Framing the Price: Practice

by Tim Smith, PhD, 21 July 2004

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Lincoln Mercury proudly announced their one and only clearance sale on the 2004 Lincoln Navigator. Corporate executives took out a full page add on the back page of the Wall Street Journal to announce their deal. Boldly, in the center of the page, they announce the availability of 0% financing for 60 months or $4500 cash back. (The Wall Street Journal, July 16 2004 p. A14.)

This is an excellent example of controlling the frame of reference in order to drive customer behavior. Their offer of 0% financing or cash back appears as a win-win offer for consumers. On one hand, customers can drive off with the luxury SUV and pay no interest. On the other hand, customers are being paid to purchase the luxury SUV. Either way, the customer gains.

However, there is another message that could have communicated an equal offer. The manufacturer suggested retail price (MSRP) on a 2004 Lincoln Navigator is $49,760. Their “clearance sale” could be interpreted as offering a new Navigator for $45,260 with financing available with finance charges of $4500. However, this second frame of reference draws attention to costs. It states “Lincoln Mercury will charge you $45,260 to drive our car and more if you need financing.” In other words, it is a cost-cost offer.

The Lincoln Navigator example demonstrates how sales messages can be shaped to implant a more favorable frame of perspective on the offer. Rather than promoting the acquisition of an item at a cost, they reframed the offer as a gain to customers. Successful management of price communication to individual customers relies upon setting the frame from the perspective of gain.

Discount or Add-on Charge?
Customers love discounts and hate add-on charges. Even though the offering price may be the same, the route through which the price is communicated affects the willingness of prospects to pay. Discounts are perceived as a win for customers, while add-on charges are perceived as a loss.

Customer receptivity towards discounts and the aversion towards add-on charges drive tactical choices in setting prices. Executives must offer their goods and services at a high price and then provide discounts to individual prospects in order to capture customers. Because raising the price is a greater challenge than lowering it and because prices will vary between customers and over time, prices need to be tactically set above the expected transaction price while the actual price is managed through discounts. Furthermore, the size of the discount should adjust to reflect the variance between the list price and that required to capture profitable customers.

Price Changes
Raising prices is always more tricky than lowering them. Analogously to geological fault lines, one can say that prices suffer from a stick-slip phenomenon similar to that observed in tectonic plate shifts. Tectonic plates are able to slip in one direction but are sticky when adjusting for overshoot. Likewise, prices easily slip downward yet are sticky when attempting a rise.

For instance, consider two offers for similar products. In the first offering, the salesperson states that the item lists for $2000 but is on sale for $1000. In the second offering, the salesperson states that the item used to sell for $500 but has recently been raised to $1000. Which would you feel better about purchasing? The offering with a 50% discount or the offering whose price has just been raised by 100%? In reality, both offerings require the exchange of $1000 in order to acquire the item, but most customers will select the “sale” offering over the “raised” offering.

The stick-slip dimension of price framing drives tactical choices in communicating price changes. Lowered prices can be communicated proudly as a company approach to providing their customers with greater value. However, raised prices can not be communicated as an effort to increase profits (except to shareholders and owners). Instead, the raising of prices is usually blamed on external factors, such as supplier costs, maintenance costs, and inflation. In an alternative approach, price rises can be positioned as being proportional, or even a relative discount, to an improvement in the underlying offering.

Value Focus
Customers seek value but shed costs. When customers perceive an offer as providing value, their frame of reference is skewed towards maximizing that value. Contrawise, if the offer is perceived as a cost of doing business, they will seek to lower the cost and accept the minimum solution that performs its function.

The ability to charge more when the offering is perceived as adding value rather than a cost input, drives the positioning of price and value communication during the buying process. By leading with a description of the value on offer then following through with the price, the sales and marketing effort can focus on uncovering the challenges facing the prospect and describing their offerings as approaches that overcome these challenges. The value focused framing enables the customer to perceive the price as a small cost to pay in order to receive the value being offered. Contrawise, communicating the price first then following through with a description of the value encourages customers to focus on the price and seek discounts throughout the discussion.

Value framing also shifts the price negotiation from a one dimensional challenge to a multidimensional opportunity. In a price focused negotiation, the single issue between buyer and seller is where will the price lie between the seller’s minimum and the buyer’s maximum. In comparison, value focused negotiation requires all price variances to be associated with value variances in that any price concession must be accompanied by the removal of value from the offering. Value negotiation can actually improve customer profitability as challenges are shifted to the party that can better manage them.

Price Framing Questions
In managing price variances, price changes, and price negotiations, the frame of perspective through which the price is communicated can either support sales or block sales. From the Lincoln Navigator example, we see how price communication can drive the market perception favorably. In considering pricing, the issue of framing raises three practical questions for executives:

• How can the price variances be framed as a win-win versus a cost?
• How can price changes be communicated as necessary steps to remain competitive rather than gratuitous profit taking?
• How can value be communicated to set the frame of reference when considering price?

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Author
Tim Smith, PhD is Editor of The Wiglaf Journal, Principal of Wiglaf LLC, and Adjunct Professor at DePaul Graduate School of Business.

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