The Effect of Price on Brand Value
In Japan, a hair cut costs $70 and includes a scalp massage, a shave with a straightedge razor, nose hair trimming, pre-cut wash and post-cut wash.
In America, many barber shops offer cuts for $7 to $10. No scalp massage; no nose hair trimming; no straightedge razor shave. A wash with the cut is the height of customer service.
A market exists for a customer service oriented barber shop. Yet, new barber shops are popping up to compete in the cheap hair cut market. Why?
“Price Drives the Sale!” This is the myth that sends business after business into crowded, unprofitable low price markets. Price does not drive sales. It never has, it never will. Value – perceived value – drives sales.
You have a headache. You go to the drugstore. The store has Excedrin, Tylenol and a generic pain reliever. Which will you buy?
Excedrin and Tylenol continue to sell even with generic brand pain relievers priced as much as 75% lower. Go figure.
A Not So Hypothetical Situation
A friend recently asked about eMachines. She was looking to buy a computer and not spend a lot of money. I told her that eMachines are junk. Any computer that cheap has to be junk.
It later occurred to me that I had never used an eMachine. None of my friends had used eMachines. They could be good computers… maybe.
So I searched Google for eMachine reviews. Most of the comments I found were along the lines of “eMachines are too cheap to be any good” – in other words, the judgment of quality was based solely on the price of the computers, not actual experience.
The point is, eMachines is losing sales – and profits – because of their low price strategy. In the consumer mind, low price conveys an image of low quality; high price conveys an image of high quality.
Building a Brand on Price
Often it’s the case that the consumer has nothing other than price to go on to judge the value of an offer. One webhost offers 500MB’s for $1.99 per month; another offers 500MB’s for $79.99 per month. Most consumers don’t know anything beyond what is stated on the site – and thousands of webhosts offer the same damn feature list.
The same applies to many products we buy everyday – DVD players, soap, milk, printer paper, light bulbs, bottled water, gasoline, etc.
As consumers, we don’t have the time to research the products. We often base our judgement of value on the price of the product.
ARCO is cheap gas. Many consumers won’t use ARCO gas simply because it’s the cheapest gas in town. They use Texaco, which has branded itself as a high quality gas simply by pricing its gas higher than the competition.
Prada, Rolex and Lexus are just a few who use prestige pricing to build strong brands.
Value is in the Eye of the Beholder
The beauty of the high price strategy – prestige pricing – is in its reliance on the price to establish value.
Naive business owners love to protest, “But John, we can’t raise our prices because our products aren’t worth that much“.
Welcome to business. That Prada handbag isn’t worth $710 until it sells for that. Texaco gasoline isn’t worth $2.10 per gallon until it sells for that. A Lexus isn’t worth anywhere near $64,000 until it sells for $64,000.
If you’re selling hosting at $1.99 a month, the consumer has every reason to assume that your hosting is junk hosting.
You could take that same hosting account, slap a $79.99 per month price tag on it and give a better impression.
Studies have shown time and again consumers believe that price and quality are directly proportional.
In the end, your products and services are worth only as much as the consumer is willing to pay and you are willing to charge.