2011/10/12

The Psychology of Pricing


Psychology influences our daily lives. Sometimes, it’s so subtle that we don’t even know it’s happening. Consider these powerful examples…

• the comforting smell of fresh-baked bread in a house to ignite childhood memories of food or family in the prospective home-buyer.
• fresh flowers/produce near the grocery store’s entrance to encourage impulse buying -- something that’s not “on the list.”
• big sale signs at the back of the boutique to force the customer to walk by all this season’s trendy clothing styles.
• the offer of coupons or big prizes on a Web site in order to get the visitor clicks and cookies.

All four of the strategies above involve psychology. It’s a reality in the business world today. You’ve got to be able to get inside your customer’s head. And not leave one empty space for your competitor! It’s a race for “share of mind.”

Pricing is no exception. The “Perfect Price” is that price that maximizes your profits while building a lifetime customer through value satisfaction.

How do you define “value satisfaction”? By putting yourself into your customers’ shoes. Simple but often ignored advice. Sometimes a vendor thinks that s/he knows what’s best for the customer. Let’s call it the “mothering-smothering effect.” If you reverse your viewpoint by coming at it from your customer’s angle, then you start to look at your product differently. (That’s the funny thing about psychology, it works on both sides of the business fence.)

Price to attract those first-time customers and let the value of your product “keep” them with you for a lifetime.

Naturally, you don’t decide whether to penetrate or top price on this basis alone. But once you’re in the ballpark, it helps to have a keen understanding of human nature. Let’s start with the most well known example...

1    The right number

Some prices just sound like less money than other prices that are very close to them in value. Take the price of 99 cents. It sounds a whole lot cheaper than a dollar -- the same way that $9.99 does with $10.

Humans buy on emotion first, rational thought second. If they can say “and it’s under $50,” it’s one more plus for you.

Point to take away?
End your price in a 5, 7, 8, or 9 and be on the right side of human nature. Let’s also consider what Eric Mitchell, involved with the Pricing Society, observed about the rules of rounding off prices, based on his market research...

For Prices up to $10... It makes more sense to use $0.99 rather than $0.95. Respondents’ reactions are the same for both numbers. So why leave 4 cents of profit on the table?

Odd price endings like $0.74 can sometimes cost sales. They cause some confusion in the customer... $0.74 just doesn’t “sound right.”

For Prices from $10 to $100... “.95” and “.75” price points are much better received than “.99”. In this price range, there is a resistance to “.99” because it is often viewed as a “greedy” price point. Think about a restaurant menu... the special of the day is usually set at $12.95, not $12.99.

For prices above $100... It’s better to deal in “whole” dollars. From the customer’s viewpoint, $149 is a more acceptable and cleaner price point than $148.95.

Pricing a professional service? Price in whole dollars. Choose $50 per hour rather than $49.75. You’re not “on sale”, are you? Reception (of a price) is based on perception (of that price). Make it positive!

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Pricing Isn't All Logic. Discover The Hidden Pricing Tactics You Can Use To Increase Profits!
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2  The Value Bundle

Something for nothing. Don’t we all love that? Definitely! Value-bundle, if possible. What’s “value-bundling”? Simple, really. Group-related products and set one price for the combination. This works best if the grouped products have a logical association with one another.

Customers tend to assign value to a bundle, based upon the probable cost of individual “ pieces.” Value-bundling is a powerful method if the price of your bundle equals the price of the most expensive component.

Offline example -- You commonly see vacation packages where air tickets and ground arrangements (hotels, meals, bus tours and so on) are advertised at one bundle is just a bit more than what your customer would pay for the air tickets separately, your customer has that wonderful “something for nothing” feeling!

Online example -- AOL bundles a number of information products and interactive services together and charges one price for all of them. And, the company keeps adding to it...all for one low price.

The bigger the bundle, the better!

3     Discounting

You’ll always find Ken over by the... “SALE” rack.

“I love a good bargain.” Most folks do.

On the Net, you start a product launch with a huge advantage -- you can reach all your previous customers with the click of a mouse. When you introduce a new product, offer them a discount off the regular price. Send these supporters to a special discount URL. Do the same for your affiliates. Both deserve it. They’ll appreciate that you appreciate them.

Quantity discounts are really worth considering, especially if you are shipping hard goods. Go beyond the obvious reduced “per unit shipping charge”... offer “three for $20” (or better, $19.95) for that $7 bottle of wine.

Sure, the margin is a bit less... but your gross is much better. Your customer saves on shipping, product cost, and gets that “under $20 psychological boost.”

And your competitor?... well, that’s two bottles of wine that he is not selling to your customer!

Discounting can be used in a variety of other ways... for seasonal deals, special markets like seniors and students, affiliate (or distributor if you are offline) network. Whether you use it to build existing customer loyalty, for quantity savings or for competitive reasons, discounting can be a strong tool. Define the goal clearly, though, before you discount. Otherwise, you’re just giving money away.

4     “Reverse Discounting”

“Geez, it has to be good -- look how expensive it is!”

Quality is in the eye of the beholder. And a high price tag can certainly help create a high perceived value. After all, is Mercedes really worth three times a Ford? Is a Tiffany’s diamond really worth five times more than the same one on the Net?

This can work if you are selling the snob appeal of a status symbol to the wealthy, or a high-priced, big-name service to multi-national companies. But don’t try this for
most products on the Net, especially if you sell digital products -- unless, of course, you enjoy... the feeling of your head being clamped in a vise.

If you simply set a high price for a new product with the hope of increasing Net sales due to a high-perceived value, you’re headed for pain. Big time pain. Yes... if your site makes a great sales effort, you will be able to build a higher perceived value. And that will support a higher price.

Whatever that value is, when it comes to selling on the Net... never price beyond the value that your Web site creates and that your product supports. This is essential knowledge if you want to build a successful, growing, long term business.

5    The Infamous “Plus S&H”

“Plus shipping and handling”... That famous phrase! Everyone’s aware of these hidden charges, of course. But somehow S&H are just not part of the price. Let’s say that you charge $39.98 for a Crocodile Dundee knife. Plus, of course... Shipping & Handling of $9.98.

So, Mr. Smith, what does that knife cost? $49.96? No, by the time Mr. Smith has decided he must have the “That’s-Not-a-Knife-Now-That’s-a-Knife” knife, it only costs $9.98.

Including S&H in the price of your product is a big boo-boo. It can only mean one of two things...

1) Your product looks $9.98 more expensive… or...
2) You’re losing money. You can only do that for a while. If you build customers on the basis of price, be prepared to lose them when you have to start making money.

Naturally, if you’re shipping digital products directly via the Net, S&H are free! In that case, sure... be generous.

Tell your customer...
“Shipping & Handling Included.”

6   Price Elasticity

If demand for your product drops when you increase the price by only 1%, you have a product that is very price-sensitive or price-elastic.

If, on the other hand, doubling the price only causes a slight drop, you have a price-inelastic product -- that means that it almost doesn’t matter what price you charge because people will still buy it.

Elasticity is largely driven by customer perception of your product and the competition.

If you are a grocery chain selling your own brand of instant coffee, your coffee better sell for less than other brand names. Bump the familiar price up and watch your inventory sit on the shelves.

But if you sell a top-line, in-fashion, gourmet brand of coffee... it can be a license to print money.

What kind of products are price-inelastic?

Products that...
• deliver important benefits to the customer.
• offer uniqueness that is understood and valued by the customer.

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