Companies often have difficulty talking with customers about prices, because price is often an obstacle to a sale. That leads some companies to use pricing tricks that conceal the true cost or otherwise mislead customers. That’s a mistake. This article offers guidelines companies should follow as they rethink pricing strategies, particularly in a time of high inflation.
A simple take on prices is that they are an obstacle toward the purchase of a desired product or service. Companies, therefore, see a legitimate need to reduce “friction” in the transaction, which they accomplish by reaching into a seemingly bottomless bag of tricks, ranging from the subtle to the egregious.
Some companies, for example, tweak price endings to distort perceptions or to signal a bargain, drawing on research showing that, say, $9.99 is perceived as a whole dollar cheaper than $10, rather than just one cent cheaper. Others flank their prices with intricate or dubious cues that evoke a favorable reference point. A third option is to break an expense down into a set of component charges in the hope that shoppers underestimate the total or struggle to compare across competing offers. Ticketmaster, Overstock, and Intuit have all faced criticism for potentially misrepresenting how much they charge for their products and services. The current inflationary environment has only extended the practice.
The challenge for purpose-oriented organizations and their leaders, then, is clear: Is it possible for a company to be transparent and truthful even at the delicate moment it asks customers to reach into their pockets? After all, even companies that are fundamentally ethical and truly care about their customers face the competitive pressure or commercial temptation to make prices appear smaller or less relevant than they actually are.
In our experience helping organizations improve how they present their prices, a useful starting point is to think of customer relationships as an iterative dialogue in which the company contributes information — including the price — to achieve a desired objective.
This sounds intuitive, but our own research shows a troubling disconnect between buyers and sellers on how they perceive price in their relationship. When we asked over 300 consumers to list tools or activities that they believe are commonly used in business to communicate about a brand or a product, price was mentioned in 24% of cases. In fact, in half of these cases price was ranked as the most effective tool or activity. When we posed the same question to a group of executives from different industries, however, traditional and digital advertising clearly came out on top (over 60% of cases), and price was not even mentioned.
Once a company accepts that price is an integral part of its dialogue with customers, the next step is to figure out the best way to present it. Here, we turn to the field of linguistics. In linguistics, meaningful dialogue is characterized by the assumption that participants attempt to follow — and expect others to follow — four basic rules:
- The rule of quality: Participants in a conversation say only what they believe to be true and accurate.
- The rule of manner: They avoid expressions that are overly vague, complex, or simplistic.
- The rule of relevance: They only contribute information that is related to the topic.
- The rule of quantity: They provide the right amount of information — neither more nor less than needed.
Linguistic norms have already been applied to a variety of communication contexts including advertising, product descriptions or reviews, and company announcements. These four rules reflect what we would call “conversational cooperativeness,” which can guide companies on how to be forthcoming about prices without necessarily provoking sticker shock. Here are three initial recommendations that flow directly from the four rules, along with illustrative examples that help clarify how each recommendation can be applied.
Make price a reflection of your values
Our first suggestion is to position price as a component of the company’s responsible and ethical intentions. A fine example is Southwest Airlines, which throughout its history has carefully nurtured a reputation for unrivalled customer focus, incorporates price fairness in the very name of its approach to service: on its website, the US airline describes “Transfarency” as a “philosophy in which customers are treated honestly and fairly, and low fares actually stay low — no unexpected bag fees, change fees, or hidden fees.” A second example is John Lewis, the popular chain of department stores in the UK, which since 1925 has used the claim “never knowingly undersold” rather than the much drier “everyday low prices” to underscore its commitment to customer service. Similarly, the use of simple, transparent communication of prices strikes at the very heart of IKEA’s principle of “democratic design” and Hyundai’s dedication to “shopper assurance.”
From a linguistics standpoint, this suggestion applies the rule of relevance: you communicate about the company’s ethics, you connect price to that message, and hope that customers also establish a link between the two. The danger, of course, is that the gesture comes across as opportunistic, rather than an authentic demonstration that the company is willing to align its own interests with those of customers. This was certainly the perception of onlookers when StubHub, which was often criticized for ANGERING customers by separating ancillary fees and charges from ticket prices, suddenly (and unsuccessfully) shifted to “all-in” pricing. Being genuine about how your price supports your core values, therefore, is critical.
Explain the price
Customers commonly wonder why a price is set at a particular point, or why it has recently changed. The popular fitness startup ClassPass was recently criticized for “squeezing studios to the point of death” with the aid of dynamic pricing technology that made prices opaque and unclear, as it was unclear when and why prices fluctuated. This created discomfort and pushed many customers to leave the platform.
Our second suggestion, therefore, is to apply the rule of manner by being increasingly clear. “Demystifying” how prices are set or changed can help establish a trusting relationship with customers. Specifically, companies can work to explain their rationale or disclose components of the price for a product or service. For example, the furniture company Neptune provides extensive detail of its underlying logic for pricing, while software developer Buffer allocates the cost of its monthly subscription to cost items (salaries, rent, fees to intermediaries, etc.) and profit. Tesla curiously decided to explain Chinese consumers why its Model S would cost significantly less than its competitors when it first launched in that market. Daniel O’Day, the CEO of Gilead Sciences, published an open letter with an explanation of the pricing objectives for the Covid-19 drug Remdesivir. Finally, a recent trend in online retailing is adding an explanation of the company’s finances on the company’s website, such as ZocDoc’s “how we make our money” page.
Violate a rule, but do it blatantly
Any of the four rules can be broken, if done in a lucid way. In fact, people break them all the time, and for a good reason: blatant violations encourage thinking beyond direct literal meanings, evoking imagination and adding creative aspects that enhance the value of a conversation.
We suggest that a company can use communication that intentionally and vividly breaks any one or more rules to make a point about its price. For example, in Saudi Arabia IKEA replaced monetary values printed on price tags and ads with images of coffee cups, pizzas, bananas, and other relatively inexpensive everyday items to prompt patrons to consider just how affordable its furniture really is. No one can literally exchange coffee cups or pizzas for furniture at IKEA, but customers infer that the furniture is as affordable as these common goods. In this manner, IKEA is vividly violating the rule of relevance, as it presents seemingly irrelevant information in the ad. But this is actually a more cooperative way to indicate the affordability of the company’s prices.
Another example is Stella Artois’ award-winning “reassuringly expensive” slogan and campaigns. This AB InBev beer brand attempted to signal premium quality by making its comparatively higher price salient. In one instance, an ad featured A coupon that, if used, ostensibly increased the price of the product rather than decrease it. In doing so, the company vividly violated the rule of manner because it presented a confusing and illogical “deal.” In turn, customers were expected to conclude that the company was highlighting the beer’s superior taste, not the price itself.
Finally, the Japanese ice cream brand Akagi recently apologized following a 12-cent price hike on some of its products after 25 years without change. This public, exaggerated apology for an increase of a fraction of a dollar could be literally perceived as a violation of the rule of quantity. But the company used this vivid violation of conversational rules as a way to build its reputation.
Pricing decisions in organizations seldom receive input from those who design and implement interactions with customers (through advertising, websites, etc.). Indeed, a recent survey of CMOs revealed that the marketing function controls branding in 90% of cases, and has an important say in advertising and positioning decisions, but it leads pricing in only 21% of cases. Integrating price setting with price communication requires that organizations treat the two as interrelated outcomes of the same decision process. The decision on whether a price is “optimal” is not purely mathematical, but also a function of how the communication of that price will affect customer perceptions of the firm’s intentions.