Do you buy premium brands and save money at discount stores? Recent studies show that Germans have become even more price-sensitive. At the same time, however, the market volume for luxury goods is also growing. Manufacturers and retailers are under pressure: how can they strike the right balance between price sensitivity and customer loyalty? Marketing expert Peter Klein believes that companies should focus on the value of their products. However, most companies lack a clear, professional pricing strategy developed by a specialized pricing team. How can this be improved?
Mr. Klein, what developments are you currently observing in consumer behavior?
Consumption is becoming increasingly differentiated. There is basic consumption, where price is a key consideration—this applies primarily to everyday items. On the other hand, there is luxury consumption, which clearly shows that end consumers are willing to spend relatively large amounts of money on things like eating out.
So, selective spending on luxury goods and perhaps also luxury items?
Exactly. Expensive fashion labels, for example, no longer have a specific target group. They now also attract young adults who are willing to spend a lot of money on a luxury item – and thus on an image. To do this, consumers are saving in other areas. These are the reactions at the moment.
What is the situation on the manufacturing and retail side?
There, the reactions range from reactive to panicky. We have been observing a lot of actionism for quite some time. Promotions, discounts, special offers, inflation surcharges. Attempts are being made to calm the market: losses in volume and sales are to be compensated for by reduced prices. However, this is a measure that only has a short-term effect. Manufacturers and retailers are not even dealing with the change tactically. If the focus is on securing sales rather than adding value, value is destroyed. In the long term, consumers are trained to look for the cheapest price, not the best value.
What would be better?
It would be better to use the value of the goods strategically instead of lowering prices. Because price erosion reduces brand trust on the part of customers. Luxury brands such as Louis Vuitton and Miele never offer promotions. They lead the markets, which in turn react. Otherwise, they would lose sight of value creation and thus their pricing power.
What is happening in this regard in the automotive market?
The automotive trade has been reversing the price spiral for a while now. Manufacturers no longer give dealers any room for negotiation. Fixed discounts now apply, which the trade must adhere to. Why? Because the price of a premium model such as Mercedes is such a strategically important factor that it can no longer be left to the dealers. In the consumer goods trade, companies are counteracting this to some extent by differentiating their prices – according to target groups, channels, customer segments, and purchasing situations. This is a form of price intelligence that I perceive as completely untapped in Germany.
What do you suggest?
Consumers should be given a comprehensible value logic: the quality and benefits of the products or services and, associated with this, price transparency. Brands such as Bosch, Miele, Vorwerk, and Thermomix pursue a transparent and logical pricing strategy. On the customer side, their value communication achieves the effect that their goods are perceived as high-quality and durable. Quality has its price, and that is why certain brands succeed in building customer loyalty. Price also plays a role, but not a primary one. Sales are driven by lasting value. However, very few companies really succeed in achieving a reasonable pricing strategy and, associated with this, clear value communication. This is because pricing, and this is the core problem, is often the responsibility of the sales department.
So you are arguing that pricing strategy should not be controlled by a company's sales department.
Not exclusively. Because sales are measured by completely different metrics: they have to push volume and increase revenue. But I also observe that pricing is docked in controlling. For controlling, on the other hand, profit is the only thing that matters. It wants to curb spending and thus also marketing, which considers good visibility to be the most important thing and invests in promotions. Almost every department believes it has a say in pricing. But everyone pursues different interests, which becomes a problem. Ultimately, pricing has no mandate of its own. That's chaos. But pricing must not become a plaything of various interests. The result is unclear pricing logic. This can be seen in the discount campaigns out there; price movements are indecisive. Companies are really wasting a lot of potential here. If companies do not have clear responsibility for pricing, a kind of power vacuum arises. Pricing then becomes increasingly random and is not seen as a strategic lever for earnings. Ultimately, there are always losers.
What lever should companies pull instead?
They need to set their prices in relation to customer value. Who is my target group? What is the value of my products for my target group? And what is my target group willing to pay for this value? This value information is often a black box for controlling, sales, and management. If companies do not know the value dimensions of their target group, they cannot address them in their product communication. Only by focusing on customers, values, and benefits can communication measures be tailored to them. It's psychology. Major international brands devote a lot of energy to analyzing the psychological effects of purchasing behavior and prices.
What approaches are used internationally?
In B2B, these are value-added selling and value-based selling. While value-added selling focuses on the concrete economic and strategic added value of a purchase, value-based selling is directly oriented toward economic and strategic value—but from the customer's perspective. In value-based selling, the price is determined based on the benefit created for the customer. The key question here is: What economic and strategic value does a product or solution have from the customer's perspective? Purchasing decisions are made based on key figures such as return on investment (ROI), process improvements, and risk minimization. This approach requires a high degree of transparency, which also makes it particularly complex. The focus is not on the price or individual product features, but on the added value that customers receive from the solution. In this way, brands differentiate themselves through the added value they offer, thereby reducing the price sensitivity of their customers. I tend to see this approach more in the German mechanical and plant engineering sector.
You say that pricing should not become a pawn in the game of various interests within the company. How should pricing be anchored in the organization?
Pricing does not have to be the responsibility of one person or a dedicated department, but it does require a central interdisciplinary unit or a division with clear responsibility for pricing that reports directly to the CEO. This is an important lever. Pricing is a strategy. And strategy is a management task. A professional pricing unit has a very positive impact on company performance. It can increase the EBIT margin by two to five percentage points. This is confirmed, among other things, by a study by De Toni from 2017. A specialized pricing department can therefore achieve significant improvements in company profitability; this has been documented. I have come across companies whose pricing teams were called “revenue growth management teams.” These teams worked on an interdisciplinary basis on strategies, pricing, package size, promotion, and purchase occasions. They approached the topic of pricing holistically and strategically.
If you propose an interdisciplinary pricing team, should your own resources—e.g., from supply chain, production, marketing, sales, after-sales—be pooled for this purpose?
That's right, they report directly to the CEOs as a team, unit, or department; that's the key.
Often, expertise in business administration, classic controlling, marketing, and sales is available. What underestimated skills does an interdisciplinary pricing team need?
What is missing is data expertise, market analysis skills, and an understanding of consumer psychology. A specialized pricing team is able to derive customer benefits from data and translate them into product concepts, marketing concepts, promotion and packaging concepts for various channels. Storytelling is just one keyword. Ultimately, it's about gaining a neural understanding of purchasing, sociology, and consumer behavior. What is the psychology behind it? That's what it's all about. In an increasingly difficult, volatile, competitive, and saturated market, it will not be enough for many companies to simply know their customers. It will be about increasing revenue through optimal pricing. And not through more sales, but through profitable sales. Low prices will not win any competition, nor will they enable companies to grow profitably. This can only be achieved through smart price-value positioning.
This means that the way of thinking is completely different.
That's right, it's moving from “What does it cost?” to “What is it worth to our customers?”. Brands with heritage, brands that offer a special service, brands that manufacture user-friendly products are relatively valuable to their customers – for different reasons. I advocate strengthening values. Many companies manage to lead the market instead of reacting to it. And yes, that's easier said than done, but good pricing means not talking about price.
Thank you very much for your insights, Mr. Klein.
