We've come quite a way since our first article in January. It's now pay-off time! Set the rates. Then, multiply by the number of units and feel good about being in business. We've all done it, but there's more. Our discussion will show that pricing is more than what it first seems.
Price establishes one of the terms of purchase. But pricing is more than that to the marketer. It is as much a feature of a product as the size, color, etc. Also, it is a sure-fire attention-getter.
There are several aspects of prices that are at work. The interplay of these is a part of our product-design strategy. Remember that the utility price is the one the prospect believes the unit is worth outright without any other considerations. The market price is the one suppliers are forced to offer in a competitive situation. Elasticity (a new element) is the volume sensitivity a product has to changes in price.
In a perfect sellers' world, the interplay of the utility price and elasticity would control the prices. This is exactly what happens with a patent holder. The moment the market price or competition gets into the act, the seller must deal with a wild hair. To contend with that, we must continually strategize using packaging and innovation, which are designed to maintain a distinctive product preference and eradicate the competitive influences.
Price conveys things other than just setting the terms of the rental. It communicates a sense of the degree quality. A high price demands an explanation. A low price must be accompanied by reassurance that it truly is economical, not just cheap. So prices invite curiosity and discussion--a good thing.
Implicit in this is the ability of pricing to produce curiosity. Most ads don't include pricing. That gives the marketer some flexibility, but more importantly, if the seller can hit the mark with his ad, he can generate more interest and induce the viewer or reader to further action. The clever marketer will use that to maintain attention as he seeks to lay in his product story.
The usual ploy is to delay the revelation as long as possible. Often the seller feigns inability to provide price until certain questions are answered by the prospect. That encourages a discussion centering on the needs of the prospect, which provides the seller with more opportunity to engage the buyer. It also means that the offering must be set up initially with options or steps that support the seller's request for more information. Thus, the administration of price becomes an important part of the market strategy.
Before we go too much farther, we should shoot down a common assumption about price and costs. Product cost is not a consideration in setting prices--not because I say so, but because it just can't be. The only thing that drives pricing is the customer perception of value, nothing else. The customer doesn't know what your costs are and doesn't care. He is only concerned with the value of the product to him. To be sure, you are concerned about the relationship between price and costs, but cost plays no part in the setting (and getting) of prices.
Often, studies are used to assure the supplier that a certain number of units can be sold at a given price. Actually, attempts are made to test responses at various price points to establish general acceptability and, equally important, elasticity. Only after that story is developed does the profitability enter the picture. The supplier then can determine his costs at those various volumes, but one doesn't cause the other. They are unrelated. The supplier's only choice is whether to offer the good or not. He totally controls his supply. He tries to affect, but has no actual control, over the demand.
A Price Tactic
Often the sales function (sales people, advertising, promotional material, etc.) hopes that after the presentation of all the benefits, the prospect will just ask for the product. That rarely happens. At the time a buyer is considering a purchase, there is a tussle going on. The buyer is anticipating the gratification of possession of the product or service, but this is offset by the accompanying feeling of hurt or pain from the contemplation of price. The savvy marketer will attempt to assuage that feeling by granting the prospect the gratification immediately and delay, in some manner, the "pain." Now the emotions are inverted. The prospect has possession and the gratification it grants, and faces its loss if the purchase is not completed.
Marketing-oriented organizations will design these kinds of options for their sales group to use. Many arrangements are used such as a very low (or no) initial payment followed by later payments. These schemes are correctly grounded in the emotions of the purchase process and are often not connected with any buyer economic disability.
One important thing to note is that it not the job of the sales/advertising people to approve of these approaches. There are serious credit and, at times, ethical questions that need be examined. The people who compose the marketing/sales programs must be under the training and/or close reign of owners. Those kinds of questions and their resolution are at the core of an owner's marketing responsibility. He must keep his facility filled; he must stay on the right side of the line. That's why he makes the big bucks.
Is Creative Pricing for You?
I can hear you now saying that you can't conceive of using the kind of pricing approach described. When involved in the sale of one or two units at a time, I agree. That's a retail-style operation, and these approaches won't have much application. But when you begin dealing with a wholesale opportunity (selling multiples of say 50 units at a crack) you may well find yourself getting creative in your pricing approach.
