HOW TO STOP CUSTOMERS FROM FIXATING ON PRICE

Increasingly am hearing that people are choosing cremation not because people in their markets want cremation but BECAUSE THEY CAN’T AFFORD BURIAL. YIKES!

   In the May 2010 issue of The Harvard Business Review there appeared an article entitled “How to Stop Customers From Fixating on Price” by Marco Bertini and Luc Walthieu.

   The article’s authors help us understand that:

   “Most mature markets customers have become unresponsive to marginal changes in value. They have lost interest in how each product option might serve them... [so] they default to price minimization. In fact, (and this was interesting) a list of options at different prices doesn’t make [consumers] examine the relative merits of those options, it activates their predisposition to pare the price.” [emphasis mine]

    Consider these other points:

 “Faced with the many options available to them…[customers] behave as though only one factor matters…price.”

 “Undercutting to capture customers…damages brand equity and erodes profit margins…worse, customers…grow disengaged. They fixate on price and lose interest in marketing communications…”

 “It is still possible…to jolt customers into considering the value of your offering.”

 “The key to escaping commodity status is not what you do to your product - it’s what you do to your customer.”

   The authors offer 4 research-based options for breaking this customer fixation. I originally applied these to funeral service in my weekly blog, “The Creedy Commentary” which you can access by going to www.alancreedy.org. The 4 options are:

  • Use price structure to clarify your advantage

  • Willfully overprice to stimulate curiosity

  • Partition prices to highlight overlooked benefits

  • Equalize price points to crystallize personal relevance (my favorite)

USING PRICE STRUCTURE TO CLARIFY YOUR ADVANTAGE

   Your pricing structure can be used to call attention to the value your service delivers and, potentially, to what differentiates you from your competitors.

   Think for a moment. What does the traditional funeral pricing strategy call attention to? Typically, two things:

   • Activities: ceremonies, transferring and embalming bodies, cremating or burying, etc.

   • Merchandise: caskets, vaults urns

   At a minimum, merchandise often holds equal importance (as represented by price) with the activities. But, judging solely by the statistics, consumers are increasingly disengaged from both. Debate has raged for years about moving the emphasis to services and off caskets. A few brave souls have done this with fair results. But I wonder if they would have better results if they went the next step and stopped charging for activities and started charging for what people value about those activities. How could we alter our pricing strategy in ways that consumers would focus on value? I am not sure I know any longer what consumers value; but the majority, I am convinced, still feel that “Mom’s Body” is a sacred thing. Given that assumption, here are two ideas that I am throwing on the wall for reaction:

   1. All the funeral homes I work with are operated by people who have a high level of personal integrity. That integrity creates “value” boundaries expressed in a variety of ways. But the most common is the attention to detail and the quality of the measures they take to protect and preserve the body… including the process of cremation. Such things as “chain of custody”, internal control procedures, safeguards, licensing, and the consistency and clarity of processes are important to them. This may or may not be true of low-cost providers or discounters. I am told that often it is not. Most frequently they cut corners, outsource a lot of work, and are not always as diligent about safeguards. The problem is the customer doesn’t know this. Or, worse, they don’t know if they care.

   So, let’s say integrity and trust are valued at your firm and you hope that they help distinguish your service. Hampered as you are by integrity, it makes it difficult for you to offer the same low price to compete. Your integrity prevents you from cutting the corners to enable you to do that.

   What if you made cutting corners the customer’s choice? You could do this by creating packages based on the level of care the customer wanted rather than the quality of service.

   Here is one small example. Let’s say you do all your own cremations and the “chain of custody” is rigorously observed, etc etc. But, you have a discounter who says he will do a direct cremation for $549. You might create a competing offer in which it is carefully and respectfully disclosed that for that low price, you outsource in the same way your competitor does, you cannot guarantee any of the values you normally offer and you require a “hold harmless” agreement in the event anything happens whether within your control or not.

    According to the principle of using price structure to clarify your advantage, potential customers will be forced to think about how sacred mom’s body really is.

   2. How about suggested prices? Here is one that is totally outside the box. We are required to offer General Price Lists. But what if those prices were only a suggested reference point instead of a fixed reference point? In other words, you would make it clear to customers that they need only pay for the value they feel they have received. For those of you who offer unconditional guarantees think of this as a reverse guarantee.

   Am I out of my mind? Not really, The Museums of Modern Art and American History in New York City have been doing this for years. The admission fee is clearly presented as a suggestion. Restaurants in cities like Vienna, Berlin, Seattle, and Denver are trying it too. They are finding the “PayWhat-You-Want” model is both sustainable and competitive. Research shows that customers, on average, pay 86% of the suggested price. This average is a blend of those who paid the full suggested price and those who paid less, but everyone paid something. I shared this with a funeral director friend (thinking he might ask me to step out of his car) and he re called a time when a family was so delighted with his service, they deliberately overpaid his bill by $500.

