An Introduction to Price Cartography
Pricing products is hard and placing your product in a landscape of similar products items — all of different qualities and prices — is harder. This is particularly true when your product isn’t a fully mature commodity, i.e. it can’t be replaced like-for-like with its competition with no trade-off. We all prefer to spend less where we can but there’s a reason that people with the money to eat at fancy restaurants sometimes do that rather than just going to McDonald’s every day. At the same time, while people prefer nicer products, they’re not going to go to a Michelin-starred place every lunchtime either.
So, what is a good way of thinking about pricing a product? How can you hit that balance and how can you establish your product in the pricing landscape among its peers? Here’s a good intuition pump I’ve developed to get you up and running. It requires a bit of mapping first though.
Setup
Broadly speaking, we expect things that cost more to be better and vice versa (where better means of higher value to us). If we plot this expectation on a set of coordinates it would look something like this:
Important: the line is effectively ‘market expectations’ or the ‘expectation meridian’. Being north of this meridian means that the price of a product is higher than the market expects.
In the ‘south-west’ we have the cheap and bad; in the ‘north-east’ we have the expensive and good.
You’re probably thinking immediately of counterexamples. Things that cost very little but are good and things that are expensive but are disappointing. That’s because the meridian is more of a trend line…
…where the points plotted are competing products in a particular category. This is the ‘pricing landscape’, a new territory for you to chart your course and stake your flag — let’s look at how it’s contoured.
Let’s think about your new product. Any product has a target market made up of individuals. Each of these individuals will have a preferred product choice among the competition. Taking a reasonable average of all those preferred products and plotting it, unless you’re in a particularly idiosyncratic market, your product is probably located on the expectation meridian, looking something like this:
OK. We’ve got the market expectation for a set of products and we’ve got the average price and quality your target market typically goes for. To illuminate further, let’s plot two further lines:
Everything to the left of the vertical line is cheaper than the market favourite; everything to the right is more expensive.
Everything north of the horizontal provides more value (i.e. is ‘better’) than your target market’s fave; everything south of it is lower quality.
You will notice that the introduction of these two lines (the ‘same price’ boundary and the ‘same quality’ boundary) has carved the price-value landscape into six distinct regions.
That’s the mapping complete. There’s a lot to navigate, so let’s explore this region by region.
Pricing Regions
Region 1 — Better and cheaper
Region 1 contains products that are cheaper and better. These are the rare disruptors that provide more value to their customers than the market norm, while still being cheaper. Obviously, this is the El Dorado of the pricing landscape, a place very few products reach. This space doesn’t need much analysis. This is the region of true invention.
Some examples here might be LED lightbulbs, which are longer-lasting and less expensive in the long run than the incandescent bulb. For the most part, Google Calendar is cheaper and better than a physical calendar. Your paper calendar can’t ping reminders to your phone or track which rooms in the office are currently in use. It also isn’t completely free.
Regions 2 and 3 — Better but more expensive
A number of products, when they first populate the market, are of a higher quality than their peers but are positioned at a price point north of what consumers typically expect to pay. Obviously much of that price point isn’t by choice. Long-term, companies need to make a profit on their products in order to meet their fixed costs. If the cost of goods is driving up the price then so be it; some things can’t be helped. Energy, land, water, labour and raw materials are immovable aspects of the environment. The problem, however, is navigating the expectations meridian.
The products in this region are ‘luxury’ items. Fancy, nice things. But how many times have you bought a luxury product and found that, yes, it was better than your usual purchase, but wasn’t really worth the extra you paid for it?
The products in this region are “luxury” items. Fancy, nice things. But how many times have you bought a luxury product and found that, yes, it was better than your usual purchase, but wasn’t really worth the extra you paid for it?
That’s the difference between products in region 2 and those in region 3 — meeting the increased expectation that your price point projects.
Ergo, questions for product owners navigating a luxury product through the market:
- Am I in region 2 or region 3?
- From the feedback, is my product seen as too expensive or not good enough for the price? (These are different.)
- Is anybody providing a similar service for much less? How are they doing that?
Regions 4 and 5 — Worse but less expensive
Denizens of regions 4 and 5 are what you may recognize as ‘budget’ products. That’s quite a loaded term with a lot of connotations and many of them come from the conflation of the two regions. The products in this south-west quarter are those that are lower in quality than the central product in the market but are also cheaper, making them a good option for the cost-constrained.
Products in this region can often be considered ‘cheap’ or ‘tacky’ but, actually, this applies to only one of the two regions. Region 5 is populated by products that are cheaper and worse but are worse than what’s expected for the price. There’s a clear intent to provide a cheaper product for the market but, much of the time, this can come at too great a sacrifice. Sometimes, it can be avoiding the bad surprise these products bring that draws people to the central product — or even to region 3.
Region 4, however, contains the products that are cheaper but sacrifice little in order to get there. These are the hidden gems of the economy, the “You know, I tried that supermarket own-brand ketchup and it wasn’t that bad!” products. A good example here is budget flights. European flight operators like Ryanair see such traction because the sacrifices you make in order to experience the miracle of human flight are worth it. When all is said and done, you still get to where you’re going in as many hours as days, previously.
So, the questions for a product owner navigating a budget product through the market are:
- Am I in region 4 or region 5?
- What have I sacrificed in my product to get it to this price point? Is this too much?
- What’s different about the products that are more expensive and why?
Region 6 — Worse and more expensive
Region 6 is populated with products that are more expensive than the central product on the market and also worse. This is what you might call a ‘rip-off’ product. What is the point, you may ask, in spending all that extra money on something if it’s just going to be worse than what you usually get? The answer is that this product may not be targeted at you.
Often, products in region 6 have some kind of niche appeal. People may like them because they’re expensive, because they’re different or, maybe, because they’re new. For one person, a product may be in region 6; for another, it might be in region 2. This cuts to a key point about Price Cartography: it’s subjective. There are averages everywhere and there’s no accounting for taste.
So what?
I was getting dangerously close to analysis there. All I wanted to do with this post was to introduce the key concepts. There’s much more to say on the topic of Price Cartography, which I will go into in at a future point. For now, consider:
- Not everyone can afford region 2, so how good can it be?
- What can a product do to move from region to region? How do they know if they’re right?
- What about free things?
- Are there some products in region 1 that don’t succeed?
Much to consider. Thanks for reading!
If you’d like to reach out, you can do so below.
e: alex@anthemis.com
