What Matters Is the Perception of Value, Not So Much the Product

A lot has been written recently on how the perception of value rather than a formularized multiple of “cost” can help guide your pricing decisions. If you can honestly get the customer to perceive a higher value for your product than a simple markup on cost, it permits you a higher ROMI and a greater ACPO.

A lot has been written recently on how the perception of value rather than a formularized multiple of “cost” can help guide your pricing decisions.

In a previous blog post, I recounted the story of the “thank you” gift given to the U.S. Ambassador to Brazil by the chairman of the American Chamber of Commerce. He presented Madame Ambassador with a small blue Tiffany box and said:

“Here is a small gift to show our appreciation for your support.”

Her answer should be writ large on Tiffany’s advertising.

“There is no such thing as a small gift from Tiffany.”

That says it all. Imagine that whatever was in the Tiffany blue box had actually been purchased less expensively from some other source. Would anyone question that the gift’s perceived value grew exponentially when it appeared to be from Tiffany? I remember a humorous ad in the university newspaper offering Brooks Brothers, Paul Stuart, and J. Crew labels to sew into your discount purchased garments to upgrade them by endowing them with the right Ivy League cachet. Somebody understood the magic of perception.

If you haven’t watched Flint McGlaughlin’s excellent presentation from MECLABS Institute you should. His insights make a very strong case for his pricing methodology, which is really worth studying.

Pricing of products or services is one of the key strategic aspects of all businesses. It is fairly easy to look at what your competitor is doing and use that as a benchmark. But “me-too” market pricing is seldom enough and certainly not the way to have a big success. If you can honestly get the customer to perceive a higher value for your product than a simple markup on cost, it permits you not only a higher ROMI (Return on Marketing Investment) but it also often provides a greater allowable cost per order (ACPO) — more money with which to promote, more customers and, hopefully, greater profits.

The profusion of “subscription” offers in the marketplace is testament to the simple economic truth that if you can engage or enroll someone in a program of purchases, the likelihood of being able to transform a “product” into a “service” is greatly enhanced. And services tend to have higher margins. You may remember the story of the 40 or so Microsoft executives in Brazil who, when asked how many had subscriptions, very few hands went up. But when asked how many had Netflix, virtually all of the hands went up. Netflix had managed to eliminate the negative perception some people have to a “subscription” simply by not using the dreaded “S” word.

What has been surprising is that Netflix competition’s pricing appears to have been forced down to undercut Netflix. Looking at all of the streamers, there appears to be much too little effort to segment customers, to determine their individual perceptions of the value of the services (other than to see how many people subscribe and at what cost) and to reengineer the offerings to cater to perceived values. As Rafi Mohammed, the founder of “Culture of Profit,” wrote in the Harvard Business Review:

A one-price-fits-all strategy fails to acknowledge the simple fact that for any product or service, customers have unique needs and a different willingness to pay. With few rivals, mandating all-you-can-watch pricing was once tolerable. But to win in today’s competitive market, streaming companies need to step up their pricing strategies by offering choices to better accommodate the needs of their customers.

He hits the jackpot when he observes, “ … customers have unique needs and a different willingness to pay” and these needs and this willingness are driven, to a significant degree, by how much each customer perceives the services to be worth. That perception reflects the subscriber’s assessment of the channel’s content. For certain affluent customers, the more content that is unique and the subscriber “believes” will meet his/her tastes, the more likely to purchase a premium package, especially if it has “exclusive” content. The couch potato who is less choosy and has a tighter budget will probably go for the cheapest option.

As we can see in this example, the pricing has little to do with the product and service “costs,” which are probably similar for both the premium and economy versions. What matters is the perception of value.

If you don’t embrace the reality that perception may matter more than some other criterion for pricing and how your prospect looks at your offering, you may never have given anyone a little blue box from Tiffany.

How Hospitals Can Compare Prices, Despite Not Having a Consumerism Model

The inability to compare prices is an often-cited reason for why healthcare hasn’t fully evolved into a consumerism model — patients don’t comparison shop among healthcare providers, using price as a significant factor in decision-making like they do when comparing other purchases.

The inability to compare prices is an often-cited reason for why healthcare hasn’t fully evolved into a consumerism model — patients don’t comparison shop among healthcare providers, using price as a significant factor in decision-making like they do when comparing other purchases.

So when the Centers for Medicare and Medicaid Services (CMS) rolled out a regulation that required hospitals to post their “chargemaster” rates online, as of Jan. 1, 2019, it was another experiment in creating a more price-aware environment.

Nearly a year later, the introduction of chargemaster data into the public sphere has had no discernible impact on use. The structure and volume of chargemaster data made comparisons too difficult, and the results too generalized to be predictive of the costs an individual with insurance would incur.

