The Punishing Precision of Price Walls
In 1970 the popular VW bug carried a suggested retail price of $1,839 and held a firm position in the minds of US drivers as a great value car buy at about $2,000. It’s also probably represents one of the best early examples of the importance of price walls. $2,000 was not chump change back then and indeed in today’s dollars is equal to almost $14,000. Still it represented a very fair bargain especially for the shopper who was looking for a reliable no-frills mode of transportation. But according to the law of price walls the VW Bug probably would have seen a significant drop in volume if its base price exceeded $2k and conversely also could have sold almost as many units in the US if its base price was $1,999 versus the actual $1,839.
Few things are considered more rigidly axiomatic in the business world than the direct, constant, inverse relationship between unit volume and price. Specifically, the higher the price for a given product or service, the fewer units will be sold at every point along the axis. Except the axiom does not hold true in the real world. It is true that unit volume almost never goes higher when the price goes up, but it does not always go down.
The rule of price walls suggests that almost as many VW bugs could have been sold at $1,999 as $1,839. The question is why and the truth is we don’t definitively know. It may be because price does reflect quality and if something is priced too low, prospective buyers might be concerned about short cuts in production or the quality of the parts or customer support. It’s also very possible that our brains think spatially and put product value in mental “buckets” that suggests a reliable, no-frills car was worth $2,000 in 1970 and $20,000 today and whether its priced a few percentage points below that is insignificant.
Except that it is, very much so to the manufacturer, according to research by McKinsey Consulting which shows that on average just a 3% increase in price will boost the bottom line by 30% or more. Given that the suggested increase by VW to $1,999 represented a 9% higher price, the move could have almost doubled profitability because a price increase represents pure profit versus a boost in unit volume.
Price Walls however are double edge propositions; approximate closely on the low side and realize optimized profitability; however even a small breach on the higher end and you can very well experience an immediate and punishing 10% decline or more in unit volume. How do I know this? I am the CEO of a leading global pricing research firm called Atenga Insights based in Stockholm and greater Los Angeles that has performed almost a 1000 different pricing research projects for some of the biggest names across a wide variety of industries including travel, transportation, entertainment, sports, education, home improvement and consumer package goods. The data does not lie especially now with the added advantage of artificial intelligence to help interpolate the results.
Price Walls differ by industry, by brand, by product, and by channel. It’s imperative for every company to determine where the baseline price walls exist for their products and industry, and also what they can do to raise them by perhaps focusing more on a different customer niche or changing the marketing narrative. Pricing research has gone through a sea change over the past decade and what used to take months now takes only a few weeks and what used to cost hundreds of thousands of dollars, cost far less. We know it works because many of our clients tell us so and typically come back to do encore projects. Don’t be punished by the precision of price walls; instead identify where they exist for your company and products and leverage that information to the utmost.
CEO Atenga Insights