How to Stop Customers from Fixating on Price by Ajay K. Sirsi * [40]

 

In business-to-business settings, I often hear managers making unsubstantiated statements such as: 

  "We are too expensive"

·          " Our customers are so price sensitive"

              "All that our customers care about is the price”

             " We are pricing ourselves out of the market”

·          " Lower-priced competitors are taking business away from us”

These “truths” are often spoken in tones bordering on hysteria and hopelessness.  In this article, I will show you that these statements are not only false; rather, these myths take on a life of their own and become part of the organizational narrative, sapping business prosperity. 

I was at a shopping mall on the weekend and noticed something interesting.  All the high-end stores (read: expensive) had velvet ropes at the entrance, stopping customers from entering.  A hostess stood by the door, putting shoppers' names on a waiting list to enter the store.  I overheard one of them say to a shopper that the wait was 45 minutes.  At each of these high-end stores, the lines of consumers snaked around the corner, with shoppers waiting patiently to get in.

None of the middle-of-the-road brands (read: inexpensive) had such an arrangement.  Nor did they have any line of consumers waiting to get in.

The data show that consumers are spending money on high-end brands.  I asked myself what these expensive brands do to make consumers not care about price?  The truth is that these consumers are price insensitive because they receive benefits in exchange for the price they have paid.  These benefits are tangible (quality product) and intangible (prestige and status).  The high-end brands have done an excellent job of creating and communicating these benefits to their target customers.

Why can we not do the same thing in business-to-business markets?   

First, let me destroy a firmly entrenched misconception.  While it is popular to proclaim that all that customers care about is price, the research does not support this claim.  The research reveals that in B2B markets, price is never the most critical factor.  While price is not unimportant, customers prioritize other factors such as quality, delivery, reliability, after-sales service and support, and trusted partnerships.

Therefore, if a customer is fixated on price, it should tell you that you have done a poor job of creating and communicating the value of your offering.  Either your offering does not have the benefits desired by the customer, or you have done a poor job of communicating the value you are providing.  Let me add details to both points.

Creating Customer Value

In business-to-business situations, it is easier than in B2C markets to develop benefits for the customer.  In B2C purchases, some benefits consumers seek might be pretty nebulous.  These might include notions of status, prestige, and one-upmanship – factors that typically are not considered by B2B professionals (I have seen instances where these intangible factors are dominant even in B2B markets, but I will save that for a future article). 

Creating customer benefits is more straightforward in B2B markets because, in this space, customers only care about two things: reducing their costs and increasing their revenue.  Nothing else matters to them.  Every customer need and pain point falls into one or both categories.  Please review the table below to get a sense of the point I am making here.

	Impacts Customer’s Cost	Impacts Customer’s Revenue
Purchase price	X
Availability of spare parts	X	X
Shortage of labor		X
Retaining employees	X	X
Operational efficiency	X
After-sales support	X	X
Supply chain issues		X
Building a brand		X
Getting more customers		X

I think you get the point I am making here. TBO, not TCO

To create value for the B2B customer, go beyond conducting a Total Cost of Ownership (TCO) analysis.  Instead, perform a Total Benefit of Ownership (TBO) analysis.  A TCO analysis only considers the customer’s total cost by incorporating the customer’s costs of acquiring, possessing, using, and disposing of your products.  A TBO analysis, on the other hand, combines both the costs and benefits the customer accrues from your product.  Read the related articles suggested at the end of this article for excellent examples of creating customer value.    

Communicating Customer Value 

Creating customer value in itself will not make your customers price insensitive.  The final step is to communicate the value you have created.  To do this, you must focus on quantifying the value you have created and providing tools to your sales force to communicate the value.

Value Quantification

It is not enough to tell a customer: “Our product is superior.”  Instead, say to the customer: “Our product lasts X% longer than the competitor’s; it consumes Y% less energy, and it enables you to do Z% more jobs in the same amount of time.”  Of course, these assertions must be based on unbiased data.  

Finally, provide your sales force tools to communicate the quantified value propositions quickly and easily.  I am surprised how many organizations I interact with fail on this score, much to the frustration of the sales team.  I put the responsibility of creating such tools directly on the shoulders of the marketing department.

Bottom line:  Customers do not fixate on price because it is their nature.  We make them behave like this by our failure to shift their focus to the value we are creating for them. 

