How to use price signaling in marketing?
It doesn’t matter if you’re a price signaling expert, or hearing this term for the first time. If you have a product with a consumer base, you are already practicing price signaling, even if you don’t know it.
Price signaling plays a vital role in how people perceive your product and most importantly, how much they’re willing to pay for it.
Familiarizing yourself with the price signaling concept and learning how to use it as a part of your marketing mix is an invaluable skill. In addition to improving your return on marketing investment, price signaling can impact everything else from your brand positioning to your company’s bottom line.
Choosing not to utilize price signaling as a part of your marketing strategy is such a waste, especially in today’s world. Digital technology has made it easier for businesses to acquire unprecedented amounts of information about their customers, which can be used to leverage price signaling even more.
Before we dive into the details, let’s start by explaining what price signaling actually is.
What is price signaling and how do companies use it?
In layman terms, price signaling is the message that your prices send to your customers about the quality of your products. For most people, prices are directly proportional to quality. So, if a product is more expensive than another similar product, people tend to assume that this price increase is due to the more expensive product being better.
Of course, this isn’t always accurate, as there are other factors that can influence the price of a product. This includes everything from the strength of the brand, and whether the company is doing quality branding or not.
So, how are companies using price signaling in their marketing? Let’s look at what Apple is doing, as an example.
When you compare what Apple offers to other similar products, it’s hard not to notice that their products are substantially more expensive. This goes for everything from their flagship iPhones to AirPods and other accessories.
Even though the “quality” of the iPhone might not be higher —if at all— than the competitor products that cost less, most people believe so. While this is not the result of price signaling alone, it does play a vital role in giving people that impression.
Just ask yourself this: if you walk into a store and picked up two smartphones. The first costs $800, and the second costs $1000. If you haven’t used either of these phones before, which one do you think is of higher quality? The $800 model, or the $1000 model?
That’s how price signaling works.
What are the benefits of price signaling?
Being able to increase the perceived value that your customers have about your products without incurring additional expenses is no small feat. Increasing the amount of money consumers are willing to pay for a specific product is something that almost all businesses are trying to do, and willing to spend a lot to achieve.
With price signaling, some companies are able to sell fewer products —again, think Apple— while making more money, due to the increased profit margins.
What types of organizations does price signaling work for?
Price signaling works for different types of organizations that are selling their products through different channels. So, whether you’re running a pure ecommerce business, a pure retail business, or a mix of both, it can do you wonders.
What really matters though isn’t how you’re selling your products, but what you’re selling. For some products, the quality isn’t a deciding factor for consumers. People just want something cheap that works. And that goes for day-to-day household products that people buy without putting much thought into which brand has the highest quality.
If you’re selling a product for which quality is a major deciding factor for buyers, price signaling can help you achieve great results. In some cases, the problem isn’t with the quality of a product, it’s with its price.
Why should price signaling always be combined with premium marketing?
Great products always have premium marketing. These are two things that are associated together in your customers’ brains that you can’t separate. No matter how good your product is, or how much research you put into what the price of the product should be. If your marketing isn’t on the same level, people won’t believe it.
In fact, this is something that applies to you as well. You know this in a way where you don’t even notice it anymore. Think about any “premium” brand that you know. Something that people are willing to pay top dollar for, brands like Rolex and Omega in watches, or Apple products in the consumer electronics world, or Gucci in clothes.
Now, think about the commercials and general marketing materials that these companies have. Even though these companies are selling completely different products, premium marketing is one thing they all have in common. That’s what people expect, and that what you should give them if you want to increase the perceived value of your products.
Imagine an iPhone being marketed with some cheap-looking promotional materials. Not very enticing to buy now, is it?
The theory behind price signaling
When people first hear about price signaling, they feel there is something wrong with it. How come people would want to buy a product even more when its price increases, without an increase in quality that matches that new price?
If you think this doesn’t make sense, you’re right. It doesn’t, and that’s why the price signaling theory is based on consumers not having perfect information about what makes products quality high. In this scenario, companies can alter people’s beliefs regarding what “quality” means. When consumers don’t have the knowledge and expertise to determine quality for themselves, they consider the price itself to be a quality indicator.
