Is my price too low?

Are you making the mistake of pricing your products too low? A lot of companies are. Which is why we explain the best approach to pricing your products and how to apply this approach, using the Qatar Airways example, in the article below.


Despite the efforts of its many “angels” in promoting the brand, Victoria Secret started losing appeal among young women. The brand once known for having the most sought-after women lingerie products used price promotions as one of its marketing tools to sustain demand. Yet, the result has been dismal: lower volume as well as lower margins. In just five years, Victoria Secret’s market share shrunk from 31.7% of the US women’s lingerie market in 2013 to 24% in 2018. At the same time, analysts point to “sliding margins” and changing shopping habits (with customers demanding ever more promotions) as reasons why the brand is also losing appeal among investors.



Victoria Secret offers just one anecdote of a pattern in firms' pricing decisions that is, sadly, all too common: lowering prices in order to sustain volume while ignoring what ultimately matter the most - profitability. But how could one avoid this temptation? Is there a tool to help marketers improve pricing decisions?


Value-based pricing: 24% higher profits than cost- or competition-based pricing

It is by now well-known that the ideal way to price a product or service is to use value-based pricing, i.e., to price such product or service as close as possible to the perceived value of the product or service to the customer.

However, research shows that the vast majority of marketers price their products or services by anchoring on costs (cost-based pricing) or on competition’s prices (competitive-based pricing). This is unfortunate because companies adopting value-based pricing have been shown to earn up to 24% higher profits than industry peers [1].

The pricing triangle: A tool to help you do value-based pricing


An interesting question is why don’t more companies use value-based pricing? Well, simply because value-based pricing is hard to do… While costs and competitive prices are readily observed, customers’ perceived value and willingness to pay are hard to measure. Hence, to do value-based pricing companies need to first understand their customer needs and then map such insights into their pricing.


To do value-based pricing, companies need to first understand their customer needs and then map such insights into their pricing.

To simplify the application of value-based pricing principles, at MTI² we use a simple tool that we call the pricing triangle. Let us take you through it using an example case from the airline industry.


As discussed at length in Stefan Stremersch’s book How Winners Make Choices (Stremersch 2016), certain companies like Qatar Airways have successfully adopted value-based pricing principles. Let us illustrate how we can use our pricing triangle to understand Qatar’s value-based pricing approach. It requires four steps towards value based pricing.


Step 1: Choose a specific target segment

To do value-based pricing a company needs to focus on a precise and well identified segment. In the case of Qatar airways, it is clear that the company focuses on a premium segment of high demanding customers. For instance, even if we are talking about a traveler in Qatar’s economy class, we are not talking about a customer that searches for the lowest fare, but one that seeks the best possible economy flight, for instance for long-haul flights.

Step 2: Ensure that customers “see” the value they are getting

Qatar Airways certainly ensures that customers “see” and “feel” the value they are getting as compared to other airlines. This value demonstration is crucial to support a higher price point. In Qatar’s case, its business class is uniquely luxurious: “travellers might encounter fresh flowers, chandeliers, premium drinks, a toilet bag filled with nicknacks by Georgio Armani, ultra-wide TV-screens as well as voluminous leather seats that fold back fully flat. The food on board is always developed by starred chefs of world renown. Their hub in Doha has a lounge where passengers are pampered with jacuzzis, saunas and massages. Also their economy cabin is praised for its comfortable and spacious seats – and then on top of that there are the flexible luggage rules.” Once the perceived value and differentiation are clear, it is easier for the company to map such added value into premium prices that reflect the premium service differential it offers.

The Qatar Airways Al Mourjan Bussiness Lounge in Hamad International Airport, Doha, Qatar.

Step 3: Compare your solution to the next best alternative

As a third step, Qatar could then compare its offering with the “next best alternative”, or a benchmark competitor. A quick search online shows that Qatar is typically compared with Emirates (see here a comparison of their luxury class, and here a comparison of their economy class).

Once a company has been chosen a benchmark competitor, it is time to understand which unique benefits does one’s offering solution delivers to customers. For example, in a video comparing the economy class of Qatar and Emirates (and this case also Etihad), one frequent long-haul flyer commented: “An important thing is that Qatar has 18,5 inches wide seats, Emirates has 18 and Etihad has 17,5. This matters on a 8-15 hours flight.”

Step 4: Quantify the monetary value of differentiation

The most difficult and critical step is the last one: to calculate how much are customers in the chosen target segment willing to pay for the unique benefits just identified. For instance, how much more would a demanding economy flier in a long-haul flight pay for the additional perks and benefits of flying in Qatar airways versus, say, Emirates. There are several statistical techniques available to do this estimation, but often a simple interview or call with a couple of customers suffices to have a valid input.

Having such information, the price can be obtained through value-based pricing as follows:

  • Take the price of the benchmark brand. In this case, Emirates. We have checked the price of a flight between Amsterdam and Dubai (a 6h40 minute flight from Amsterdam to Dubai, with a 7h30 return in an A380 aircraft). We took the most basic economy option (“saver”), which resulted in a return ticket price of 653.20 EUR.

  • Ask customers how much more are they willing to pay for the benefits Qatar offers when compared with Emirates for a comparable flight (e.g., the flight between Amsterdam and Doha, which is 6h30 in the outbound journey and 7h15 return in a Boeing 777-300ER). Let’s say the estimated differential is 250 EUR

  • Finally, we would need to add that amount (250 EUR) to the value obtained above from the benchmark flight from Emirates (653.20 EUR) leading to a price of 903.20 EUR.

Note that this approach does not require a marketeer to evaluate how consumers assess each single feature of a product and also how much value each of these features creates. The only thing Qatar needs to do is to find the features where there is a difference (e.g., the 18.5 inches seat in Qatar versus the 18 inches in Emirates) and assess customers’ valuation of these differentiated features only. As Dholakia (2016) puts it, such a focus on differentiated features is “a lot easier to do”.

In sum, using value-based pricing is an effective way to maximize profitability and avoid pricing offerings too low. Moreover, using tools like the pricing triangle and the steps proposed here makes value-based pricing much easier in practice than theory suggests. Let’s start using these tools and make better, profit-maximizing pricing decisions.


[1] Source:, Nagle, Thomas T., John E. Hogan and Joseph Zale (2011), The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, 5th Ed. Upper Saddle River, NJ: Prentice Hall.

Sources:

Dholakia, Utpal M. (2016), "A quick guide to value-based pricing", Harvard Business Review (2016).

Stremersch, Stefan (2016). Kiezen voor Winst: Een bron van inspiratie voor bedrijven met ambitie. Boom.

© 2020 MTI² (The Marketing, Technology, & Innovation Institute)

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