Brands’ pricing shouldn’t be bound by their categories

Consumers don’t perceive price in absolute terms but relative to similar products, so if you want to change your pricing model you just have to change your comparison set.

price categoryImagine you’re doing your weekly shop. You’ve been pushing your trolley around for half an hour and bought nearly everything on your list – one of your last stops is in the soft drink aisle. You scan the bottles and spot an interesting new brand nestled between the Ribena and the Robinson’s. You fancy treating yourself, so you check the price tag.

Now, how much would you be prepared to pay? A fiver maybe? Well this brand wants £26 for a 700ml bottle. Still interested?

FMCG giants test their pricing power

I doubt it. It’s an eye-watering 15 times more expensive than the surrounding drinks. It probably feels like a complete rip-off. No one in their right mind would fork out that much, however many berries and herbs it contains.

Price is relative, not absolute

But now imagine your shopping trip took a different turn and instead of visiting the soft drinks you find yourself in the booze aisle. Next to the small batch craft gins you spot a new brand – a non-alcoholic spirit for £26 per 700ml bottle.

Is that a reasonable price? It’s pricey certainly, but not mind-bogglingly so. In fact, it’s exactly the price that the non-alcoholic spirit Seedlip asks for.

Now, why such a different reaction to the price? Seedlip – which is essentially an adult cordial – feels reasonably priced in one situation but not the other.

Do everything you can to change the field of reference shoppers have to one that is more profitable to you.

The reason for this anomaly is that we don’t perceive value in an absolute sense. We don’t have a single scale by which we measure the merits of all purchases because it would require too much effort. People are busy and so they rely on simple rules of thumb when judging price, not complex calculations.

Shoppers ask themselves: how much did I pay for something similar in the past? If I’m being charged more than the comparison product, then this new brand is expensive; if I’m being charged less, then this new product is a bargain.

Customer experience is as much about perception as reality

That should interest every marketer as it means that price is relative, not absolute. If you change the comparison set, then you can shift willingness to pay by orders of magnitude.

Seedlip has harnessed price relativity by performing a sleight of hand. By describing itself as a non-alcoholic spirit and designing a bottle that mimics premium gins, it has shifted its comparison set away from cheaper squashes. This frees it to charge five times as much as an upmarket adult cordial could reasonably ask for.

Price relativity can be observed under more scientific conditions

Of course, Seedlip never launched as an adult cordial so my thought experiment is conjecture. But I’ve also run price relativity experiments which support this argument.

In one study I told participants that a 250g box of PG Tips cost £2.29, while the same weight of Tesco own label tea cost £1. When questioned about the price, 31% of the respondents rated PG Tips as good value.

I then asked another group the same question but with one tweak. Rather than compare PG Tips to own label it was contrasted with Twining’s, priced at £3.49. In this scenario, the number who thought PG Tips represented good value jumped to 65%.

Brands can apply price relativity in two broad ways. First, don’t accept your comparison set as fixed. Do everything you can to change the field of reference shoppers have to one that is more profitable to you.

My favourite example of this has been doing the rounds on Twitter:

Second, why not introduce a premium version of your main brand. The high-end variant will then make the original brand look cheaper by comparison. So, continuing our tea example, Twining’s could introduce a Platinum Reserve blend at a higher price to improve the perception of the main brand. For well-established brands this is a simpler tactic than shifting your comparison set.

Behavioural science identifies a range of profitable pricing tactics. Test which one works best for you.

Richard Shotton is founder of the consultancy Astroten and author of The Choice Factory, a book about applying behavioural science to advertising. He tweets at @rshotton.

Sue Benson is managing director of The Behaviours Agency.