   The point is: By offering price as a suggestion, you create a situation where people start thinking about what they value and pay for it accordingly.

   Think about how you could alter your pricing strategy by aligning what customers value with price. Customers no longer value activities or merchandise.

WILLFULLY OVERPRICE TO STIMULATE CURIOSITY

   This strategy has proven to be particularly effective for mature industries. Examples range from coffee to high priced elevator systems.

   In a price-competitive mature market, the logic behind willful overpricing seems counterintuitive. At the same time, I can well remember that our primary pricing strategy at the funeral home I managed was to be $100 higher than anyone else. This “strategy” is one I have often encountered as well as its evil twin: being $100 lower than anyone else

   According to research, customers don’t automatically dismiss the higher price model. Instead, a higher price can motivate them to take a closer look. That closer look could (and should) reveal information they care about that works in your favor. (It bears repeating here that the point of all these strategies is to get consumers focused on value rather than price.) Some of the things I can think of are quality (“your mother never leaves our care”), reputation, or an uncondi tional guarantee, etc. 

   In one experiment products were priced at an 80% premium. Subjects were able to recall twice as much product information than the comparison products; this enabled them to cite more arguments in favor of buying the products. “The overpricing also evoked a more passionate response to the products which led to a willingness to pay much more than was originally intended. By contrast, people who were exposed to a premium close to their expectations (10%) or one that was outlandishly high (190%) simply acted accord ing to their pretested inclination…” THIS IS IMPORTANT because most funeral homes in price-competitive markets are only marginally higher than the lower-priced firms. This research would tell us they are not enough higher to provoke the necessary attention to value.

   The implication is that a price range exists above what customers thought they would pay which causes them to ask value questions. Willful overpricing can reverse the down ward “price cutting” trend common to mature products and services. Starbucks deliberately set a price point for a product that, at the time, most restaurants gave away. The price made people rethink the importance of coffee in their lives.

   In another example, Kone, the Finnish elevator compa ny, used willful overpricing to introduce innovation. In the 1990’s, the elevator industry had become very price-compet itive. In this highly commoditized market, Kone introduced an innovation that the market (being entirely price-focused) was unprepared to take into consideration. 

   To provoke consideration of their advantage, Kone began responding to RFPs with two proposals: A normal proposal with old features and normal pricing and a much higher-priced proposal for their innovative elevator system. It took a while, but it caused buyers to talk about the new concept and even to call Kone for an explanation. The high price enabled them to have conversations about value with people who wanted to know why it was higher priced.

   I have a friend in a very price-competitive market who used this to his advantage. He deliberately prices direct cre mation at more than 3 times the low-price competitors and about 2 times his conventional competitors. He offers first– class service no matter what you choose. 

HOW COULD THIS WORK IN FUNERAL SERVICE? 

   Why not create two price lists: one that is price compet itive but strips out all the liability and quality of service (in fact one that maybe highlights some of your competitor’s disadvantages without mentioning them by name) and another that highlights features, safeguards, and other benefits that are included. For instance: 

   Transfer of remains to the funeral home: 

  • Price competitive: use of a 3rd party trade service at your convenience. Must sign a “hold harmless” agreement: $350.

  • Full service: The deceased never leaves our care, two at tendants and a Cadillac Funeral Coach within 2 hours of the first call: $650

   I just made these up but maybe you can think of some better ones. A last point of caution: the research suggested that if you use this strategy the overpricing should be 50-80% above what people expect. What price shoppers expect is generally a function of your competitor’s prices.

   So, the next time someone says, “Your price is a lot higher than the others.” see it as an opportunity. The trick is not to focus on the value that YOU think is important but the value THEY think is important. In other words, stop obsessing about activities and start obsessing about what makes people happy with your service. 

PARTITION PRICES TO HIGHLIGHT OVERLOOKED BENEFITS

   Partitioning Prices to Highlight Overlooked Benefits is the most difficult concept to grasp and execute. The research found that poorly executed it has the ability to alienate cus tomers. They see it as burdensome and a form of “bait and switch”. Think luggage fees that have been partitioned out of the normal ticket price for airlines. 

   If done correctly, however, partitioning can have a pow erful effect on buying behavior. Basically, the partitioning strategy is based on the proven premise that customers don’t really tune into benefits they might find valuable unless they know their value. So, if you include items within a package and the buyer doesn’t know the value of the individual items included in the package they don’t really have a way of distin guishing between product or package offerings.

   According to research, “Presenting a cost as a set of smaller mandatory charges invites closer analysis and therefore increases the likelihood that a customer will revise a routine consumption behavior.” Basically, this means that if you use package pricing you need to set a frame of reference by either identifying the individual prices of the items in the package or by clearly showing that the cumulative value of items in the package exceeds the package price by a specific amount. Say, for instance, that to induce people to buy your best burial package you include better quality caskets, a video memorial and DVD, 10 death certificates, and your premium-level register book. If you don’t partition those items as having a specific price customers may not see the value of going from better to best.

