When price isn't enough: Experiment

When your customers behave as though your products are commodities and focusing on price only, what should you do? No one want their products to become commodities. We strive for differentiation in both brand and features. Then we expect the customer to pay a premium and become loyal to our superior products.
Well, unfortunately customers are more lazy than that. They see switching costs as more important than premium. Low expectations on products actual and usable features combined with routinized behavior is commonplace. Researchers call this a psychological state of mind that drives commoditization. It is no longer the actual features, or lack thereof, it is the mental map of the customer that drives their behavior.

What should we then do to circumvent this behavior? Experiment on price! Use differentiation of price as one way of getting your customers to notice the difference in offerings. You don't know what your customers prefer and how you actually compare to the competition. Instead of guessing, experiment with pricing and products.

In several different experiments (one referred to in Dan Ariely's excellent book Predictably Irrational) customers get two similar products with different price (the more expensive has some additional features). Roughly 60% goes for the cheapest and 40% for the more expensive one. Adding a third product priced well above the previous expensive product shows interesting customer behavior. Now 10% goes for the new most expensive, 60% goes for the middle (previous most expensive) and 30% for the cheapest. By having an expensive alternative to compare against customers tend to go for the middle priced product. Viola, we have moved 30% of customers upwards just by introducing a product we don't want them to buy - just compare against.

Could we know this ahead of the experiment? No, just guess. A simple experiment helped us gain more knowledge. Will it work for you? Don't know, try it out in a smaller test market or segment.

Here's some more strategies to try out to circumvent commoditization:

• Use price structure to clarify your advantage
• As you could see in the example above, a pricing structure forced your customers to closer investigate the features of each individual alternative in the structure.This is taken to the extreme in Chris Anderson's Free where one model is called Freemium which starts at the price of 0 and goes upwards.
• Willfully overprice to stimulate curiosity
• When customers are faced with a product priced higher than their mental expectation they actually do investigate it further. What additional features does this have that I may have overlooked before? Beware that you better have some valuable features, otherwise they will dismiss you without further consideration in the future.
• Partition prices to highlight overlooked benefits
• Break bundles into their components and itemize the bill. That forces customers to investigate what they are paying for and start valuing what they are buying. Beware that this can only be done on products and services that they potentially value.Don't list the price of screws in your package.
• Equalize price points to crystallize personal relevance
• With many alternatives targeted towards different tastes, use same price to force the customer to see what they value rather than price. Then we get the customer to put focus on something else than price when comparing.

Experiment to see which of these strategies work for you and what the actual price should be. And gone are the days of commoditization in the eyes of the customer.

More to read:

• HBR May 2010: How to stop customers from fixating on price