The Price is Right

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  1. 1. The Price is Right When thinking about researching price, its important to understand the category in which your brand plays. Sounds obvious doesnt it? But different categories not only have very different pricing dynamics but also very different consumer motivations and behaviours. These make some categories very price elastic (small variations in price lead to large variations in demand) and other categories much less price elastic (brands can increase price with little impact on demand). Where are different categories on our pricing map? We have identified two key determinants of price sensitivity: 1. Brand differentiation. If brand propositions are very similar, consumers are happy to substitute one with another purely based on price. There is less willingness to do this if brand propositions are very different 2. Ease of being able to switch between brands. There may be functional barriers to switching between brands, for example changing a utility supplier takes effort or you may be tied into a particular smartphone ecosystem. There can also be emotional barriers to switching, such as if you trust a particular brand of infant pain killers because you have used them since your child was small Differentiation between brands Easy to substitute Difficult to substitute No barriers Easy Hard Low High Elastic Inelastic Substantial barriers Own label meat Lager Toilet paper Salty snacks Laundry Basic phone Spirits (grocery) Luxury brands Executive cars Family cars Home Wi-Fi/ TV Smartphones Lottery tickets Child analgesics Newspapers Insurance Bank current accounts /Insurance Utilities (gas, electricity) Ease of switching Soft drinks
  2. 2. We can identify four category pricing typologies in which consumer motivations and behaviours vary markedly The four types of typology: Price and Promotion Prompted this is classic FMCG territory where brand engagement is low and consumers will happily substitute brands if the price or promotion is right. Typically there are high repertoire, high frequency staple categories where price is highly visible at point of purchase Disengaged Inertia often low interest, infrequently purchased but essential categories, where brand offers are similar, pricing is not transparent (think gas and electricity tariffs) and switching requires effort. Aggregators play in this space as they enable price comparison and lower the barriers to switching Desirable Premium here brand desirability reduces price sensitivity and choice may be limited or exclusive. Purchasing is discretionary and irregular. In some cases higher price actually helps define quality and prestige Emotional Captivity the consumer may feel obligated to stay with certain brands because they are tied in emotionally and/or there is little alternative availablebuying lottery tickets with regular numbers or long- term devotees of a newspaper or those with a magazine subscription. Price visibility can be low. Differentiation between brands Easy Hard Low High Ease of switching Price and Promotion Prompted All about the deal Low engagement Lots of choice Disengaged Inertia Cant be bothered Very low engagement Complex/obscure choices Desirable Premium Got to have it High engagement/ trend and socially driven Emotional Captivity Cant do without it Trust and security Personal connection Easy to substitute Difficult to substitute No barriers Substantial barriers
  3. 3. Behavioural biases over-index in different typologies These typologies link to behavioural biases: Price and Promotion Prompted obviously incentive is key (whats in it for me?) and these categories typically display strong price framing and anchoring (so brand x sits in the frozen fixture where prices are easy to compare to brand y) Disengaged Inertia the effort required to change a service may discourage switching and the consumer may worry about whether they can manage the process (will all my direct debits move if I change bank account?) Desirable Premium consumers are affected by social acceptability (its the must have accessory this summer!) and by the context of seeing the brand (its a car driven by a celebrity I like) Emotional Captivity the concern about what is being given up can outweigh the negative of a price increase (but I will lose all my apps if I switch from my iPhone to a Samsung!) In both the last two typologies the emotional response (Affect bias) plays a substantial role, for example I like shoes and when Im buying them Im less bothered by price than when buying groceries. Differentiation between brands Easy Hard Low High Ease of switching Price and Promotion Prompted Incentive Disengaged Inertia Self Efficacy Desirable Premium Social norms Emotional Captivity Loss aversion Human behaviour CulturalInuence s Env ironmental Cues Making Tools P ersonal Decision - Framing Anchoring Effort Default Messenger Affect Easy to substitute Difficult to substitute No barriers Substantial barriers
  4. 4. Growing brand value and reducing price sensitivity Reducing price sensitivity will generally grow brand value. Increasing equity and distinctiveness pushes a brand to the right. Building an emotional connection can increase your stickiness with customers, pushing the brand down the map. Often low engagement brands with relatively undifferentiated products spend a lot to build their brand equity so people have an emotional connection. Aggregators want to take the same brands in low engagement categories (like current bank accounts, credit cards, insurance) and force price comparison and make the switching easier. At Incite we use this category pricing model to make our research more powerful. By understanding the consumer motivations and behavioural biases we can provide an accurate picture of the role that price plays in your category and predict how your brand will respond to price changes. If you are interested in finding out more, please contact Jules Berry on +44 (0)20 7438 4982 or e-mail Differentiation between brands Easy Hard Low High Ease of switching Price and Promotion Prompted Disengaged Inertia Desirable Premium Emotional Captivity Increase brand equity/increase distinctiveness Increase emotional connection Aggregators want to disrupt barriers Easy to substitute Difficult to substitute No barriers Substantial barriers