I had to post to a discussion board this week about pricing and marketing in my online business course. The question was “What is an ‘effective’ price?” and instead of just giving the definition and having nothing else to discuss, I came up with an example of how pricing swayed me from the expensive Oreos over to Food Lion’s private label cookie, the Creme-O’s. I need to post the picture of my cookies and couldn’t find a photo like the one I took myself in order to link, so I’m posting it here along with the text of my post. Enjoy!
What Is an “effective” price?
An “effective” price is one at which the most possible customers are willing to purchase a product. The customers must perceive that the value of the product is favorable in relation to the dollar amount being charged for it. When a business prices its product in a range that is comfortable for the largest number of customers and the quality of the product is such that the customer is willing to not only purchase it the first time, but come back and repeat purchasing of that product again in the future, the volume of sales can be maintained and even grow.
For example, a grocery store may sell several brands of “big name” cookies in addition to its own in-house private brands. On the shelves, the display will be clusters of cookies arranged either by brand, such as Nabisco, or by type, such as chocolate chip. I have seen Food Lion handle displaying their private brands in two ways. First, in the cookie aisle, they will have all of their private brand cookies in a clustered section similarly displayed as though it were a cluster of Nabisco brand cookies. Second, I have seen in the breakfast cereal aisle, they will separate their private brands and display them side by side with the national brand, such as putting Rice Chex right next to their own Toasted Rice private brand and Post Raisin Brand will be right next to a box of Food Lion’s Bran Flakes with Raisins cereal.
Okay, so how does this tie in with “effective” price? When I go in to the grocery store looking to satisfy my sweet tooth with Oreos in mind, I browse the cookie aisle for all of its chocolate offerings. I note that a one pound package of Oreos is marked at close to four dollars and am offended at the high ticket price and keep examining other chocolate cookies for a more inexpensive, yet acceptable, alternative. I find in the Food Lion private brand section a plain blue and white package labeled Crème-O’s with a subtitle that reads “compare to Oreos” and I am now intrigued because the price marked for the private brand is only $2.79. Being a frugal shopper I am now faced with a dilemma: pay the extra dollar and get the Oreos and the quality I already know, or take a chance and purchase the store brand, save a dollar and hope they are a decent substitute.
Here’s how the story ends: I bought the store brand, got them home and tore into the package. I discovered that they were not made with a cheap chocolate so common in knock-offs, but that they were made with the same dark chocolate cookie wafer that I loved in the Oreo. The crème sugar center also tasted the same as that of an Oreo. Having taken a gamble on the private brand, I am now hooked AND pleased with myself for saving money and still getting the quality – in this case, a particular flavor – that I wanted. This helps Food Lion to increase its market share in the cookie aisle because I have now “converted” to their private label away from Oreo’s brand. Additionally, I will make repeat and multiple purchases, and have even used word of mouth in the check out line to share my findings with an elderly man who was holding a bag of Oreos and who was so impressed by my findings that he went back to the cookie aisle and exchanged the name brand for the Food Lion Crème-O package. I saw him again the next week, and he was just as pleased as I was and said he had told his daughter about making the switch as well. The “effectiveness” of the price of the Crème-O cookies combined with consumer word of mouth marketing has therefore led to an increase of sales for the private label and taken away a portion of the market share from another national brand. Was the dollar difference effective? I think it was.
Other than defining the term, anybody else have examples of how they’ve been swayed by the effectiveness of pricing for or against a product they’ve traditionally chosen?