Back to the iPhone example, most people don’t have the technical knowledge to determine which smartphone is superior in terms of specs. So, on paper, an Android phone might outperform an iPhone in all technical aspects. The screen is better, the camera is better, and the processor is faster.
However, that’s not how people would judge quality. That’s something that Apple fully understands. When you see things from your customers’ perspective and understand how price signaling works, you’ll be able to lower your cost and raise your prices at the same time. And with premium branding and marketing to go with your new prices, your customers will love you for it.
How to start with price signaling?
Successful price signaling requires lots of work upfront. Here’s what you should do to make sure that your new prices achieve the intended results.
1. Conduct a full analysis
Before you even start thinking about your new prices, you should take your time to do enough research. This includes analyzing everything from your product and market to your consumers and competitors.
Compare the quality of your competitors’ product to what you’re offering, and understand how your customers perceive quality in that market.
2. Figure out how to bring premium quality to your marketing
After you know what “premium” even means in your market, you should start thinking about the type of marketing that’ll work with your new premium image. As we’ve discussed earlier, the marketing should be on the same level as your proposed product quality in order for price signaling to achieve the best results.
3. Understand the relation between your premium marketing and signaling
Now, it’s time to look at the big picture. Setting up a strategic premium marketing initiative will help you ensure that all your marketing efforts are moving you closer to your goal.
4. Study your distribution channel price signals
If your product has multiple distribution channels, you should always assess each channel separately. Your price signaling decisions must be based on the outcome of this assessment, to ensure that your new prices are aligned with what your customers are actually willing to pay.
5. Study competitive products
Taking a close look at what your competitors are doing will save you lots of time and effort. Look at their competitive products, marketing channels, and prices and see what’s working and what’s not. By doing this, you’ll be able to start where they ended and make the most out of your marketing efforts.
6. Examine your price elasticity
Analyzing the current price elasticity of your products is something you should always do as a part of the price signaling preparation process. In short, the price elasticity is a way to measure the relation between changing a product’s price, and the effect this will have on the demand for that product.
It goes without saying that changing the price of any product will affect the demand, one way or another. In some cases, this is something that’ll play in your favour, as you’ll end up making more money selling fewer products at a higher price. Before you commit to price signaling, make sure you’re aware of its effect on your price elasticity.
7. Coordinate with your marketing and pricing team
Successful price signaling requires seeing the big picture. And that’s why you must plan the entire process with your marketing and pricing teams. By doing so, you’ll ensure that all your efforts are aligned and that everyone has a clear vision about what you’re trying to achieve.
Keep in mind that changing your prices will also affect how your marketing and pricing teams work so, you should get them involved as early as possible.
Price signaling tips and considerations
Now that you know what price signaling is, the theory behind it, and how it works, it’s time to put that knowledge into action. The following tips and considerations will help you get the results you are looking for.
a. Never underestimate research
When it comes to price signaling, rushing things is never a good idea. Take your time to do all the research you need, covering even the smallest details that might impact the price signaling process.
b. Start with your new products
Price signaling is always easier with a new product that’s being introduced to the market. With a new product, people are open to how you’re introducing it to them so, you are less likely to encounter resistance with a new product. Once you succeed with a new product, people will start to see your brand differently, and you can then apply the price signaling concept to your existing products.
c. Break the process down into small steps
At first glance, price signaling sounds like a simple process. You just up your prices, and people will suddenly perceive your products as more premium. While that’s what it sounds like in theory, reality is pretty different. There are many factors that affect the signaling process and lots of work that goes into it.
And that’s why you need to break down the process into small steps. By doing so, you won’t forget anything and will make sure that all the small details —which can make a huge difference— are accounted for.
Wrap-up
Price signaling is a promising technique for any business in the right industry. When applied correctly, it allows you to charge more for your products, increasing your profit margins without increasing your manufacturing costs.
Even though the quality of your products doesn’t change, the higher price tag combined with premium marketing will affect the way people perceive that product, and how much they’re willing to pay for it. Not prioritizing price signaling can be such a waste for your business, as you could be charging less than what your clients are actually willing to pay for your product.
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