Business Talk with Michal Strahilevitz

Pricing products and services is a challenge for companies ranging from new startups to multinational corporations.  To better understand how Israeli companies should manage their pricing strategy, I turned to Professor Michal Strahilevitz, a leading authority on the topic.

Michal Strahilevitz, Ph.D. is a Marketing Professor at Saint Mary’s College of California in the US where she serves as the director of the Elfenworks Center for Responsible Business.  She is also an Honorary Research Fellow at the University of Wollongong, in New South Wales in Australia.  Prior to earning a Ph.D. at U.C. Berkeley, and becoming an academic, Professor Strahilevitz earned her MBA at Tel Aviv University and worked in advertising and marketing research.  Her research focuses on consumer psychology, behavioral economics, and the role of emotions in human decision making. Her teaching includes a wide variety of marketing and behavioral economics courses as well as a new course on the Science of Happiness and Well-Being, which was featured on the Stanford Psychology Podcast.

Michal Strahilevitz, Ph.D. (Courtesy)

Many marketing strategists think that if a product is priced higher than other products, it will be perceived as better by the consumer.  Along this line, some claim to never discount a product because it lowers the brand value.

One of the advantages of keeping prices high is that many people equate higher prices with higher quality.  Even if a discount is temporary, it can lead thrifty consumers to wait for the next sale, so they can get that discounted price. For nonperishable goods, consumers may stockpile (or bulk buy) a lot of units at the low price so that they don’t need to buy it at a higher price. Their sense of the “fair price” for a brand becomes the cheapest price they ever saw the brand offered at. So a temporary discount can be great in the short run, but in the long run, it can hurt you.

Yet other marketing strategists suggest using deep discounts to attract customers or to move products.

The time it makes sense to reduce prices is when you have very high inventory and it is either going to expire (perishables like dairy products, etc) or you need to make room for new inventory.  In these cases, deep discounts to move products make perfect sense. It can also work for getting people to try a new product, but there are risks, as I stated in the prior question.

This may move a product, but it can also backfire.  For example, why should I buy this product now, if I think it is going to be 50% off at the end of the season? Is this true?  Do these examples apply to services as well?

Exactly! Some services, like airlines, will have sales from time to time, especially if their flights have been underbooked. So if El Al has a big sale, that might make me buy a ticket I would not otherwise buy. That said, it won’t stop me from buying a ticket at a higher price in the future, assuming I actually need to go somewhere and there is no sale option from any airline.

With the El Al example, the company is losing money if it is too underbooked – meaning it doesn’t sell enough seats per flight to cover the cost.  Empty seats cost as much as full seats, so they don’t actually lose money selling their otherwise empty seats for less. One consumer, perhaps a person considering a vacation – may look at the low rates and say “Wow, now I will take the vacation that I have put off.”  Another consumer, perhaps a business traveler flying to negotiate a contract might see the price as a nice discount, but they are going to fly regardless of the price.  That said, sales will make many people switch airlines to the cheaper option, at least for that particular flight.

How do business service companies such as management, business development, and marketing consulting fit this model?  If the economy is down, does it make sense for a management consulting firm to discount its prices?  Will clients view the discount as the “new normal” even after the economy recovers?

With the EL Al example, you mentioned there is a fundamental difference if it is an optional (vacation travel) trip or a necessary (business) trip.  Does the same apply to consulting firms?  Is the primary difference seen if the consulting is for something necessary for immediate use or an optional item that is lower down on the priorities?

Much of my academic research has been on linking donations to charity with the sale of products and services. Consulting is an example of where this can work.

If I am looking for new consulting clients, rather than discounting my price, I sometimes offer that a portion of my fee can be donated to one of two or three charities that I like. If the client proves they’ve made the donation that week, it will take the donation amount off my regular price. Obviously, for this to make sense, it has to be a charity both of us like. A management consulting firm could do the same. At least in the US, many companies make donations as part of their corporate philanthropy anyway. So rather than spend it all on management consulting fees, some of it can go to causes that the consultants and client both want to help. This will not work for every situation, but it is worth considering because it creates positive feelings that can strengthen the relationship.

Similarly, I do some executive coaching. I never discount my price, but for a new client that I’m interested in working with, I let them pick from a very short list of charities that I like, and they can donate 75% of the cost of the first introductory session to one of the charities. So far, I’ve only done this with one client, but it made both of us very happy that money went to a good cause.  We both got to feel the warm glow of giving to a cause we care about.