BCG Henderson Institute

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The list price is under threat. Once an indispensable benchmark that expressed a company’s confidence in a product’s value, the list price now risks becoming overemphasized or, at the other extreme, obsolete. Widespread, easy access to price and product information subjects the list price to intense scrutiny by customers, suppliers, and channel partners alike. How can a single number withstand this onslaught and remain persuasive?

To declare the list price extinct amidst this disruption is reactionary. But to cling to the list price as a primary source of price communication is shortsighted. The management imperative is to evolve the role of the list price. At the same time, management must optimize its price communication. This requires supplementing the list price with other powerful communication approaches — many of which did not exist in the preinternet days when the list price reigned supreme.

How can companies change the role of the list price to help address divergent customer and partner segments, adapt to market dynamics, and extract full value in a fair and profitable manner? The answer is by deemphasizing the list price, which companies can do in one or more ways: create multiple list prices, soften the impact of the list price through discounts and other incentives, phase out the list price and replace it with another means to convey a price-value relationship, or recalibrate the list price to express value in a way that gains acceptance and drives sales.

As a product matures, the need for more segmented or customized pricing can increase. To address this need, companies can create multiple list prices. Apple and Microsoft use this approach, and each list price targets an important customer segment, such as students or government organizations. This method acknowledges the idea that there is no such thing as a single value for a product; the value is in the eye of the beholder. If a company segments its customers and has a relatively homogeneous product offering, it can use multiple list prices in a way that is perceived as a fair and reliable expression of value.

More commonly, companies evolve the list price by softening its impact after the launch of a product. This recognizes a fact of life in a world where price data and the ability to make comparisons are rarely more than a few clicks away: after years of frequent discounting — whether in the form of store sales or concessions in B2B price negotiations — customers suspect that there is a better price than the list price. In some industries, taking more than 90% off the list price is not unusual, because sales and channel managers use discounting to compete.

In the B2C world, however, discounts of that magnitude can land a company in legal trouble in most developed countries around the world. For example, the US Federal Trade Commission makes this point very explicitly in its “Guides Against Deceptive Pricing”: “To the extent that list or suggested retail prices do not in fact correspond to prices at which a substantial number of sales of the article in question are made, the advertisement of a reduction may mislead the consumer.”

“May mislead the consumer” is an important phrase. It does not preclude companies from providing sample products for free or making limited-time offers with discounts of as much as 90% off the list price. Media and entertainment companies often do the latter. Instead, the regulations are meant to prevent companies from abusing these tactics by willfully deceiving customers into believing their purchases are “deals” when they really are not.

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