THE LIST PRICE IS UNDER THREAT
Once an indispensable benchmark that expressed a company’s confidence in a product’s value, the list price now risks becoming overemphasized or, at the other extreme, obsolete. Widespread, easy access to price and product information subjects the list price to intense scrutiny by customers, suppliers, and channel partners alike.
The management imperative is to evolve the role of the list price. At the same time, management must optimize its price communication. This requires supplementing the list price with other powerful communication approaches—many of which did not exist in the pre-internet days when the list price reigned supreme.
EVOLVING THE ROLE OF THE LIST PRICE
If a company decides to maintain a list price in its traditional role, then management should gain a better understanding of a product’s intrinsic value and recalculate the list price from the ground up, rather than tweak or adjust the existing price. Market dynamics in terms of product quality, competition, customer segments, price communication, and channel access have likely changed substantially since the company last set the list price. Incremental increases or adjustments to the old number are liable to miss or misrepresent new market realities.
OPTIMIZING PRICE COMMUNICATION
As the list price declines in both effectiveness and prominence, companies can use an arsenal of communication approaches to express the relationship between price and value. These methods can accomplish more in terms of reassuring customers—building their confidence that there’s an equitable sharing of value—than a list price can on its own. Many of these approaches take advantage of consumers’ digitally driven tendencies to hunt for bargains (time permitting) or make snap decisions when what they need at the moment is a mere click away.
How customers will respond to these approaches is only one factor in selecting the optimal set. Companies must also consider the costs of adoption, which may require investing in technology, data, or analytics capabilities. The prevailing market situation may also limit a company’s options. In a market where the balance of power favors retailers or distributors, suppliers must consider how their customers will respond. In a mature market with a stable oligopoly, suppliers will be reluctant to be the first to switch away from list prices and disrupt the equilibrium.
EVOLVING THE ROLE OF THE LIST PRICE
How can companies change the role of the list price to help address divergent customer and partner segments, adapt to market dynamics, and extract full value in a fair and profitable manner? The answer is by deemphasizing the list price, which companies can do in one or more ways: create multiple list prices, soften the impact of the list price through discounts and other incentives, phase out the list price and replace it with another means to convey a price-value relationship, or recalibrate the list price to express value in a way that gains acceptance and drives sales.
As a product matures, the need for more segmented or customized pricing can increase. To address this need, companies can create multiple list prices. Apple and Microsoft use this approach, and each list price targets an important customer segment, such as students or government organizations. This method acknowledges the idea that there is no such thing as a single value for a product; the value is in the eye of the beholder. If a company segments its customers and has a relatively homogeneous product offering, it can use multiple list prices in a way that is perceived as a fair and reliable expression of value.
Keeping implementation factors in mind, companies should consider the following approaches:
- Encourage peer comparisons.
- Make direct competitive comparisons.
- Emphasize discounts.
- Change the pricing model and reset expectations. Over time, a list price can lose its link to the underlying value of the product or service. When this occurs, companies can adopt a pricing model on the basis of a metric that better reflects how the customer derives the product’s value. An example is the consumption-based pricing model, under which customers pay only for what they use on an ongoing basis instead of paying a large price upfront. This essentially transforms a product-based business into a service business. Many manufacturers of consumer durables or industrial machinery have adopted such models in recent years.
- Differentiate prices on the basis of deep customer databases. To improve their position in a negotiation, the sales units of industrial goods companies have built databases that include buyer data, such as purchaser title, past purchases, business unit information, and even data on the customer’s customers. In other industries, the customer relationship has largely shifted from producers to companies in the sales channel, putting them in the best position to collect data and assess customers’ price sensitivities as well as their preferences for price structures. Some retailers have built loyalty and rebate programs to better understand and retain their customers. The more sophisticated retailers have begun to track purchase occasion as well as customers’ other habits. This effort puts those retailers in a better position to tailor their offers to repeat customers.
These price communication approaches allow companies to reduce their reliance on the list price by removing it from the customer’s primary field of vision, even if the list price still serves as the starting point or anchor for calculating a discount.
Instant access to price information has fundamentally changed how customers, suppliers, and channel partners perceive value and judge prices. It was inevitable that this disruption would diminish the role of the list price. The shift is a signal to companies that they should evolve their list price approach and find opportunities to use price communication in ways that benefit themselves as well as their customers and partners. Although its dominance will likely never return, list price can still play an important role in an optimized price communications mix.