* Dr. Ajay Sirsi is an award-winning marketing professor and Director of the Centre for Customer Centricity at the Schulich School of Business, York University, Toronto. Visit Dr. Sirsi's website to learn more about his work on customer-centricity at: https://ajaysirsi.com

Misconceptions About Store Brands by Selima Ben Mrad * [21]

National or manufacturer brands have been for a while the choice of consumers and a signal for quality. Consumers usually trust manufacturers’ brands and associate them with a certain level of quality. However, this is not the case for store brands. US consumers still lack the knowledge about private label and avoid buying them unless the product does not generate any risk. Private-label brand success is strongest in commodity driven, high-purchase categories and products where consumers perceive very little differentiation (Nielsen 2014) . While store brands or private label market share keeps growing in many European countries, this is not the case in the United States. Indeed, the market share in several European countries is more than 30% with UK , Spain, and Switzerland having the highest market share among European countries. (PLMA’s International Private Label, 2017). The United States private label market share has been lower than its counterparts in Europe and it is only lately that this trend has been changing.  Today, the market share of store brands has reached nearly 25% of unit sales in the U.S. and is expanding faster than national brands (PLMA 2017).

So What is Private Brand or Store Brand?

Private brand is any brand that comprises the retailers’ name or any name created by the retailer (PLMA 2017). Target, Walmart, CVS Pharmacy, and Walgreens market their own brands. For instance, Target has a store brand “Up & Up” in their household product line that is much diversified. Some retailers, such as Walmart, see private label as part of the road to their future success. Indeed, Doug McMillon, president and CEO of Walmart, when speaking at the Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference in New York, stated that “The widespread availability of name-brand products online will compress the margins of private brands over time.” He also added that "having a private brand from a margin mix point of view has always been important, but it is even more important now.”  Therefore, it is important to educate customers about private brands. Indeed there are some misconceptions about store brands:

1. They are of  lower quality than manufacturer brands
2. They are manufactured by the retailer
3. There is only one category of store brands
4. They have low prices
5. They generate high risk

The truth about store brands is that they are indeed similar to manufacturers’ brands and sometimes even of better quality. Here are some clarifications about store brands:

Who Manufactures Store Brands?

According to PLMA (2017), there are different ways that store brands are manufactured. They can be produced by:

• Large manufacturers who produce both their own brands and private label products.
• Small and medium size manufacturers that specialize in particular product lines and concentrate on producing private label almost exclusively.
• Major retailers and wholesalers that operate their own manufacturing plants and provide private label products for their own stores.

Categories of Store Brands

Private label brands are classified into generic brands, standard brands or copycat brands or flagship brands, premium brands, and value innovators.

1. Generic brands are usually cheap, inferior products. Usually they do not carry the name of the retailer on the package , but simply the name of the product, such as ‘milk’ or ‘butter’, in plain script . They usually use very cheap packaging .
2. Copycats or flagship brands or standard brands. They usually carry the name of the retailer and tend to copy the main manufacturer within that category, they have packaging and price points very similar to the main manufacturer.
3. Premium store brands are usually of higher quality than the manufacturer brand  and compete directly against the manufacturer’s  brand. Kumar and Steenkamp (2007) define two types of premium brands: the premium private label which is exclusive, higher in price, and superior in quality to competing brands; and the premium-lite store brand which is promoted as being equal or better in quality to the competing brands, while being cheaper.
4. The fourth category is value innovators which consists mainly of retailers reducing costs and processes to simplify the production and marketing of product ranges, so that a good quality product can be offered at very low prices. They are usually limited in number.

Benefits of Store Brands

Store brands provide retailers with several key benefits. It gives them exclusivity to offer their customers special products, which make consumers loyal to them. In addition, store brands create a unique brand image and generate more retailer brand recall and recognition. Finally, store brands increase retailers’ revenues and have higher profit margins.

Attitude Towards Store Brands

The positive or negative attitude towards store brands has been attributed to several causes. Consumers evaluate store brands based on price/value of those brands, the products’ attributes, on the perceived risk and on their own self-perception (smart shopper). Consumers who buy store brands realize that when they are indeed purchasing store brands they are paying for certain “marketing” practices for  manufacturers’ brands, which is not the case of retailers' brands.

