What You Don’t Know Does Cost You

HeadacheDo you buy generic aspirin (i.e. the store brand) or Bayer? Do you buy generic acetaminophen or Tylenol? How about generic ibuprofen or Advil. It turns out 70% of us buy generics. Higher than I expected, but still 30% of us pay for the brand name.

For those of us who buy the brand name version, we can pay 2 or 3 times as much for the exact same thing. Why do we do this? There are several possible explanations, consumers just make random mistakes and that brands may be more effective especially considering placebo effects.

Recent research from some University of Chicago professors found evidence for the explanation that we just don’t know better. We are not sure what to do. They compared the purchases of doctors, nurses and pharmacists with the purchases of the rest of us. They found that pharmacists only purchase branded headache medicine 10% of the time (compared to our 30%).

NPR interviewed a lawyer who buys the branded version. He said, “I don’t have time to make the decision, so I’m just going to, you know, pay an extra buck or two and buy the brand name.”

This is fascinating, but what does this have to do with pricing? Here are a couple of pricing lessons we should learn.

Perceived Value – People pay for perceived value, not just for real value. In the case of headache medicines the law dictates the generics have the same effectiveness as the branded versions. There is no difference in real value. But there is a difference in perceived value. You can and should focus on how to create more perceived value. This includes building a brand.

Segmentation – Remember to segment your markets. If you were in the headache drug business with only one product, you would likely go after the 70% of the market. But the branded versions are much more profitable than the generics. The ideal solution is to build both and do your best to keep the markets separate. Do you have different versions of your products so you can capture different segments?

What other lessons are there?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by psyberartist