Setting price on your products or services is one of the weightiest decisions you’ll make in your business. It will touch every part of your business from the financials to how you are perceived in the marketplace.
Yet often scant attention is paid to the psychology and marketing potential of price.
More often than not, business owners set price based on what their competitors charge. A common application of this is setting price slightly lower than the market leader in their industry.
Another common way that price is set, is to just take cost price and add what feels like an acceptable margin.
Both of these are acceptable starting points, however, if you aren’t thinking about the marketing or the psychological implications of price then you are likely leaving huge sums of money on the table.
TOO MANY OPTIONS OR TOO FEW?
Regardless of industry, most products or services offer multiple flavors or variants of the primary offering.
Henry Ford famously offered his customers the Model T “in any color that he wants so long as it is black”.
While it may seem backward by today’s expectations of infinite choice and expressions of individuality through ever-increasing personalization, the great industrialist does bring up an issue that is relevant to all entrepreneurs. How much choice should we offer?
Conventional wisdom would have you believe that the more choice you offer, the more sales you will make. However, this has been proven totally false time and time again. There is a famous study by a professor of business at Columbia University that illustrates this point well.
In a California gourmet market, Professor Iyengar and her research assistants set up a booth of samples of jam. Every few hours, they switched between a selection of 24 flavors of jam to only 6 flavors. On average, customers tasted two jam flavors, regardless of the size of the assortment.
Here’s the interesting part. Sixty percent of customers were drawn to the large assortment, while only 40 percent stopped by the small one. But 30 percent of the people who had sampled from the small assortment decided to buy, while only 3 percent of those confronted with the flavors purchased a jar.
The conclusion? Offering too much choice can actually prevent sales. The psychology behind this finding is that people get caught like a deer in the headlights. Fear of making a suboptimal choice prevents them from making any choice at all.
THE “STANDARD” / “PREMIUM” STRATEGY
If you look at Apple and their wildly successful products, you’ll see they are usually offered in only two or three variations each.
This seems to be the happy medium between too few options and the brain overload that is caused by too many options.
Along these lines, a pricing strategy that I’ve seen work very well is offering a “standard” and “premium” variation of a service or product.
The “premium” version is priced at about 50% above the “standard” but offers twice or more value than the “standard” variation.
When using this strategy it’s important to make sure that you are genuinely offering much more value with the “premium” than you are with the “standard”.
This strategy works extremely well in cases where the incremental cost of delivering the “premium” is relatively low because the price differential ends up as pure profit on your bottom line.
THE UNLIMITED STRATEGY
Most people are extremely risk-averse. They fear being stung by unexpected charges whether this is related to data usage, medical costs or consulting fees.
If you can remove this risk for them, you greatly increase the opportunity for a sale. An excellent strategy for removing this risk is to offer an “unlimited” variation of your product or service at a fixed price.
For example, an IT company could offer unlimited technical support for a fixed monthly fee, a restaurant could offer unlimited beverage refills and so on.
While many business owners fear that abuse of an unlimited option will send them broke, this can easily be remedied in your terms and conditions which would allow fair use but would stop or limit abuse.
Especially when you are selling something that needs to be consumed in a particular time frame, the risk of offering an unlimited option is very low. Looking at your average transaction value over time and working with the law of averages can give you a very accurate idea of what it will cost you to offer an unlimited option.
People tend to overestimate how much they will use a product or service when they are at the point of purchase – my ab workout machine is a testament to this! So offering an unlimited option helps you capitalize on this as well as removing any perceived risk of overage charges.
THE ULTRA HIGH TICKET ITEM
In every market there is a small percentage of the population who want to buy “the best” variant of product in its class.
The indicator most often used by consumers as to what is “the best”, is price.
Some consumers will pay 10, 20 or 100 times the price of other functionally similar products e.g. Rolls Royce car, private jet travel etc.
While you might not sell these kinds of high ticket products every day of the week, if you don’t make them available among your normal product mix, then you are definitely leaving money on the table.
These ultra-high ticket items can make up a very large percentage of your net profit even if you only sell a small number of units. It will also help you attract a more affluent customer who shops based on prestige, service and convenience rather than on price.
Lastly, a big benefit of the ultra high ticket item is that it makes the other variations in your product range look much more reasonably priced by comparison. RESIST THE URGE TO DISCOUNT
When the market you operate in is highly competitive, there is a strong urge to discount your prices. This strategy needs to be used with extreme caution, because of the pressure it puts on your margins and profit.
Unless you have a very specific loss leader strategy whereby you try to entice a customer based on price and then upsell or cross-sell then try to avoid discounting.
A better option than discounting is to increase the value of your offering. Bundling in bonuses, increasing quantities or adding peripheral services can be of genuine value to your customer but cost you very little to do.
Regardless of which specific strategies you implement, it is important to continually test and measure.
Consumers are bags of emotion and are not driven purely by rational motivations.
Make setting price a central part of your overall marketing strategy.