The price that we pay

Nokia slashed the prices of a large range of phones to fend offcompetition from cheap unbranded handsets and smart phonespowered by Google Inc’s Android.

Mr Harish Bhat   -  Bijoy Ghosh

How do consumers evaluate the price of products and services?



Two weeks ago, Nokia announced a significant reduction in the consumer prices of a large range of its mobile phones. In particular, high-end smart phones including the flagship Nokia N8, the multimedia C7 and the business-user oriented E6 models saw a sharp 15 per cent price drop in several countries, including India. Many independent observers viewed this as a sign of desperation, to stem Nokia's loss of market share to phones running on Google's Android operating platform. Indeed, this view is reinforced by the fact that the breadth of mobile phones receiving this price cut has not been seen for some time.

This sharp reduction in price will hopefully deliver to Nokia the desired rebound in sales volumes. It also brings into focus an important area of marketing which has perhaps not received the attention it deserves over the past few years: the pricing of products and brands, and the fundamental consumer factors which impact this important variable. Much discussion in the profession has centred on exciting themes such as product innovation, brand building and advertising, tactical promotions and retail formats. It is high time that the fundamentals and science of pricing claim their place on the top table of marketing.

Marketers often speak about the price premiums that their brands command, or the price discounts they are forced to offer. Companies speak about inflation in input commodity costs and the consequent impact on product pricing. Economists speak about price elasticity of demand. Yet, the best place to begin this discussion on pricing is a simple examination of the fundamental reasons why consumers willingly open up their wallets every day, and pay a price for the specific brands they buy. Here are seven factors worth reflecting upon.

Functionality

This is the most fundamental factor determining price, because consumers pay first and foremost to obtain functionality from their purchases. Based on the category involved, functionality could mean features (in a computer), fragrance (in a perfume) or design (in jewellery). The greater the functionality, the higher the price the consumer is willing to pay. A good illustration of this principle is the everyday shaving razor. A simple razor which offers a fairly good shave is priced at Rs 10, but the hi-tech Gillette Mach 3 Turbo, which promises the smoothest of shaves, is priced several multiples higher, at around Rs 100 per cartridge. Despite this significant difference, I ignore the simple razor, pay a relatively astronomical price and use the Mach 3 Turbo, because of the extreme functionality it offers me – “anti-friction blades for a close comfortable shave even against the grain, soft protective microfins to smooth out the skin, front pivot technology that follows the contours of your face”.

Experience

Consumers are increasingly willing to pay a price for quality of experience, and not merely for basic functionality. Experience is somewhat more intangible to measure, and it can mean very different things. For instance, many international flyers are willing to pay a higher price to travel by Singapore Airlines, because the quality of the flying experience is superior. Flying experience includes a basket of variables such as timeliness, seating comfort, delicious food, excellent in-flight entertainment and service, and such things. Similarly, youngsters in our cities pay Rs 30 and more for a cup of coffee at Café Coffee Day outlets, compared to one-fifth that price at any Indian fast food hotel. The relaxed and modern ambience at CCD, which encourages extended conversations over a cuppa, is the experience these consumers pay for.

Reassurance

Consumers actively seek reassurance and the resulting peace of mind, while buying products or services. In the midst of their hectic lives, they are, therefore, willing to pay a price premium for brands they can fully trust. This is true not merely of the finance sector (for example, State Bank of India and LIC), but also of brands in the consumer durables and lifestyle accessory sectors (Sony and Titan, for instance), and equally of brands in the FMCG sector (such as Dettol and Colgate). Reassurance often goes beyond functionality, and leads not merely to pricing power but also to high brand loyalty.

Exclusivity

Many affluent consumers seek exclusivity and are very happy to pay for it. This is the reason that limited-edition designer jewellery or wristwatches command such premium prices. This is also the reason that many exclusive clubs or apartment blocks (“by invitation only”) charge very high membership fees or prices. Here is an extreme example of exclusivity. Consumers wait endlessly to obtain reservations at the most exclusive restaurants in the world - Noma of Copenhagen, the world's highest rated restaurant, is sold out for several weeks at any point in time - and are thereafter delighted to pay a fortune for the privilege of dining there.

Status

In several categories, consumers like to flaunt a badge, and they happily pay the price for these “status” brands. Owning and travelling in a Mercedes Benz car, writing with a Mont Blanc pen, sporting a Rolex watch on your wrist, serving Chivas Regal Scotch at parties you host … none of these brands are highly exclusive or limited-edition, yet they confer desirable status on the owner. As a result, all these brands, nurtured carefully over many decades, command prices which are well ahead of several competing labels.

Novelty

Many early adopters, including geeks, are quite willing to pay a price to be amongst the first to use a new product or brand. This could be a new gizmo, or the first edition of a new book (the paperback version, released a few months later, will be half as expensive), or the premiere shows of a new movie or play. Across categories, novelty seekers will line up to fulfil their urge for the new, a factor that brands can smartly leverage.

Convenience

Offering convenience and easy access has always fetched a price, and in today's time-starved world this need is being valued even more by consumers. At home, we are willing to pay a relatively higher price to buy vegetables and fruits delivered at our doorstep, rather than have to travel to the main market a few miles away. Our neighbourhood kirana store, just a hop away from our apartment, always charges a marginally higher price than the supermarket, but when you need a household item urgently, you are always willing to pay. Travellers are willing to pay a reasonable additional fare to board a direct flight or train to a distant location, rather than undergo the pain of changing vehicles en route, waiting at stations, etc.

This is only an illustrative list of seven factors. There are likely to be other variables as well, which are relevant to the pricing of specific products or services. Marketers and students of marketing should understand which fundamental factors impact specific brands. They should then build their “big” pricing hypotheses, and test these with target consumers.

This is painstaking effort, particularly since price studies in most cases require tests of consumer behaviour, and not just attitudinal response. However, such detailed work will undoubtedly help gauge underlying trade-offs and establish optimal prices, which in turn can have a significant impact on both the brand and the business.

Harish Bhat is Chief Operating Officer – Watches, Titan Industries Ltd. These are his personal views.

Published on July 20, 2011
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