January 16, 2017

The Eight Tiers of Pricing

Ever feel like Amazon is putting their big thumb on top of your comparatively tiny business? Yes? Well, that's the impact of pricing and merchandising strategy.

Based on my experience, there are Eight Tiers of Pricing. Your mileage will vary. Companies happily pick and choose from each tier.

Tier 1 = Full Price. This, of course, is my favorite tier. It is the realm of honesty. You have a price, you honor your price, and you do not cheat prior customers who may have paid more. You'll see a lot of full price activity among companies that have a "healthy brand". In other words, if your company is respected and customers trust who you are and your company behaves in a consistent manner, you'll be able to charge full price for your products/services. By the way, full price may well mean low price (Wal-Mart, Amazon).

Tier 2 = Liquidations. When you buy 10,000 widgets and the customer only purchases 7,000 widgets, you have to do something with the remaining 3,000 widgets. This is where liquidations come into play. The $49.99 widget is ultimately sold for $29.99. This is a necessary tier, but a dangerous tier. The temptation, of course, is that you get to see how well an item sells when it is discounted. This causes the business leader to "think strategically" about what "could" happen if prices were always low, or what
"could" happen if a promotion was applied to a purchase.

Tier 3 = Specials. This is like going to your favorite restaurant and finding out that Prime Rib is $34.95 instead of $39.95 because it is Valentine's Day. It has been my experience that the most successful clients I work with leverage a combination of Tier 1, Tier 2, and Tier 3 in their core strategy, with Tier 3 applied to specific items at specific times.

Tier 4 = Rewards. Think about flying on United, for instance. You earn miles, and after you earn "x" miles, you are rewarded with perks - maybe a free upgrade to first class, maybe a free flight (conditions may apply). Regardless, the "brand" maintains pricing integrity while allowing best customers to pay less. Proprietary Credit falls into the Rewards category - the customer gets a perk for using Proprietary Credit (i.e. pay later or points or whatever). Gamification falls into rewards - download an app and score 10,000 points and you unlock something or you purchase in-app allowing you to perform better - all forms of rewards.

Tier 5 = Shipping Promotions. For e-commerce, of course, but free shipping is a fundamentally different tier because it does not impact the price of the item being sold but instead discounts a service provided to the customer. Many companies offer free shipping. Amazon does the opposite, tying fast delivery to paid shipping.

Tier 6 = Promotions. Ah yes! The realm of the modern retailer. 30% off all Outerwear, today only! Then tomorrow all merchandise is 40% off. Promotions destroy pricing integrity, and worse, promotions train the customer to shop when promotions are offered. Early on, promotions work for the brand. As time passes, the brand works for promotions. Sometimes promotions play a valuable role - giving a new customer 20% off a cable contract if the customer signs up for a year, or by bundling services (internet + cable). But in 2017, promotions are more a reflection of brand health than a strategic marketing tactic.

Tier 7 = Inconsistent Pricing. You'll see this in car sales and you'll see this in vendor services. Go talk to Adobe about pricing for a web analytics solution. Do you see transparent pricing posted anywhere (click here)? It's always fun to learn that Client #1 paid $88,000 for the exact same solution that Client #2 paid $58,000 for ... and each client is the same size. The seller intentionally squeezes profit out of "dumb" customers. Or worse, go to Wal-Mart sometime. This happened to me last week. A ten pack of batteries was $6.47 in the battery display, but was $6.88 next to a toy that required the batteries. Amazon leverages inconsistent pricing. Hotels are big culprits of inconsistent pricing, as are airlines.

Tier 8 = Lies. Lies are common in marketing (often called a "brand story" instead of a "lie"). Lies may include the $89 widget that is sold for $19.99 (but wait, there's more ... we'll give you two widgets and a wudget for just $19.99, plus shipping and handling ... then we learn that "handling" is $8 and we have to wait 4-6 weeks for delivery). Nobody is buying the item for $89.

I'm sure there are countless examples that I missed. But this is how I like to think about pricing. It's been my experience that a company can be healthy operating in any tier, as long as the company is consistent about the tiers they operate in. Those old TV commercials (but wait, there's more) worked because the brand always operated in Tier 8.

More on the topic tomorrow.