Four years ago, my friend Peter Field came to New Zealand. He was here to talk about his research on creativity, and he mostly spoke to our agency and clients about creativity's ability to supercharge the effectiveness of good strategy. But something that he quickly touched on in an early slide kept coming back to me in the years that followed.
He made a point that seems obvious and unremarkable: that if you increase your sales by 10%, a small amount of that extra money trickles down as profit (once all the business costs associated with producing that extra 10% are accounted for). But if you increase your price by 10%, all of that money flows directly to the bottom line.
When he'd looked at the campaigns that had created large profit growth, the majority were campaigns that'd somehow impacted price sensitivity and allowed the price to increase. He showed that the biggest chance marketing has of contributing real value to an organisation is by enabling the price to rise (while of course maintaining sales).
But amazingly, only 5% of the briefs in his database had set an objective to increase the price. Price movement is our least common objective, even though it's the most likely of all to build a brand's bottom line.
That tallied with my own experience. In fact I don't think I've ever had a client ask me what they could do to raise their prices. It seems an absurd question when everything seems to be on sale all of the time, and where every lazy research study seems to conclude, among its handful of 'insights', that people are 'value-driven' and price is the most important consideration.
Peter's point made me think we're making life hard for ourselves. Flogging ourselves silly for small sales and market share lifts just to end up with a tiny financial impact at the end of the year. Could we be provoking many times the outcome if we turned our attention to what sorts of things make people want to pay more for a brand? Once that question was lodged in my subconscious I kept noticing answers.
In Predictably Irrational, Dan Ariely tells us about what the behavioural economists call 'anchors'. The idea is that the first time we consider and purchase a certain product, the price we pay is embedded in our mind as a kind of base reference point for what that sort of product is worth. Thanks to the power of our mind, it's very difficult to move upwards from that 'anchor'. A similar product for a greater price will always seem expensive. This is why, he says, buying petrol is always such a miserable experience.
But in some cases, anchors are cut loose. Ariely points to Starbucks. For most Americans, having enjoyed their daily Joe from Dunkin' Donuts, the prices at Starbucks were, initially, shockingly high. But this proved unproblematic as Starbucks took off. Why weren't they affected by the anchor set by Dunkin' Donuts? Because Howard Schultz designed Starbucks to be a completely different experience. "The shops were fragrant with the smell of roasted beans. They sold fancy French coffee presses. Whereas Dunkin' Donuts had small, medium and large coffees, Starbucks offered short, tall, grande and venti, as well as drinks with high-pedigree names such as Caffè Americano and Caffè Misto. Starbucks did everything in its power to make the experience feel different – so different that we would not use the prices at Dunkin' Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us. And that, to a great extent, is how Starbucks succeeded."
Differentiation – not of 'positioning', but of the actual experience – is one way to tear people upward from their preconceived notions of price. Another is storytelling.
In 2009, journalists Rob Walker and Joshua Glenn conducted a brilliant experiment. They bought pedestrian, second-hand objects, such as a jar of marbles or a metal dish, for no more than a few dollars. They then wrote fictional stories about the objects and put them on eBay. Instead of a factual description, the fictional story was written next to the object's photo. On average, the value of the objects rose 2,700%. A jar of mayonnaise purchased for less than a dollar sold for $51. A cracked ceramic horse head bought for $1.29 sold for $46. (You can read all about it at significantobjects.com.)
One of Peter Field's other observations from that same presentation was that simply setting a certain objective makes us much more likely to achieve it. The fact that we almost never set a price increase as an objective looks to me like a huge clue for planners and their clients.
