The Price Point Strategy: Don’t Be Fooled

This guest post comes from Mike of CreditCardForum. I met him at FINCON11 and I’m forever indebted to him for paying for my PF Changs. Anyways, enjoy his post!

If you live in SoCal, then you already know how much Time Warner sucks. So it comes as no surprise that the topic came up while Briana and I were having lunch a few weeks ago. What was our #1 complaint? The fact that when our internet goes out, Time Warner typically tries to peddle us “Business Class” service, which costs significantly more.

Personal vs. Business?

While I don’t know exactly how much Briana is paying, I’m guessing it’s close to what I’m paying since she’s lives in the next county over:

$44.49 for “standard” personal service, which has speeds of 6-10 Mbps.

Meanwhile, whenever I report an outage and rant that it is preventing me from blogging, they try and sell me a higher price subscription:

$58.90 per “business class lite” service, which has speeds of 3 Mbps.

So right off the bat, I would be paying more money for slower speeds. For the purpose of writing this article, I tried calling their customer service to find out how much comparable speeds would cost (Premium, Premier, or Ultra) and surprise! Their sales associates don’t work on the weekend, so they couldn’t tell me (which is ironic, considering the sales dept. for personal service is open on the weekends).

Henry Blodget says “what a joke” about this service, so that brings us to the question… why would someone pay more for it? My guess is that they’re using the price point strategy.

I once attended a speech by a well-known venture capitalist and he said (I’m paraphrasing here): “Start a company that sells services to businesses, because they’re much less price sensitive. Businesses are accustomed to paying for things.” Perhaps that’s why Time Warner knows they can get away with charging “business” customers more, despite how similar the two versions look and sound.

Preferred vs. Premier. vs Prestige?

Since I review credit card offers all day long on my site, as you can imagine I’m even sicker than you are of all those buzz words like “premier” and “preferred” that banks attach to the end of card names. Though you have to admit… they truly have mastered the price point strategy.

When American Express launched the Gold Card in 1966, it suddenly made their Green Card look less prestigious. In turn, customers were willing to shell out more money for the Gold (despite that it essentially offered the same benefits at the time). Then in the 80’s it was Platinum. For 90’s it was the Centurion a.k.a. black card. Now that precious metals have been overplayed, banks have resorted to gem stones (Chase Sapphire) and most recently, those “P” words mentioned above.

Obviously there are differences between most card tiers and for the right person (namely, avid travelers) it is worth paying for the higher tier. But a lot of times it seems that the differences between the two price points aren’t as profound as you may think.

For example, the $500 Thank You Prestige and $125 Thank You Premier from Citi are almost identical. They share almost all of the same benefits and even the rewards are nearly identical (one gives 1.2 points per dollar on categories, the other gives 1.3 points). For the life of me I can’t see why someone would pay $375 more for the Prestige. But I guess just like Time Warner, Citibank realized that by tweaking it and re-packaging the Thank You Premier card under a different name, they could make extra money.

Average vs. Special vs. Most Special Coffee?

Last but not least, we can’t talk about the price point strategy game without discussing Starbucks, who is perhaps the all-time unequivocal master of convincing us to pay more.

Next time you’re there, study the way their coffee menu is laid out and you will see it boils down to three different price points. I’m not going to call any of them “cheap” because all three are expensive, but the differences are more about the feeling you get than what you’re actually getting…

I’m average: These are under the $2.50 mark. Notice the rather boring sounding names – iced coffee, coffee with steamed milk, etc.

I’m special: From $2.50 to $4.00. These have a bit fancier sounding names, usually consisting of one or more words that end with an accented “e” to invoke haute taute European flare.

I’m the most special: For above $4.00, expect all the bells and whistles. Instead of 2 words in the name, many have 3 or even 4 (i.e. skinny cinnamon dolce latte). There will also probably be some sort of powder or spice sprinkled on top of the foam – which doesn’t really change the taste of what you’re sipping, but it does make for fancier aesthetics.

Contrary to what you are led to believe, the differences between the “average” and “most special” tiers can be trivial for some of the drinks (and certainly not as big of a difference to warrant costing up to 2x the price).

For example, not too long ago I was on my way to get my haircut and asked the woman who cuts mine if she wanted me to pick her up some coffee from Starbucks. Of course, she texts back the most expensive drink on the menu. But that’s no surprise, being that she has princess stickers on everything and loves her designer handbags… she likes to feel the most special.

So what did I do? I ordered her something from the “average” tier and disguised it was being fancy – a regular grande coffee ($1.85) only filled half-way, with the rest being steamed soy ($0.60). I then went to the condiment bar, sprinkling and stirring all kinds of goodies on it. Total cost? Around $2.50… which was almost 1/2 what she was asking for!

I give it to her and guess what? The first thing out of her mouth was“Wow this is really amazing. Are they using a new recipe?”

The lesson? Don’t be like my hairdresser and fall for the price point strategy games. Sometimes you do get what you pay for, but other times you just end up paying a lot more for a little better.

Comments (7)

  1. Reply

    Haha – tricked her!

    It’s funny you mention TWC, because Comcast is the opposite.  They relax their usage limits for their business customers and business customers have a different line to call for service (pay for convenience).  Not enough for most people to switch, but in this solitary case there are some reasons to do so.  Comcast Business should probably come with the caveat that it requires a special customer to take advantage of – sort of like your credit card example.

  2. Ron Thompson

    Reply

    Yep, it is all about making money on the up sell.  Companies love to make more on those extra services that really don’t cost much to add on.

    • Reply

      I’ve been noticing more places try to up sell you. When I was on the plane to and from FINCON11, Spirit Airlines tried to up sell everyone on their credit card.

      • Ron Thompson

        Reply

        Good ol consumer psychology.  Usually when people have already agreed to buy something for say $400 [and is a good deal and such] then they are predisposed to buy that extra add on for say $50 [though it is not such good of a deal] because the mind says “well, $50 is much less than $400; what they heck, I’ll go for it”.

        It is rather ironic that at times, companies understand what is happening in consumers’ minds more than consumers understand their own minds.

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