In the past, whenever I wrote about price increase done right it was either Starbucks or Apple that showed us the way. By this, I do not mean we simply copy their pricing, price points and premium pricing and call it our own. What do we see in these examples?
- Their customer centric approach – who is the customer and what job the brands want to position their products for
- The rigor in their methods – you understand all scenarios including downside of backlash
- Their understanding of value waterfall and customer reference price
- Their invisible price increase – price increase can come in the form of better product mix, taking away cheaper products from the mix, etc.
- Their effective communication of the pricing changes – there are always reasons for price increase and it is never because it deserves the price increase.
We recently see an example of a business that did the exact opposite of all these principles – Turing Phramaceuticals raised the price of tuberculousis drug from $13.50 a pill to $750 overnight. What is wrong with this? If the tablet saves lives, is it not worth the price for the value it delivers? Don’t I always recommend here pricing as share of value delivered?
There are several things wrong with Turing’s approach to price realization.
- Thinking and saying the product deserves the price tag because of its value. No product deserves its price because we say so.
- Ignoring the value water fall – even if we can objectively show the value created by our product there are many factors at work that reduce the final realized value.
- Ignoring reference price effect – Sure customers see value in a life saving drug but if the price they have been paying for it (or its alternatives) sets a strong reference price in their minds.
- Not practicing versioning – They saw the drug as adding considerable value, priced far lower than what some customers are willing to pay hence they felt across the board price increase was the solution. If some customers have higher willingness to pay then just target them with a product version at a price and value packaging that nudges them to self-select to that version.
- Extremely poor pricing communication – The biggest part of pricing strategy is effectively communicating it to customers. In this case they did no communication and let the media define it. To make matters worse their CEO took to twitter to attack everyone and justify with, “my product deserves the price tag” claim.
Pricing is a hard problem. There are no easy recipes that you can copy from others. It requires you to start over every time you touch the pricing dial. We may not become pricing experts by studying Apple and Starbucks but we can learn the importance of pricing as a strategy from Turing’s failure.