills, a good deal can be struck. Even so, consumers hate car pricing.

This creates a huge opportunity for savvy marketers - if consumers hate the normal pricing methods for your product, you can gain advantage by changing them. Saturn in its early years was a great example of this. Saturn set prices for their cars, and there was no negotiation. Consumers loved it and Saturn sold a lot of cars this way - even though the value per dollar of their product was nothing special, and in fact a good negotiator could get a better deal on a Toyota or Honda. A lot of consumers hated the way car prices are negotiated so much that they just bought Saturns to avoid it.

Saturn's advantage, of course, evaporated when fixed pricing spread. It's not the norm for car buying, but it's available from many dealers for other cars. And of course, Saturn still had some negotiating - if you were trading in an old car, that was where things got hairy.

If your service or product has a pricing scheme that is unpopular with consumers, you've got an opportunity - if you can change the pricing model while preserving your margins.

Consider another industry: air travel. Pricing for most airlines is hideously complex. Prices change frequently, sometimes because of demand, and there are rules that no one fully understands - Saturday night stays, advance purchase requirements, and so on. Consumers hate airline pricing.

Southwest, one of the few healthy companies in the industry, took a different approach. While Southwest still has demand-based pricing and fare rules, they are far simpler than anyone else's - and you can look at the entire price grid for any Southwest flight on their web site. You can't do that with other airlines. By simplifying fares and making them more transparent, they've earned a great deal of customer loyalty.

Southwest also got rid of the infamous "gotcha" of buying airline tickets - the dreaded change fee. Other airlines have held on to this $50-100 bit of extortion for the unfortunate buyer whose plans change. They've also held onto the small number of full-fare tickets they sell. They make excellent money off of business travelers on these tickets - but have also earned the emnity of those very good customers.

Now let's look at the extreme: telecommunications services. There's probably no pricing scheme as opaque to consumers and as full of hidden charges as phone service. Not surprisingly, customers resent it tremendously.

It doesn't help that telecom services are heavily taxes. That's not the fault of the providers. But phone companies have never broken out of their mindset of nickle-and-diming their customers. The result is prices advertised to consumers that are entirely fictional. On top of whatever stated price you pay for service, there are taxes. Those are reasonably fair, in that they are imposed by governments and are a percentage of the consumer's bill. But then there are the mystery charges.

When the US government created the Universal Service Fund to provide phone and net access to underserved communities, carriers promptly responded by adding charges for it to everyone's bill, and blamed the government. There's a shred of fairness here; their operating costs went up. Of course, each carrier came up with their own unique approach to this, from flast charges to a percentage of the bill. Then there were enhanced 911 charges.

The net result is that your phone service costs anywhere from ten to fifty percent more than the advertised price. And consumers generally hate their phone company.

Part of the reason for this was the competition for long distance business. As the per-minute price of long distance dropped, there was a marketing advantage to being able to advertise a lower price. Of course, costs didn't drop at the same time, so carriers had to make up the difference somewhere. Thus, special fees.

Now that per-minute long distance charges are vanishing, the comparisons should be simpler. But in fact they are not. The interesting thing about all of this is that it demonstrates that telecommunications compnay have an entirely different way of looking at costs than the rest of us.

For most businesses, there are overhead costs and direct costs. The distinction is usually simple; overhead is, well, overhead, whereas the costs specific to the item or service sold are direct costs. In the telecom world, however, overhead costs are billed like direct costs. So when your carrier has new overhead costs, like those mentioned above, they add them to your bill - and your $50 per month unlimited long distance plan suddenly costs $70.

Imagine how you'd react if you went to the corner store and bought a carton of milk, only to find that along with the price marked on the shelf, you were paying a Shelf Stocking Fee, a Refrigeration Fee, and a Local Real Estate Tax Fee. You'l protest that those were the storeowner's overhead costs, and should be calculated before prices were set. But we accept this from the telecommunications industry, because everyone does it.

Now imagine an upstart carrier such as a VoIP carrier that decided to use a transparent pricing model where all of that overhead was accounted for before your price was set. True, if costs went up later, prices might go up also - but you would never have the disconcerting experience of signing up for a $25 VoIP service that actually costs $35. I suspect that many consumers would opt for a service that's advertised at $35 and really is $35 rather than the "surprise!" pricing model that's so common here.

Whether you're in telecom, the airlines, or something else altogether, take a look at your pricing and that of your competitors, and see if you can gain an advantage by making things simpler, not just cheaper. You may have an opportunity to boost customer loyalty without cutting margins.

(Note: sadly, my voice over IP carrier is not so smart; today I received an email explaining that I will now be paying, among other things, a "service charge recovery fee." As far as I can tell, this means "more costs that we didn't take into account when we offered you that excellent deal to sign up." I'm thinking of cancelling as a matter of principle - but there's no one else who does NOT do this.)