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In many product categories, having a somewhat higher price is part of establishing a quality image in the minds of those who buy and use the product. Companies which price their products based on costs will often miss this point, and hurt sales volume by having prices that are too low. How can you use price and non-price methods to enhance the sales and profits of your offerings?
In the 1970s, Kentucky Fried Chicken usually offered two kinds of chicken, one produced according to Colonel Sanders' original recipe and the other made like the typical "crispy" fried chicken found throughout the southern United States. Since the crispy chicken had been offered, both products had been priced the same. The thought behind this was that the company's competitors usually sold their crispy products at lower prices, and the less attention on the price differential the better.
The costs of the two products were such that the original recipe was actually less expensive to make than the crispy product. Colonel Sanders had done his homework. He had designed the product to taste better and to be easier to prepare. Some people in the company had been considering cutting the price on original recipe. This would lessen the price disparity with competitors.
The market research results showed something quite different. Customers felt that the original recipe product was a better offering, and thought that it was worth a premium price. They reported being confused by why crispy and original recipe were priced the same. They also had some doubts about the quality of the crispy product, which created doubts about the quality of original recipe if it was sold at the same price.
A test was made of charging a five percent premium for original recipe, along with putting a blue ribbon on the containers. Volume both increased for original recipe and for KFC. Consumers reported that the original recipe quality rose. And it may well have. Knowing that customers had to pay more for it, the cooks may have paid more attention. This successful program ran for many years before parity pricing between the two products was reintroduced by a new management team.
Introducing a premium-priced brand can make a similar positive impact on adding profitable market share. Black & Decker found this out when it added the more expensive DeWalt line of portable power tools. While many people who do home-improvements want the least expensive product that will get the job done, others take pride in their work and enjoy having the feel and look of top quality tools while they are working. And those tool lovers will happily pay a hefty price premium for that sense of being well-tooled.
By offering both brands, Black & Decker can be more competitive on price with those who care about that feature of a product offering while being more competitive on image and quality for those who are more sensitive about those factors. As a result, the company was able to gain market share and expand profits even faster.
Where can you use price changes to reinforce a quality perception?
Copyright 2008 Donald W. Mitchell, All Rights Reserved
Donald Mitchell is chairman of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of seven books including Adventures of an Optimist, The 2,000 Percent Solution, and The Ultimate Competitive Advantage. You can find free tips for accomplishing 20 times more by registering at: www.fastforward400.com
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