This fine line can mean the difference between no sales and big ones
Most products fail in testing, and that is exactly why it is done.
BY WILLIAM SEIDEL
The Affordability Barrier is the price beyond which the customer believes he or she cannot afford, a key factor in pricing a product.
People will pay what they believe they can afford for the value the product provides. For example, with the claim “This putter will take three strokes off your game,” are you willing to pay $79.95, $89.95 or $99.95 for the benefits?
Most people get very confused with numbers. My brain tells me that $20 is too much to pay for the product. I know $19.95 is less than $20. So, I pay tax, shipping, and handling and the total is $27.44, but
in most consumers’ minds, they paid less than $20 because that is the price they saw, what they can afford and what they want to believe.
Some prices sell better than others. The Affordability Barrier is not universal and influential in specific product categories. A small change in price may result in a large change in the sales.
For example, the classic price for a TV promoted product is $19.95 and will make more revenue than, say, $21.19 because it sells higher volume, and it creates more customers.
If the price reduction of 5 cents increases sales 10 percent, the cost to get additional sales is only 0.2 percent. If we assume sales of 10,000 units, then it costs $500 in price reduction for a 10 percent
increase in sales for an additional $20,000 in revenue. That is smart marketing.
Marketers use clever mind tricks to make consumers believe they can afford it because it is less than $20, or it was 30 percent off or two for the price of one.
“I got $2,000 cash when I bought the car.” It sounds like a good deal, but the chances are good that you are paying for it somewhere.
Testing can save big money
Learning what the customer will pay is a long testing process, usually only afforded by large companies with a marketing budget. Changes in demand, competition and customer perception can positively or negatively affect the price. Just consider the price increase of roses on Valentine’s Day.
I have negotiated with inventors who insist on a high royalty or affixed dollar value for every product. If a high royalty pushes the price above the Affordability Barrier, the product will fail in testing.
For example, a two-minute TV spot uses the magic price of $19.95 and if you need a high royalty pushing the price to $22.35 (plus tax and shipping), the volume and revenue will be affected.
Many stores are low-price-driven like Walmart, discounters and grocery stores. The shelves are enormously competitive, and customers compare prices at the point of purchase.
There are examples in Walmart and other stores where they appear to ignore The Affordability Barrier, but their premise and advertising is based on “Always Low Prices.”
They are battling to win customers as the Low Price Leader. They will commonly undercut the TV price of $19.95 at prices like $17.50.
They carefully monitor the velocity of the sales and the
financial advantages of the pricing. If the profit is too low or sales are indifferent to a lower price, they quickly adjust the price to maximize their profit on each product.
Most products fail in testing, and that is exactly why it is done. If it is going to fail, marketers and retailers need to know in small tests limiting a big national failure. The manufacturer, marketer and distributor need to project the sales before they make 100,000 units.
These tests are invisible to the customer and give you and the retailer volumes of information.
If you test one price and it fails, the only thing you know is that price failed. If you test a product at four different prices and two fail, one price point is marginal, and one sells big volumes, you have tests you can use to make well-informed decisions and accurate projections.
Elastic vs. inelastic
It is unfair to say the product failed when it may have been the price that failed, or the package, or the position in the store.
I had a client with a golf product that was profitable for TV sales at $79. The client assumed that was the retail price because it was the lowest price. Clearly, the client was Bargain Basement Brainwashed.
The client wanted to test only the $79.95 price. I insisted that we also test $89.95, $99.95 and $119.95. This enraged the owners, who falsely assumed the $79.95 price would sell more and the $119.95
would never work and be a waste of testing money.
My client was right! The $119.95 price sold 20 percent less than the $79.95 price. However, I was also right because the profit at $119.95 was over three times greater for each club sold and contributed $40 more directly to the bottom line.
The product sold fewer units and made much more money.
This is exactly the reason to test. This would be impossible to determine with surveys or focus groups.
“Elastic product demand” sees significant sales drops with price increases. “Inelastic product demand” maintains sales despite price changes.
It is inelastic when the demand does not change as the price changes. The dedicated golfer will pay $20, $30 or $40 more to take three strokes off his or her game.
Products with an inelastic price of demand are preferred because they continue to sell regardless of price.
When the price of gas goes up, everyone using gas has to pay for it. We tend to see this when the product is innovative, has no competition or is a monopoly.
Last word
The bottom line is that pricing is critical and not based on the cost of the product. The price is based on what the customer can afford or believes he or she can afford. This is no place for opinions, assumptions, or guessing.
Understanding the Affordability Barrier is essential for businesses to effectively price their products. If you do not know what the customer is willing to pay, you run the risk of overpricing the product and alienating potential customers. Pricing below it may leave too much money on the table by not capturing the value perceived by customers.
When you know The Affordability Barrier, you can price the product just a little under the barrier.