Product positioning
The price of a product is making a statement to the customer about its positioning in the market place. Where there is the potential to offer several products within a range, price becomes a means of giving messages about the relative quality of each one of those products, within the chosen segments and in relation to competition.
Marketers often use a framework of ‘price lining’ to position their products in the various segments. They categorize their products into a limited number of price brackets, each of which is making a separate statement about absolute and relative quality. A traditional approach, which frequently ties in with segment structures, has been to have three price levels – ‘good, better, best’ or ‘economy, midpoint, premium’ – with each of the three products in the range having clear differentiation with different combinations of price and benefits. In simple markets using
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conventional segmentation methods, three offers is often felt to be the ideal number.
It achieves the right balance between simplicity for supplier, retailer and consumer, and also provides reasonable choice in the buying decision. However, much will depend on the market, the type of consumer and the method of segmentation.
There is a danger that this ‘three level’ policy, carried out by many retailers, will oversimplify a complex market structure and will restrict the choice for the consumer, thus making this limited segmentation a self-fulfilling prophecy. It may also be difficult to maintain this structure during times of inflation and where the market is undergoing rapid change for other reasons. The critical need is for price lines to be reviewed regularly and tested out with market research, then to be checked against the current thinking on segmentation. For instance, the development of new segments, with different levels of discretionary income, may require the addition of further price line choices.
One other argument in favour of increasing the number of product offerings is the creation of different ‘reference points’ for price. One common approach is to introduce a new top-of-the-range offering, the main objective of which is to create a
‘halo’ effect, boosting the range as a whole and making the other product lines seem to be of better value. It is common to position the customer viewing of a store or catalogue so that the higher priced item is seen first, thereby creating a higher reference point for the next item in the range. However, it is always easy to argue the case for more product lines as more sophisticated marketing techniques and other innovations are developed. The counter argument is that this can lead to higher costs and lower focus, because of the resultant complexity and fragmentation.
However many price lines are chosen, they should be backed up by clear quality differentiation, or at least they must be seen that way. This ‘perceived quality’ – the only sort that really matters – will not be based purely on functional benefits;
emotional benefits will also be important. Brand development through advertising is the classic way of delivering the emotional side of perceived quality: designer clothes may or may not be of higher quality in the functional sense, but they are perceived to be because of the emotional impact of the advertising, brand reputation and image that is supporting them.
Product bundling
This is a popular pricing strategy which has a number of objectives and a number of implications. Price bundling means including a number of products and/or services together as a ‘one price’ package – a package holiday, a car sold with free insurance and servicing, a computer with free software, a television with servicing beyond the guarantee, a store offering a low price teddy bear for those who purchase more than a certain amount, a McDonald’s Happy Meal – everywhere we see examples of bundling as part of modern marketing.
Price as part of the marketing mix
One purpose of bundling can be to make it difficult to compare prices directly, thereby adding to the confusion and uncertainty which may cause the consumer to fall back on the familiar brand. It can also be an effective method of segment targeting – preparing bundles of services that will be attractive to different types of consumer, perhaps as a means of differentiating from competitors who do not have the ability to offer the whole package. There can be sustainable competitive advantage from a bundle that others cannot replicate and, if presented effectively, it can be achieved at higher prices than would be possible by other means.
Bundling may be positioned as the only offer, often called ‘pure’ bundling, a strategy which will be effective if you are sure of the strength of your value package and your segmentation, though it can often restrict customer choice too much. ‘Optional’ bundling will be taken only by those customers who want it, and it will often require a strong price incentive to persuade the customer to go for the bundled deal. Optional bundling can also be used for the purpose of cross selling, to introduce the customer to new types of product which they would otherwise not try.
One important requirement for effective selling through price bundling is for the customer to be clear about the value they are receiving, particularly in comparison with competitive offers. In the face of price resistance it may then be possible to make the offer of lower prices through unbundling, while showing the customer the value that is being lost. This can often have the effect of lowering resistance and persuading the customer to accept the higher value of the bundled deal.
New products and occasion blocking
One other way of developing the product range to remove price resistance is through the introduction of new products which change the occasion of the purchase, often known as ‘occasion blocking’. Successful examples include the development of ‘party size’ versions of soft drinks, gift versions of chocolates and
‘multi-packs’ of ice cream or breakfast cereal.
There is a dual benefit of occasion blocking for the company that is first to find the right product variant. They are offering extra value to those customers for whom these special versions of the product meet their needs more effectively, and this may mean that a price premium per litre or kilo is achievable. They are also changing the language of the product, thereby making the price comparison more difficult for the consumer and thus reducing sensitivity. Occasion blocking can result in a true ‘win/win’ situation – a consumer who prefers the smaller party packs of Coke and is willing to pay a price premium per litre over the standard can. As long as the cost of the extra complexity does not cancel out the price premium, everyone is better off. Only the entry of competitors with a similar product at lower prices can ‘spoil the party’.
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