Human beings are naturally superficial creatures. To us, image is everything. Market research has proven that before consumers are willing to part with their money and make a purchase, a product must appear to offer superior value. If a product is priced to cheaply it’s seen as junk, and if it’s priced to high, buyers reel in repulsion from the sticker shock. It is important for businesses to keep their pricing in line with their brand image.
This means that two technically identical products can be priced very differently.
A good example of this marketing tactic is bottled water. Here, you have two brands, Nestle Pure Life and Glaceau Smart Water.
Water is the most abundant resource on our planet and the drinking water here in the United States must adhere to a very high standard, yet the last time I looked at bottled water in the grocery store (I drink filtered tap water) the Glacaeu Smart Water was about four times more expensive than the Nestle Pure Life.
Cars are another great example of this marketing technique. Here, we have two cars in different market segments and price brackets.
The Volkswagen GTI
The Audi TT
From a distance, these couldn’t be two more different cars. The GTI is a sport-hatchback and the TT is an entry level luxury coupe. The VW costs about $22,000 and the Audi costs $36,000. You would think the Audi has the equipment and specifications to back up the $14,000 price premium.
It doesn’t.
Audi is the luxury division of Volkswagen, but the TT is actually built on the GTI’s platform. Both cars have the same 200 horsepower engine, the same direct shift transmission, the same chassis, and almost identical performance. Even if you get it loaded, the VW is still cheaper than the Audi.
So what exactly does that money buy?
The perception of value.
The Audi buyer wants the prestige of owning a premium brand car. Not everybody can afford to drive a premium coupe so the price is worth the exclusivity.
For Volkswagen/Audi, the premium brand buys them a larger market segment. They now have the ability to appeal to more consumers. They also are enjoying the benefits of a large contribution margin on Audi sales. The company is able to enjoy large profits from the Audi’s because of the higher vehicle price. It is important to note that in this situation, the Audi isn’t a bad value for the money as much as the VW is a terrific value.
Because the company has two distinct brands and it can sell to a larger market, it can take advantage of economies of scale. Because the company is making more engines, each engine costs less to make. The company can afford to put an engine built to the Audi standard in a much cheaper VW. The Audi is a strong value against its up market competition but the VW GTI is the best sport-hatchback money can buy. This is a win-win situation for both consumers and the company. Consumers get to drive excellent vehicles and the company can ethically engage in price discrimination, a profit maximizing practice of charging different prices to different customers.
When you are running your business it is essential to think about the way people perceive your product. To maximize sales and profits while appealing to a larger group of customers, you can try doing what VW/Audi does. Take your same product and re-brand it to appeal to a different group of people. Remember, it is important to sell a high quality product, and it is unethical to deceive your customers, but the sale itself is largely dependent on a customer’s perception of value.
