One of my favourite pricing cartoons is that of a schoolgirl selling lemonade for $500, with the caption reading “I just want to sell one and call it a summer”.
The cartoon epitomises one of the most commonly asked questions in pricing which, on first appearances, could appear to be a rhetorical one: do I price high and come down if I have to, or do I price low and raise prices when demand takes off? Most Leading Companies would adopt the former strategy, but does starting high always make sense?
Starting with a high price is of course the “pricing textbook” answer, and there are a couple legitimate reasons for this. It is always easier to lower the price of lemonade from $500 than it is to try and raise it, and if you want to position yourself at the top end of the lemonade market, that price is going to be an indicator of quality for you.
T-Glass (not their real name) is not a cartoon strip, nor is it selling lemonade. It is an Australian-based beverage company who last week, asked the panel of pricing experts on PricingProphets.com if they should ‘low-ball’ or ‘high-ball’ the launch price of their latest locally-grown beverage. The response from one of the experts was very thought provoking, and not exactly “textbook pricing”.
In the case of this beverage, as with many other products, a launch objective is often to build product trail, penetration, and thus market share. Starting with a high price, which doesn't stick and subsequently has to be lowered, means starting that trial and penetration exercise all over again.
In this situation, starting with a low(er) price may help to achieve that trial, penetration and establish the product in the consumers’ repertoire. That leaves us with the question of how do you raise prices in the future?
In the case of a beverage that is made from seasonal, agricultural products, look no further than the wine industry: let the customer know that this particular harvest or season is exceptionally good, include that message in the pricing communications strategy and price accordingly.
This approach also enables you to avoid hard-to-defend cost-plus –based price increases, and set prices according to the value you deliver.
We’ll check in with the beverage company in a couple of months and see how they’re going.
[This post also appears on LeadingCompany, 7th June 2012]