Last week I wrote about a product that has an average selling price (ASP) of $100,000, takes about an year to make and sells just about 2500 units a year. That product is Steinway Grand Piano. On the surface it would have looked to a casual observer the high price tag is a direct result of the cost and complexity of building the product and the incredible attention to details. One may be forgiven for thinking that the marketer had no option but to pass on those costs and likely makes razor thin profit from each unit.
However a simple math based on their financial accounting statement and their overall product mix established that what appears to be high cost- low profit product is in reality the main profit driver while the low cost volume products bring less than quarter of profits despite their volume. The moral of this story and other such stories that try to justify higher prices based on product features alone is – do the math.
If LVB sells 2500 Steinway pianos in a year, it sells 7500 units of Essex and Boston. At three times the volume of Steinway pianos these two brands account for barely 20% of the total profit. Stated another way, at one fourth of total unit sales the premium brand Steinway brings in 4 times the profit from its volume brand.
The right place to start to set prices is to start with customers and the reasons they buy the products. Different customers – different reasons and you have customer segmentation. Another way to look at the reasons they buy a product as – “What jobs are different customers hiring a product for?”. That is customers have jobs to be done (needs to be filled) – they hire (which implies they can fire and switch to another) a product that best fills those needs.
The needs could fall anywhere in the spectrum of perfectly utilitarian and perfectly emotional. But very few products get hired for purely utilitarian reasons and almost no product gets hired for purely emotional reasons. For the latter, the product should meet basic utilitarian threshold or given enough utilitarian reasons that will help rationalize the buying (hiring) decision.
This is the spectrum of reasons to buy. Do customers fall in this spectrum too? That is some customers are all rational, some less, and some are all emotional? May be. We cannot make such a stronger claim. A more reasonable claim customers do not fall in a fixed band in spectrum only their purchasing occasions do. Even the most rational customers have occasions that demand them to be emotional and splurge. Even the most emotional customers have occasions where they skimp and go for utilitarian products.
You can substitute “reason” with “job to be done” and you can see the role of a product is to get the job done. Different jobs, different competition and different prices!
Given this framework it is easier to see where the Steinway and its lower-priced brethren fall in.
For those kids that are truly interested in learning piano, parents who wished they had learned piano and vicariously living through their kids and hundred of thousands of amateurs there is the low-end Essex and Boston pianos. For $2000 a pop these pianos get the “job” done better than other alternatives. Willingness to pay is one thing, wherewithal to pay is another. Most of us cannot afford to pay the price or have places to keep a grand piano.
For these customers, the $100,000 grand piano, while will do well, is not the right candidate. It makes no economic sense for these customers to buy a $100,000 piano nor does it make any marketing sense for the maker to try to convince these customers to buy one.
That leaves segments that –
- Buy for mostly emotional reasons
“He may have a private plane, he may have an estate. If he has an estate, he may very well have, or desire to have, a Steinway piano in his home.”
- Has significant wherewithal to pay (the same “He” above and)
Then there are professional musicians. (who likely get paid enough to afford one and need one to support their own brand)
- Buy for rational reasons because they are extracting value in another way (the pros above and)
“majority of major concert halls around the world use Steinways”
That is the customer segmentation for a $100,000 product.