Bridging the gap between price communication and pricing strategy

Considering price communication when creating a strategy 

Editor’s note: Martin Hellich is the global head of brand and innovation. This is an edited version of an article that originally appeared under the title “Communicating Prices Effectively Should Get the Same Attention as Setting Prices Optimally.” 

Among all the marketing P’s – price, product, promotion, place and additionally people, process and physical evidence – price is likely the one with the most significant impact on the bottom line of a profit and loss statement, particularly in the short term. For a business with an operating profit of 10%, a modest average price increase of just 2% can enhance profitability by 20% or two percentage points.

Given this substantial impact, it is unsurprising that brands meticulously manage their pricing strategies. This can range from sophisticated dynamic pricing and yield pricing, which involve continuously processing and modelling large data sets (often utilizing AI) to determine optimal prices based on stock levels, competitive pricing and consumer willingness to pay. In more discretionary categories, primary research plays a critical role in modelling and predicting consumer responses to pricing. 

For product categories with uniform price points, commonly found in fast-moving consumer goods and consumer packaged goods, techniques such as the Gabor-Granger method are employed to gauge reactions to incremental price changes. In categories with multiple price points, commonly found in the services (tariffs), automotive or B2B (packages or extras) sectors, more complex techniques such as conjoint analysis are used to capture and model consumer behavior through trade-off exercises.

Managing prices optimally has become a common standard. However, one aspect is frequently overlooked. 

Price communication influences sales and the brand  

Effective communication is a well-established principle, validated by both practical experience and scientific evidence. This holds true for price communication as well.

Consider the example of itemized feature-price menus. Rational human theory suggests that this approach is optimal because it allows consumers to make a selection according to their preferences. Customers can purchase exactly what they need at an acceptable price and omit what they do not need or find too expensive. However, this method can be mentally taxing for some consumers, requiring a high level of cognitive effort to process and make decisions.  

Consequently, buying decisions may be postponed or diverted to products with simpler choices. To address this, bundling product features and structuring them to simplify decision-making can be beneficial. 

Additionally, positioning these bundles with a clear and compelling proposition can facilitate easier decision-making for consumers, ultimately enhancing the purchasing process. Consider some of the well-documented behavioral effects, such as those discussed in Daniel Kahneman’s acclaimed book “Thinking, Fast and Slow.” One notable effect is how the framing of alternative prices influences consumer behavior. The presentation of reference prices or the comparison of your brand product variants priced differently can significantly affect consumer choices.

Additionally, the physio-psychological aspects of price communication – such as the use of colors, fonts, font sizes and pictures – play a crucial role. While communication specialists are aware of these effects, it is surprising how often they are overlooked in price communication, like in proposals for cars or insurance contracts. This oversight may stem from the division of labor within companies, where those responsible for optimal pricing are not involved in executing the communication and those in charge of communication may not focus on pricing as an important aspect. 

In some categories, the way a product and its prices are communicated can even create a greater impact on sales volume than a price variation of up to 20%. Given this significant effect on the bottom line, it is surprising that so little attention is paid to the structure, mental effects and psycho-physical impact of price communication. 

Finally, consumer perception of how prices are communicated influences their relationship with the brand as prices normally cause negative emotions in consumers. The question though is, in which way and how intense these emotions are, which in the end depends on how they are communicated.

Besides the sales activating objective of good communication, its effects on brand equity is important to consider as it provides another reason to carefully think about the best way to communicate prices.