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Stop reacting to buyers’ pricing expectations
Expectations drive behavior and nowhere more so than when setting prices. A customer’s decision to buy something at the offered price, or not, depends upon more than the tradeoff between benefits and price. It also depends on customers’ expectations, and their experience answering this question: how might our behavior influence the prices we have to pay?
For example, a retail consumer may believe that a new fall fashion is well worth the price asked for it in September, but still not buy it if she expects that the store following its past behavior will have a 20 percent off sale within the next month. A policy of regular, predictable discounting has trained many retail consumers to wait for the sale price. As a result, sales at regular prices are less than they would otherwise be, increasing the amount of inventory that ultimately will be sold at the lower sale price.
The same dynamic plays out—only more so—when businesses sell products and services to other businesses. Professional buyers have learned to hold their purchases until the last couple weeks of each quarter when sales managers are often willing to discount more deeply to achieve their quarterly goals. Sellers in these situations see the increasing portion of their sales made when prices are discounted as a sign that customers are becoming more price sensitive in their brand choice. In fact, they are only responding to incentives for how to get a better deal on what they were other-wise willing to buy at a higher price.
About the article
In this article, Dr. Thomas Nagle and Joseph Zale of Monitor Deloitte’s Pricing & Profitability Management practice examine how to implement effective pricing policies that manage customer expectations and avoid discounts and sales, which hurt profitability. The article also discusses the need for a shift from reactive pricing to policy-based pricing and the essential communication between a company’s leaders and their customers in order to achieve profit over the long term.