References:

Hamstra M (20017) “Walmart CEO cites growing importance of private label Store brands seen as driver of margins, loyalty” www://www.supermarketnews.com/walmart/walmart-ceo-cites-growing-importance-private-label
Kumar, N  and J.B  E.M. Steenkamp, ‘Private Label Strategy’, Harvard Business School Press, 2007.
Nielsen (2014) https://www.nielsen.com/content/dam/nielsenglobal/kr/docs/global-report/2014/Nielsen%20Global%20Private%20Label%20Report%20November%202014.pdf
PLMA (2017) ; http://www.plmainternational.com/in

* Selima Ben Mrad, Ph.D., is an Associate Professor of Marketing at Nova Southeastern University. She can be reached at: sbenmrad@nova.edu

Pricing Revisited - Balancing Gains and Losses by Bill Johnson * [12]

People generally fear losses more than they covet gains; losses are weighted more heavily than an equivalent amount of gains, e.g., the absolute joy felt in finding $50 is a lot less than the absolute pain caused by losing $50, a phenomenon known as “loss-aversion”.  Kahneman and Tversky stumbled upon loss aversion after giving their students a simple survey, which asked whether or not they would accept a variety of different bets. The psychologists noticed that, when people were offered a gamble on the toss of a coin in which they might lose $20, they demanded an average payoff of at least $40 if they won. The pain of a loss was approximately twice as potent as the pleasure generated by a gain. As Kahneman and Tversky aptly put it, “In human decision making, losses loom larger than gains.”

If you ever kept a gym membership long after it has become clear that you are not now and will never be a gym rat, then you have felt the effects (i.e. “dead-loss” effect) of loss aversion. Think about how insurance is sold, not on what consumers will gain, but what they stand to lose—insurance (and warranties) is by definition designed to mitigate “loss”.

Consider the following example of how loss aversion works.  A grocery retailer has tried to decrease people’s use of plastic grocery bags. One approach was to offer a five-cent bonus to customers who brought reusable bags. That approach had essentially no effect. Later the retailer tried another approach, which was to impose a five-cent tax on those who ask for a grocery bag. Though five cents is not a lot of money, many people do not want to pay it. The new approach has had a major effect in reducing use of grocery bags.

Here is another example of where loss aversion comes into play.  Suppose two companies sell calling plans. Company A advertises their plan for $25.00 per month, with a $12 rebate for continuing the contract for at least one year.   Company B advertises their plan for $24 per month, with a $12 surcharge for dropping out of the program before a year is up. Which is the better deal after one year’s worth of calls?  Of course, the economic costs of these two plans are identical, except that the plan offered by Company B is framed differently, i.e. as a potential loss, and would more strongly appeal to loss-averse customers.

Loss aversion has many practical applications in marketing, in particular when it comes to pricing, i.e. when using price increases, reference prices, limited time offers and price bundling.

Price increases – Whenever a customer sees a price increase, they interpret this as a personal loss.  Hence, businesses often see extremely emotional reactions resulting in lost business (e.g. Netfix lost 800,000 subscribers in the 3rd quarter of 2011 after an announced price hike).  One strategy, if possible, is to change the packaging of the product, e.g., Kellogg’s reduced the size of its Frosted Flakes and Rice Krispies cereal boxes from 19 to 18 ounces. Frito-Lay reduced Doritos bags from 12 to 10 ounces. Dial Soap bars shrank from 4.5 to 4 ounces, and Procter and Gamble reduced the size of Bounty paper towel rolls from 60 to 52 sheets.

Reference prices – A reference price is what your customers expect to pay.  If they are forced to pay more than this they consider it a loss.  Less is a gain.  Existing customers often use the last price paid as their reference price (and smart phones now offer instant reference pricing data).  However, for new customers, firms have the ability to influence their reference price.  We often see retailers show MSRP and then a marked down price--this to influence the reference price.  Alternatively, some companies choose to compare their product to one that is much more expensive in hope of increasing the prospect’s reference price (a tactic frequently used by off-price retailers like Ross or T.J. Maxx).

Limited time offers – If Macy’s is willing to sell a jacket at 50% during a sale that ends Sunday, why wouldn’t they sell it at 50% off on Monday?  The answer is loss aversion.  If potential buyers are on the fence about buying the jacket, they are more likely to go purchase it while it’s on sale.  Once Monday comes they have lost the opportunity.  If Macy’s doesn’t stop the sale on Monday they don’t have the extra incentive to go buy on Sunday (Walgreens features “Senior Tuesday” sales).  Loss aversion is one factor that drives the success of “sales”.

Bundling – charging a single net price for the overall exchange hides gains and losses on the component transactions and allows consumers flexibility in mentally apportioning the net price across the components in a manner they construe favorably.

People and customers in particularly don’t like to lose. This is why good marketing and sales is often all about convincing prospects that what they are about to buy is worth more than what they must pay for it.  Something is seen as a good value when any perceived pain of loss will be more than offset by the joy of gain. 

So, what about you, are you more likely to avoid losses or pursue gains?

* William (Bill) Johnson, Ph.D., is a Professor of  Marketing (Retired) at Nova Southeastern University. He can be reached at billyboy@nova.edu