Going back to my lodging industry days, our expression was, "Lay in the base with groups and come over the top with individuals." In that situation, there was value in knowing that we had locked up 30 percent to 40 percent of our capacity months in advance of our summer high season with committed groups, and could get the rest of the way on local, seasonal, transient demand. The groups were annual volume generators and provided assurance that whatever happened (gas shortages, airline strikes, economic downturn) that we were covered. We thought those guarantees made it worthwhile.
This all brings up another aspect of marketing: Is it really necessary to use these kinds of approaches to get our product sold? I think you know the answer: It depends on the market situation. It is good to know that these kinds of hard-nosed tools are out there.
More Pricing Goodies
While this next remark goes to a more involved pricing strategy, be aware that the same unit may have different values to different uses or segments. Part of the marketer's job is to determine how much a unit is worth to each different segment and price it accordingly. Part of the purpose of packages (which we discussed under "differentiation" in previous articles) is to disguise the price being paid for each of the components of the package.
From my life before self-storage, I can tell you that on any airline flight there are at least 10 different fares being paid for identical seats on the same flight. Lodging is the same, with a dozen different room rates being charged for the same style room the same night. It works for one reason: All the guests in a hotel or on a flight are strangers, and with packages at work, many don't realize the pricing situation. (Clever, these marketers.) As a self-storage operator moves toward a marketing way of life, he will begin to more fully use the many dimensions of price.
Justification for Marketing
In the next article, we're going to get into the use of media. We will need to get our message out to our target groups. That's another way of saying that we're going to start spending serious money on marketing. The choice of media is limited to those whose benefits are commensurate with the scale of the marketing opportunity. That may seem like a statement of the obvious, but you'll see that the nature of self-storage places some restrictions on our choices.
The facility needs to think about what philosophy they will use in justifying media expense. There are two ways, and they lead to considerably different conclusions.
The most common situation is an organization that is not used to marketing costs. If it hasn't spent much on promotion previously, then anything may seem like too much. There aren't industry norms to help. The operating assumption is that a high proportion of business volume is safe or invulnerable from the incursions of changing market conditions. Also associated with that view is the attitude that the facility will get many new tenants without doing anything new. That is an especially pernicious view as it hobbles the sense of urgency or opportunity upon which these kind of activities rest.
The situation is further affected by the subdivision that occurs when using segment thinking. When the at-risk portion of business volume is broken down into the various segments, the marketing expense that can be accorded to each may become too small to operate a program.
The other approach assumes that all the volume is at risk. To maintain it and earn the market right for the owner to set his own rates, a thorough marketing effort must be made. That isn't a willy-nilly or carte blanche option to spend a bundle, for we will soon see that even that approach imposes some serious limitations on media choices. It is, however, the only way that a marketer can have the tools to make a difference. When you begin to see the degree of effort and expense associated with mounting an effective on-going program, the need to settle on a supportive philosophy will become apparent.
Need This Conceptual Stuff?
What should be developing by now is the feeling that there is some decent thinking behind the glitzy trappings of marketing work. My hope is that you will have sufficient familiarity with marketing concepts to operate creatively on your own. I admit that much of what I've presented is conceptual. The reason: If you have a sense of the theory, it is more likely that the practice or application will fly. Proven theory and concepts are what let us predict likely outcomes. Since most marketing activities are related to doing (often costly) things with hopes of seeing a good outcome, attention to some theory is worthwhile.
It surprises me how many people have reacted to my writing by saying that they just want me to tell them what to do. Without studying a particular area and operation, that's impossible to do--honestly. Yet, these same people hold equity positions in facilities worth several million dollars. I never understand that attitude. Their choice is to either get dependent on consultants or just more or less wing it. Given the cost and stakes involved, neither of those is the greatest choice. So, I hope you find interest in a little theory.
Now what? We are at the nub. What use? What product? What price? What customer? And next time, how do we tell them? The remainder of the articles in this series deal with "getting the word out" to the marketplace. Up until now, our discussion has all been preparation. Now is the moment of truth as we figure out our best choices for getting our planning out to prospects.
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Harley Rolfe is a semi-retired marketing specialist whose career included executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039.