How many price points does it take to sell a Volkswagen Jetta?
4 Insights into Smarter Pricing Segmentation from the Auto Industry
For an industry that is famous for starting with one model, in one colour, at one price point — the automobile business has come a long way since the first Model T rolled off the production line on August 12, 1908.
Many sales and marketing strategies that we take for granted these days were matured and mastered in the Auto industry long before the World Wide Web was even conceived. The 1915 Model T was, for example, offered in five variants and price points ranging from $440 to $975.
Fast forward to 2013 and, even though many manufacturers are on the back foot in the current economic climate, there’s still lots of interesting insights to be gained from the way car manufactures market and sell their products.
Enter our case study — VW & the Jetta
At the time of writing (August 2013), the US Volkswagen website promoted the Jetta at 17 different price points.
I’m a bit of a nerd with this stuff so I like to drill into the numbers and take a look under the covers. Here’s the numbers and what they look like when plotted on a graph. Note all figures are in US dollars.
- Highest Price = $31,180
- Lowest Price = $16,720
- Range = $14,460
- Average Jump to Next Price Point: $904
Insights
OK, so what do these numbers tell us about Volkswagen’s strategy and what can we take and apply to our own products?
Let’s get one thing straight up front. I’m definitely not suggesting you drop everything to rush off and create 17 price points for your next eBook, mobile app or SaaS product!
It could be that your product might only be currently suited to a single price point — and that’s perfectly fine. In fact, if you've recognised that, then you should be congratulated as there are too many products on the Web copying the pricing strategy of others that have multiple price points simply for the sake of it.
For most of us selling products online though, we’ll be working with at least 2 or 3 price points and potentially 4 to 5 — a bit like the old 1915 Model T. That’s because we know, as Ford did back then, that the best way to finding out the highest possible price that a customer is willing to pay is to segment our target market — offer multiple variants of a product at different price points and let customers pick the one they want.
So the intent with this post is to get you thinking about the way you’re segmenting your product offerings and to see whether there might be ways you can adjust your price intelligently to make more money.
Here’s my pick of the 4 most important takeaways from Volkswagen’s Jetta pricing.
1. The larger & broader the target market, the greater the potential for segmentation.
You don’t see Mercedes offering their flagship sedan, the S class, in 17 different variants. Sure there’s a lengthy option list, but there’s only one model because it’s priced at $92,900, comes standard with lots of bells and whistles, and has a very niche market. There’s no point in Mercedes offering a cheaper model, at say $90,300, without a sunroof and navigation system because luxury buyers typically expect these features and aren't likely to be sufficiently price sensitive for a $1,600 saving to make a difference to the purchasing decision.
The VW Jetta on the other hand has a much larger market. As an entry-to-mid level product it has to appeal to a much broader audience than the S class and cater for a more diverse range of budgets, tastes and needs.
The result? A seemingly crazy number of models and price points but arguably the ‘right’ fit for more new car buyers being targeted and therefore a greater chance of increased revenue for Volkswagen.
Now, it doesn't take a genius to spot that 17 price points for a product on the Web would likely to be too many in almost all scenarios that I can think of. Being confronted with this many choices at once would likely confuse buyers, and cause too much friction to facilitate a sales transaction (Another Hick’s Law reference anyone?).
So why doesn't this many price points break things in the world of auto sales? The obvious difference is that buyers can’t complete the transaction online at the VW site. They can begin their purchasing journey on the Web with research about features and pricing but there’s no Buy Now button (yet… but consider that up until a few years ago pricing wasn't even available). The whole idea is to drive potential customers to a dealership by convincing them that there’s a Jetta for them regardless of their specific budget and check list of features. Once at the dealership, its easier for buyers to limit options and it’s the role of the sales person to assist with this process as part of closing the deal.
So what does this mean for our own products?
Takeaway
Many products today, particularly a lot on the web, are already serving a niche audience — solving a particular problem for a particular group — so massive segmentation isn't going to be a requirement for a lot of product people.
If your product is serving a large audience and one that needs greater segmentation, you've got a few options:
- You could consider splitting the product like Apple have done recently with the iPhone 5S & C.
- Another alternative is to build functionality that asks potential buyers a series of questions guiding them to a recommended subset of price points based on their answers. This one is hard to pull off, can create extra UX friction that limits conversion and I haven’t seen too many good implementations of it.
- You could just merge segments together based on like value at similar price points to keep things simple.
- Or you could do what MailChimp does and opt for a complicated pricing structure (see it at http://mailchimp.com/pricing/ ) but try and explain it really, really well.
The thing to remember is that it’s not just about the number of segments. Audiences and customers change over time so it’s important that you stay in touch with their needs and update your product offerings to suit. If nothing else, review your current segmentation and think about whether you've missed anyone or could better cater to others.
2. Market segments are not just about rich and poor.
Sometimes it’s easy to forget that segmented pricing isn't just about targeting customers based on the size of their wallet. It’s really about finding out what customers care about, see value in and are prepared to pay more for regardless of their income or bank balance.