  • So will pricing information ever become a significant part of consumer decision-making?
  • Yes, although it remains several miles down the road, and likely will stay limited to services with less likelihood of medical complications, which adds in additional services and costs.

The most likely source of the data will be health plans that can associate its member’s benefits and the rates defined in plan-provider contracts to provide an estimate.

If the plans take it one step further and compare facilities within a geographic radius to present consumers with options, will that influence choice? And should pricing be a determinant of choice when other factors, such as provider expertise and facility quality, are also considerations?

It can be helpful to think of the CMS’ requirement of January 2019 as a directional change that opens the door to greater pricing scrutiny. Chargemaster rates are like “list prices” in the same way a hotel has list prices, but guests rarely pay the full amount. But that rule was just the first in what is likely to be a series of rules under consideration that will gradually pull back pricing layers until they become meaningful at a consumer level.

One rule — under consideration, but not finalized — would force hospitals to make public their standard charges, including payer-specific negotiated prices, in a format that is both machine-readable and “consumer friendly.” That would represent a significant expansion on price transparency. Assuming this rule is challenged in court, implementation likely will be delayed past its proposed January 2020 effective date.

One thing is certain: The external environment is shifting on price transparency.

If you are unsure where your facility falls on the cost spectrum vs. competitors, a data analyst can compare chargemaster data as one way of establishing context. Armed with this information, you can open the door with leadership to discuss this coming chapter in price-based competition.

The ‘Continuity’ of Subscription Marketing — Wow, It’s Everywhere!

Somewhere down the line, I missed the memo that “continuity clubs” is now a yesterday term and that “subscription marketing” is preferred. While some of us may recall “12 CDs for $.01” or may even today have a favorite product-of-the-month subscription, it seems marketing has fallen in love with subscriptions.

Somewhere down the line, I missed the memo that “continuity clubs” is now a yesterday term and that “subscription marketing” is preferred. While some of us may recall “12 CDs for $.01” or may even today have a favorite product-of-the-month subscription, it seems marketing has fallen in love with subscriptions.

Such was the topic of a recent Direct Marketing Club of New York luncheon — where featured representatives from the entirety of the “subscription ecosystem” shared their perspectives: Barry Blumenfield, BMI Fulfillment; Jim Fosina, Amora Coffee & Amora Tea; Robert Manger, Sandvik Publishing; Pattie Mercier, Vantiv; Craig Mirabella, EverBright Media; George Saul, Fosina Marketing — and serving as moderator, Stephanie Miller, TopRight.

It is truly astounding so many products can be “moved” by subscriptions — nail polish (Julip), underwear (FreshPair), software (Adobe), music streaming (Spotify, Apple), men’s designer wear (Trunk Club for Men), women’s shoes (Shoe Dazzle), cosmetics and personal care (Birchbox), buyers’ clubs (Amazon Prime), and dates (match.com) — just a few of the examples offered up, in addition to coffee/tea (Amora), and educational learning (EverBright Media and Sandvik Publishing) that were represented on the panel.

While the channels and the product mix have expanded, some tried-and-true maxims from the days of “book and music clubs” have not been lost, according to the panelists. They include:

  1. It’s all about the bond with the customer — how you differentiate your product and service to justify a continuing relationship and greater lifetime value.
  2. This is a direct marketing business — pay attention to marketing ROI in every detail, even when business is great, there could be warning signs of waste and cost in specific areas of marketing spend.
  3. The entirety of the customer experience needs to be looked after — from product development , to advertising, to ordering, to service (extending from self-service to contact centers), to fulfillment.
  4. Pay particularly close attention to such areas as technology and fulfillment: surprise and delight requires such focus.

While channel expansion has brought to the marketplace new realities:

  1. Does your brand have a “thumb stopping” moment? With more and more mobile engagement, subscription marketers must make it easy to stop the consumer, make her pause, and consider the product/service offer in a mobile moment.
  2. There is a role for every channel — but each channel has its own metrics to pay attention to. While the panelists were proprietary with details, the lifetime value of a customer acquired via email, direct mail, DRTV, website or mobile most likely is distinct from each other — and may have different attrition rates. You’ll need to manage these distinctions in the marketing mix.
  3. A payment processing partner is important. In any given year, millions of credit cards expire — and this will be even more prevalent as chip-enabled cards flow into the marketplace.
  4. “Bill me” invoicing — once a mainstay in the business — has practically disappeared altogether over the last five years — as consumers in general appear to have become more casual about not paying.

To say the least, this business model has expanded far beyond books, magazines and music — and it makes me wonder: What’s next?