Why pricing is still the most effective marketing tool

1st June, 2017

Ever wonder why you still see $99.95 items on sale when it’s obvious that it’s a marketing trick?

Because it works.

With marketers creating campaigns based on psychological and behavioural insights backed by data, they’re ignoring a fundamental truth in retailing: pricing is the most effective marketing tool in the kit bag.

Nicolas Pontes, a pricing strategist who teaches advertising at Queensland University of Technology, told The Pulse that too often pricing is used to claw market share instead of position a brand.

“If you have one cue you can give customers to position your product and brand, price would be it,” he said.

He says marketers have overlooked that a good pricing strategy can offer enormous brand uplift, while a bad one can create a negative connotation.

Since the start of retail, outlets have used price as a marketing tool – even if they don’t know it.

Take the $99.95 price point, for instance.

Logically, we know this is just 5c off a $100 item. Because of the way we’re taught to read, we mentally register the item as a $90 item instead of a $100 item.

“People tend to look at the left digit first and then they think about the rest later,” said Pontes.

“In customer research it’s called the ‘left-digit effect’ – it’s how we process numbers when comparing two prices.

“The ‘95’ at the end of that price point doesn’t matter so much – it’s the left digit that really counts.”

In some instances, a price premium can even create a perception premium between two items – even if they’re fundamentally the same.

The ‘premium effect’

In 2008, the Stanford Business School ran a series of studies aimed at exploring whether there was a link between the price of an object and the pleasure or effectiveness a customer got from that object.
Two control groups were given placebo painkillers after a series of electric shocks to their wrists. One group was told their painkillers were less expensive and the other group were told that their painkillers were more expensive.

Eighty-five percent of the group that received the more ‘expensive’ painkillers reported a pain reduction, while the other group reported a 61 percent result – in both instances the pills were placebos.

The main variable in that experiment was the price.

“We do have a bias where even if two products are essentially the same and we buy the more expensive one, we want to convince ourselves that the more expensive product or the ‘premium’ product is the better quality – so that becomes self-fulfilling,” Pontes said.

Obviously there are variables on how effective pricing is depending on category, but it shows the enormous potential for pricing strategy to affect customer behaviour.

Coles has found that out the hard way.

How Coles’ pricing created “distrust”

At the end of April, Wesfarmers Chief Executive Richard Goyder admitted that Coles’ pricing strategy to that point had created “distrust” in the Coles brand.

He explained that constant strategic discounting of several products had a negative effect, even if the strategy was a sound one.

Supermarkets create a ‘basket’ of products it thinks shoppers are looking for when they come to the shop.

Coles may have anything up to 20,000 products available, but it selects about 100 from which to selectively discount.

The theory is that if shoppers see that the products that are usually top of mind are at a lower price point, they’ll think Coles is a low-cost retailer – which may not be the case overall.

“When you go to buy, your shopping basket often contains items from outside those 100 products,” explained Pontes.

“You may discount milk, but not Milo. If somebody buys those things together, the margin on the Milo will offset the reduced margin on the milk.”

But, it didn’t work out like that at Coles.

Customers began to question the constant discounting and began to wonder how and why Coles could afford to adopt the strategy.

“When you drop the price so much, by about 70 percent…if it’s for a shorter amount of time or it’s a special that they’re doing, people know that it’s a unique opportunity to do it,” said Pontes.

“But Coles has been doing this for the past three to four years and it’s been constant. People are starting to question the [product] quality.”

After all, if Coles can afford to constantly discount and they see the price jumping around a lot (increasing the practice’s visibility), people start to wonder just how Coles can do that.

It all demonstrates that, for better or worse, pricing can be the most powerful marketing tool a business has at their disposal.

“People still think of price as a way of gaining market share rather than as a way of increasing…moving the brand value forward,” said Pontes.

“I think companies should place more importance on how customers feel about price.”