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Price is Not (Always) the Most Important Driver to Customer Purchasing Behavior

September 2014 Pricing

In Econ 101, we are taught that lower prices lead to higher sales volumes.  In sales, we hear directly from customers that the prices are high and they want a discount.  And in marketing communications, we learn to “sweeten the offer” in promotions and advertising.  But is price really the most important driver to customer purchasing behavior?

No.  Not always.

Truth is, customers don’t buy because of price alone.  They buy because of many factors: They like the brand.  They want to try the one they heard about on Facebook from their friends.  They want the light-up bottle of vodka to show off.  They need a specific set of functionality.  They don’t want too much nor too little.  They want it in orange.  They may prefer something else, but it isn’t available where they are now.

(O.K., that last one is mine: beer houses – IPA is not for me.  Beer should taste like beer, not a Disney rainbow forest.  I want Czech-style pilsner but it seems IPAs are in style.  Oh well, I’ll drink what they call beer as it is a social beverage, and I love people.)

Yet, despite these other drivers to choice, which are part and parcel of the marketing mix explored by every decent intro to marketing course, when you have been working for a while in pricing, you get used to professional cohorts and clients saying “we have to have a lower price on this, at least for this sale.”

Why?

Don’t they believe in their product?  Don’t they believe that they packaged and promoted it right? Don’t they believe they are putting it in the right place at the right time – where and when a customer needs it?

Yes, but: they want a lower price.

Fine.  Try it.  See if it works.  (Evidence-based learning usually helps organizations, and pricing professionals can rarely pull-off a power play.)

And, does it work?  Often, no.  Lower prices don’t lead to higher sales volumes in many cases.

Why not? Because, price is not the only deciding factor in customer purchasing decisions.

In fact, as long as the price is somewhat right, price itself may never enter the purchase tradeoff decision itself.  Somewhat right means it isn’t too low (where the customer purchases but the company makes no money) and it isn’t too high (where the customer starts to ask if it is worth it or if it can fit within their budget), but somewhere between these two extremes.

From my studies in the physics, chemistry, and mathematics, I recognize this as a boundary problem.  In boundary physics, all the action happens the boundary of the phase change between the two states.

The situation just described is just that.  At one boundary, the price goes from being too high to being about right (no-purchase to purchase upper boundary).  At the other boundary, the price goes from being too low to being about right (unprofitable to profitable sales lower boundary).

If we have two boundaries, then the role of pricing is to learn where those boundaries are and encourage their cohorts to stay within the boundary guiderails.  As long as the price is in the guiderails, variations in price won’t affect sales volume much.

Is this true?  Yes.  In study after study we have found products where price variations had no measurable effects on sales volumes.  This was found in consumer and business markets, services and products, durable and consumable offerings.  And these actual business findings are grounded in academic and theoretical studies of pricing and customer purchases.

Realistically, prices look like that shown in the blue or orange curve in the graph below.  Econ 101 may use a smooth downward sloping curve as shown in grey, but Econ 101 doesn’t capture all the beauty of real life.  It only provides a glimpse at overarching trends and does it at a simplified level appropriate for 18-year olds.

(Most of my readers aren’t 18 anymore so you really should be moving past Econ 101 in your thinking.  If you are 18 or below, then consider this reading as extra credit.)

In real life, prices above a certain point leads to few to no sales, prices below a certain point leads to as many sales as can be delivered.  Between these two points, the sales transitions.  That transition can be a stark shift, such as shown in the orange curve, or a smooth shift, such as that shown in the blue curve.

Figure 1

Stark price indifference can cover a wide range of prices.  In consumer markets, I have seen price variations as large as a factor of 2 make no measurable difference in sales volumes, even over extended periods of times.  In business markets, I have seen price differences up to 10% which again, had no measureable impact on sales volumes, even over the long term.

Taking advantage of stark price indifferences is an easy means to improve value capture.  Prices can go up, up to a point, and have no measurable effect on sales volumes.  Customers still find value in the offering, still purchase, and still like the company that produces it.  And that company enjoys a bit more profit on each sale that it can re-invest in creating the next customer pleasing market disruption.

Taking advantage of smooth price indifferences is a bit more challenging.  It requires carefully designing price promotions and discounts to target specifically those customers lower in the price to volume curve, while leaving those customer higher in the price to volume curve unaffected.  This is no easy task, but it can be done, at least partially.

As for the gray Econ 101 curve, I am sure something like it occurs at the industry level, at least some of the time.  But I don’t make industry-level pricing decisions.  I advise on individual firm-level pricing decisions. That is, the decisions normal people in business actually can make and impact.

So next time someone asks for a price discount or sales promotion, ask yourself: What does my curve look like?  Where are the boundaries of too high and too low?  Is the transition stark or smooth?  And, can I do something else that removes this issue from the purchase decision itself?  Then weigh in on the decision.

Nothing is as hard as learning that what you thought was true ain’t true, especially when people tell you it is right but they are wrong.  But nothing is more destructive than doing what is wrong over and over again in hoping that the right thing happens in the end.  Grow up.  We aren’t in Econ 101 anymore.  Make the phase transition to pricing within your boundary guiderails, preferably on the upper end of those guiderails.  As long as you are in the guiderails, you may be able to remove price as a driver to customer purchase decisions.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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