There are people in your company tasked with setting the price of your products. This value doesn’t fall from the sky and land on the object as a price tag, it’s set by human minds making calculations.
When it comes to setting reward and incentive values, companies all too often have a blanket rule: they set it as a percentage of the gross margin of the product. Well, we’re here to debunk that practice!
Let’s say your company usually sets spiff at 5% of gross value. The product costs $800, generating a $40 spiff. How can you really be sure that $40 is the right amount to be settling on? Is that enough to drive your partners toward the behaviours you’re looking for? Or is it perhaps too much – would $35 or even $20 do the trick?
Basic price psychology
Pricing and value are very interesting concepts and ones which we think deserve exploring a little further.
First things first, there is something known as a viable price point. This is settled upon by:
- Making a panoramic scan of the market to find out the prices being set by competitors: if you set your price too high in comparison, customers are likely to jump ship, whereas if you set your price too low they’ll assume that the quality of your product isn’t up to scratch
- Entering the shoes of your customers: what drives them, what do they value most about a product – is it comfort, status, quality? The perceived value of a product or service is based on whether your product offers those elements which they attribute most weight to
At the heart of it, consumer price-based decision making isn’t particularly conscious or rational – it’s an intuitive, abstract feeling about “value” – based on their cultural environment, means and upbringing –which is then weighed up against what other companies have to offer.
Here’s an example which might help clear things up a bit: first class travel on planes.
If flight companies were to follow a percentage model, they would work out the costs of providing first class service and the costs of providing economy service and set the price of each based on that. Let’s say their percentage rate was 200%
Cost of providing economy flight: $300
Flight price: $600
Cost of providing first class flight: $500
‘ Flight price: $1000
Bur we all know that flying first class costs five, six, seven times more than flying economy even though the cost for flight companies just isn’t that different. Sure, there’s nicer food, better service, more legroom – but none of that explains the colossal price difference.
What consumers are willing to pay – and therefore, what flight companies set their prices at - is based on an intuitive and abstract consumer value psychology:
- Valuing certain attributes of first class travel very highly
- The financial means to afford it
- Social status
- Other companies charge more or less the same
Flight companies get a huge amount of their revenue from first class passengers and it would be downright bad business sense for them to use a percentage model to determine price, instead of analysing the value psychology at play in consumer decision-making.
Data-based decision making
Nowadays, suppliers no longer need to rely on blanket percentage rules to determine spiff in their channel engagement programs. Instead, there’s advanced, automated digital technology that provides accurate ways of attributing values.
Companies are able to closely examine how different factors affect incentive levels and behaviors and set a viable and effective reward value, as well as assessing whether it’s more lucrative to present spiff values to participants as cash bonuses or trophy rewards.
Intelligent technology can help you gather invaluable data about what motivates and mobilizes your partner base – how their value psychology functions – so you can optimize your offerings to increase savings and drive sales.