Differential Pricing: Learning from the price spread for pens

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Why does the price of a pen vary so much? Functionally, they are all simply writing instruments for applying ink to paper. We could describe them as recording devices to capture our thoughts for sharing with others or reviewing at a later time, yet this type of a description would only inflate the overall price level of pens, it wouldn’t account for observed price variations.

While pens come in a variety of colors, shapes, sizes, technologies, these variations in type fail to account the variations in price. Surely more than functionality accounts for the price differential that we accept between the pens we get from the office supply cabinet and the Mont Blanc we get at the airport shopping mall.

To get at the drivers behind the variations of prices in categorically similar offerings, we need to go beyond issues of functionality and examine the motivational factors to market participation. These customer motivational factors can guide salespeople and marketers in managing customer perceptions in order to capture more customers and maintain higher margins. And, by abstracting these principles, we can apply them in a practical manner to business markets.

Motivational Factors

At a base level, economic choices are driven by greed, fear, and ego.

• Greed motivates us to seek offerings that leave us financially better off than we would be without them, and to select between offerings according to that which fulfill our needs at the lowest overall cost.
• Fear motivates us to seek offerings that lower our exposure to undesired changes, and to select between offerings according to that which has the lowest associated risk.
• Ego motivates us to seek offerings that enable expressions of one’s self identity, and to select between offerings according to that which most supports one’s self identity.

In terms of business markets, the motivating factors of greed, fear, and ego can be found in the driving business and personal factors that guide the choices of key decision makers.

Business factors include strategic and financial issues. Strategic motivations drive businesses towards offerings that enable an organizational, operational, or market opportunity change. Financial issues drive businesses towards offerings that lower costs or improve profitability.

Personal factors include a broader array of issues that affect the individual decision makers and their influencers. In business markets, the most pertinent personal factors are job security, job execution, compensation, career growth, professional prestige, and self actualization.

Value Sources Embedded within Offerings

When we examine the common sources of value embedded within most offerings to business markets, we usually find that they relate to business factors. Offering are commonly positioned as decreasing costs, increasing revenue, improving reliability/quality, increasing flexibility, decreasing cycle time, or supporting positive customer experiences and market interaction in general. These are business issues and not personal issues.

If we reflect the value sources embedded within offerings in the mirror of the motivations that drive customer businesses to purchase, we find the overlap is poor. Most of the embedded value sources of an offering are related somewhat to the greed motivations of businesses, and can sometimes be related to the fear motivation, but have a weak if any relationship to ego.

Business related value sources are functional in nature. From the comparison of office pens to Mont Blanc, we know that differences in functionality accounts for only part of the potential to maintain a price differential to competitors. Hence, we should look beyond pure functionality issues for business offering if we are to drive margins.

Requirement to Transcend

To address the other motivational factors, businesses can utilize tools such as brand, trust, and relationship building. These softer factors are effective in addressing the personal motivating factors of a decision maker. As such, they can be used to fill the gaps between the motivational factors and the functionality of the offering.

To improve the resonance between the motivational factors and the offerings position, sales and marketing can fine-tune their message through questions. Questions can detect the specific motivating factors of the key decision maker and his/her influencer. They can also uncover their perception of the offering and how it fits within their motivating factors. Moreover, well designed questions can shape their perceptions to improve fit.

Returning to office pens versus Mont Blanc, which would you prefer, a common pen or a symbol of your achievement in business? Just as this question clarifies and perhaps shapes your desires, so can a salesperson’s or marketer’s question clarify and shape the desires of a business prospects. It may not lead to Mont Blanc level prices, but at least it will improve your market share and margins.

Author:
Tim Smith, PhD, Editor in Chief of The Wiglaf Journal and Adjunct Professor of Marketing at DePaul University . This article was originally published in The Wiglaf Journal, December 2005.  Available online at www.wiglafjournal.com.