   Let’s be even more specific: Let’s say you offer “good-better-best” packages. In your good package, you offer two caskets. In your better package you offer 3 and in your best package you offer a choice of 4 caskets. The partitioning strategy tells us that you should show the value of the caskets in each package. That doesn’t mean the price of each casket but something more like you would see in a retail advertisement. Think of a “callout” bubble next to the pictures of caskets that says something like: “A value of $2,995” or (for your Best Package) “A value of $4,495”.

   The research concluded that “to those who saw the price partitioned, quality mattered: the better package induced more people to choose the more expensive [product]…people are unlikely to factor a benefit into their choice unless an explicit charge is made for it.”

EQUALIZE PRICE POINTS TO CRYSTALLIZE PERSONAL RELEVANCE.

   This is my favorite because it addresses the “sticker shock” I so often experience in selection rooms today. With rural funeral homes in particular reporting families opting for cre mation BECAUSE THEY CAN’T AFFORD BURIAL, I think it is a solution to price spreads of $2,900 up to $28,000.

   I encountered a funeral director who had courageously narrowed his casket price offerings from a low of $1,100 to a high of less than $3,000. As I stood looking down at a row of caskets, I actually found myself saying (as if I were a consumer): “Wow, I can pretty much have anything I want.” Having been in so many selection rooms over my career, at first, I was shocked. Then I found, to my amazement, a feeling of relief. Here is a picture:

1. Solid Mahogany Urn shaped, Velvet Interior $2,650 2. Brushed Copper, Velvet Interior $2,995 3. Solid Cherry, Urn shaped, Velvet Interior $2,550 4. 18 Ga round end brushed, Velvet $1,740. 5. Oak Veneer, Velvet Interior $1,845 6. 18 Ga two-tone blue, square corner, Crepe interior $1,495 7. Stainless brushed velvet interior $2,150 8. L 98 Mandarin $1,150 9. 18 Ga Blue round end, crepe interior $1,575 10. Solid Cherry, Velvet Interior, $2,600

   As I surveyed the selection room above, I found myself moving from thinking about what I could afford to which casket I liked best and which would be a good fit for me (just like the research said I would). And, as if I were an actual customer, I felt relief. Some years ago, I picked a Pembroke Cherry for my prearrangements. At the time it sold for under $3,000. I watched it creep up above $5,000 but just figured that was inflation. When it went over $6,000 I made a mental note to find something cheaper.

   Once a consumer realizes they can get pretty much what ever they want for just about the same price they move from thinking about what they can afford to thinking about what they want. The research found that this allowed sellers to price above their normal average. If the customer is a shop per, their emotional reaction to the selection room, contrast ed with that experienced at your competitor’s, will change their attitude towards you.

   The implication is this: Let’s say that your average casket and service sale is running about $7,500 and the range of caskets you are currently offering to reach that average is from $2,500 to $28,000. The concept of equalizing your price points would suggest that as you narrow your price range you could accomplish two things:

   First, you would change the playing field for handling price shoppers and likely increase volume. 

   Second, you would (as the research found) be able to realize a higher overall average casket and service sale on what you are currently serving (say from $7,500 to $8,000 for traditional burial).

   Of course, this implies that you have exercised some ag gressive tactics to control the wholesale cost of your caskets. My friend sells almost exclusively Chinese caskets which enables him to offer retail prices at or below the wholesale prices of our larger American manufacturers.

A FINAL THOUGHT ON PACKAGING 

   One of my readers offered a very thought-provoking in sight into a completely different approach to packaging. I re peat it here to spark your thinking. Let me know if you adopt her idea and what you experience.

   “Very thought-provoking…but here is one I’d like to talk over with someone…why are most of the package offerings I see on GPLs categorized by final disposition? Such as cremation with full service etc. Why not categorize by cere mony … such as “religious remembrance”, “life celebration”, maybe even a “destination” offering? I really like the idea of an “expeditious” package for those who think they want quick. To me the value of what you all do is in the service not the final disposition. The way it is now service always feels like an add-on when I think it should be the focus.”

   We need to think about this insight and, hopefully, talk about it. My take is we categorize this way partly because customers often start with “I want cremation” so we think we are responding to that issue. But I also think that it is our way of saying: “With casket or without casket”.

   This point has gotten me to wondering if we couldn’t sidestep that issue and do a better job of relating with families if we just let go of the casket issue altogether. Why not have a Catholic Funeral Plan, a Military Honors Plan, a Simple Plan, etc, etc, etc? I can anticipate that someone might say “Too complicated”. Thirty-eight caskets on display are complicated...not to mention expensive.

   I wonder..

CONCLUSION

   The Harvard article stimulated me to think about how we do things. Experience suggests we may be causing consumers to act in ways that we don’t like. It is my sincere hope that practitioners will see this article as a catalyst for their own thinking and experimentation. The old saw: “if you keep doing things the way you have always done them you will get the same results” has held true for the profession for far too long