You've probably seen examples of this everyday. Think golf, cycling, and snowboarding enthusiasts (among others) who just have to have the latest in pro-level equipment — the same clubs as Tiger, the same bike as Lance (well maybe not anymore…) and the same snowboard as Shaun White all because they’re just so into it and passionate about the hobby they love. This doesn’t just happen in the consumer world. If you work in the tech space think of the effect that the Agile and Lean movements have had on people you know. It’s almost like a religion to some people!
With the Jetta, you’ll notice that in addition to standard segmenting based on engine size, equipment levels and features, VW has placed a premium on Hybrid models. It’s obvious that they've identified a good opportunity to pitch the Hybrid Jetta to early adopters, tech heads and eco-conscious buyers and are trying to connect with people on something other than just leather upholstery or lowest drive away price.
Takeaway
The message here is to stop blindly throwing T-shirts, mouse pads and coffee mugs into your higher price points hoping people will pay more for that junk. Start thinking about how you can segment your audience based what’s important to them and give them a compelling reason to pay more.
3. The size of jumps in pricing can encourage or discourage upgrading.
Two things you’ll notice straight away about the Jetta’s pricing when you look at the data graphed is that the gaps between the 17 price points are relatively small (the average jump is $904) and they’re also fairly consistent (most jumps are a similar size).
This is not a coincidence.
It’s a deliberate strategy to encourage upgrading by teasing the consumer with the better model just within arms reach, by dangling a carrot (more equipment and features) at each price point to spend more money.
VW is hoping that a Jetta buyer is thinking that they’re already paying $24,995 for the Hybrid but that the Hyrbrid SE is only a fraction more at $26,990. They’re hoping that the buyer thinks the SE looks better, has better ‘stuff’ that they want and that maybe it’s worth upgrading. They’re also hoping that the buyer then sees that the SEL is, all of a sudden within reach, only a small jump again from the SE but with way cooler wheels, a chilled cup holder and parking assist etc etc. Before the buyer knows, they've talked themselves into a model several price points above the one they were originally considering and, presuming there’s more margin at higher price points, VW makes more money.
Takeaway
Transitioning this to products in the online world where most have a smaller number of price points can be tricky — especially if there’s a large difference in the value proposition between tiers. If this is the case I’d recommend using the tactic sparingly and combining it with the use of larger gaps between lower price points to encourage upgrading to higher margin offerings.
If for example you have 3 price points for an eBook, App or SaaS product, perhaps try for a larger gap between your entry level offering and second tier with a smaller gap to your top level product — this might look something like $29 > $69 > $89. Of course you need to think about what’s offered at those respective prices and tweak features and value accordingly to ensure alignment with price.
4. Your lowest price point dictates your highest price point.
Why did VW stop at $31,180 as the price of the most expensive Jetta? A figure roughly double the cost of the entry level price and low and behold, just like the 1915 Model T ($440 vs $975).
The best way to answer this question is to ask another. Would you buy a Jetta if VW priced it at $40,000? Maybe? What about $50,000? Getting expensive isn't it? What about $60,000? No way?
Why?
Because no matter the feature list and price tag a Jetta is still a Jetta. At it’s heart it’s still a small, practical, entry level vehicle.
Takeaway
There’s only so far you can stretch your product’s core value proposition.
Every now and then I come across a product where I really struggle with the upper end pricing that’s been set. You know the ones I’m talking about — where the highest price point looks like it’s been an afterthought, just there to make the cheaper options seem more compelling, or where the premium price doesn't seem to be matched by the corresponding features.
EBooks can be a bit like this. The books themselves (typically the entry level price point) might be priced at between $20 to $40 and then the author might add videos, templates, and interviews etc to create an a top tier price of $200 or more in some instances. I can see the effort that’s gone in to producing this extra content but sometimes I wonder if the increase in ‘stuff’ warrants the increase in price. Arguably, if a majority of the value is in the core content detailed in the book, then it’s difficult to justify the return on investment for the top top price point which might be as much as 1000% above the basic price point.
Conclusion
Now it’s time to go put the theory into practice using the 4 takeaways we've gleaned from analysing Volkswagen’s Jetta pricing.
Here’s a recap:
- Regardless of the size and diversity of your products’ market and the degree of segmentation you engage in, audiences and customers change over time so it’s important that you stay in touch with their needs and update your product offerings to suit. Review your current segmentation and think about whether you've missed anyone or could better cater to others.
- Stop segmenting purely on the size of your users’ wallets and start thinking about how you can segment based what’s important to your audience and how you can give them a more compelling reason to pay more.
- Experiment with the size of the jumps between your price points to encourage buyers to upgrade to higher margin offerings. Think about what’s offered for those respective prices and tweak features and value accordingly to ensure alignment with value.
- Your lowest price really limits your highest price point because there’s only so far you can stretch your product’s core value proposition.
PS: If you’re interested in products and business you might also find my book on developing ideas helpful.
