Branding, Bell Curves, and Managing Expectations
When I first heard of companies rebranding their name brand products as generics to selling them at a discount, I thought it was pure greed. "Why not just sell it at the lower price? Why charge more for the illusion of superiority?" I wondered. Then, I heard a hot tub salesman explain why he might charge a wealthy customer more than the usual price. He wasn't gouging the customer, he was the managing customer's expectations of the product. Some people aren't sure they're getting a quality product if they aren't being being charged "enough." He would charge a customer more if that was what it took to reassure them that they we're getting the product they wanted.
Most people have heard of the bell curve. In this case, the bell curve describes profitability. The less you charge, the more units you can sell, but the less money you make on each unit. Somewhere in the middle of the scale there is a sweet spot where profits reach their peak. Charge more than that and the decline in sales erodes overall profits. Charge less and the increase in sales won't be enough to make up for the decreased margin. What the hot tub salesman was saying was that there are two markets for his product and therefore two bell curves. Most people are probably looking for the best deal, but some people are willing to pay top dollar for what they think is better than average quality A nationally advertised brand with a reputation for quality may relabel their product with a name no one has ever heard of. Then, they sell it at a much lower price to gain new, thriftier customers without loosing their customers that associate the quality of the product with its price. And the reduced price doesn't necessarily have to come at the expense of the profit margin because the generic brand isn't supporting an extensive advertising campaign and fancy packaging created by expert graphic designers.
Another example I heard of managing customer expectations through price was when PayPal began selling security key fobs to customers who wanted an additional layer of security. According to the report I heard, PayPal, who wanted adoption of the new security measure to be as wide as possible, was charging something like $5 because of another bell curve. The more they charged, the fewer people would buy the key fobs. The less they charged, they fewer buyers would actually use the key fob once they bought it. They were charging near cost--possibly even blow cost--to drive adoption, but they didn't give them away to avoid people seeing them as a novelty, a cute toy.
