Pricing is a marketing headache, and for good reason. It takes some pretty intense understanding of Economic Theory to price your products just right and can mean a lot when it comes to who buys your product. And if finding a perfect price isn’t enough, you have to consider packaging and presentation.
We all know that perfectly pricing your product and sculpting landing pages to emphasize those prices can be the small difference between generating a profit and incurring horrible losses. It’s a delicate process that takes a lot of testing, time and most of all, patience.
But before you put on your CEO pants and order the prices of all your products to double immediately, you should know – there are much more specific strategies to entice your customers. In fact, there are some really powerful ways to get your consumers’ subconscious to even do the convincing for you. And they don’t require you to be an advanced statistician either.
Thank you, psychology.
Some of these pricing strategies straddle the grey area that exists between persuasion and manipulation. While you should never, ever want to cross that grey area, they can be insanely effective. But humans are “predictably irrational,” and there’s nothing wrong with leveraging your knowledge of human nature to give consumers the final nudge towards your conversion goals.
Here are some pricing hacks, backed by science and real world examples, which will help drive conversions and increase revenue.
The Decoy Effect
The decoy effect is when marketers provide an extra option that they don’t expect to sell, but hope will influence buyers to pick the products they want. Used correctly, this hack can be really effective in generating conversions – and the greatest companies use it all the time.
If a business has products A and B, which are very similar in offer and price, then people may have trouble comparing them. However, if that business introduces product C, which is obviously a better deal than product B, most consumers will naturally choose C.
Why? Because people don’t have an internal value meter to tell them how much things are worth. Rather, they focus on the relative advantage of one product to another and assign value accordingly.
Bloomberg Businessweek gives us a great look at Apple for a classic decoy example. Apple is notorious for selling its gadgets in pricing series, such as the iPod Touch’s $229, $299 and $399 price tags for different storage capacities in 2010. You might consider these options and gladly spend $229, thinking it’s a deal versus the high-priced media player.
What didn’t occur to you, however, was that you could have bought an iPhone 4 at just $199 with more features than that $229 media player. That $399 gadget was a decoy, designed to make you think you were getting a good deal – and distract you from the real bargain.
Want to test it? Add a decoy offer next to the one you really want consumers to take.
The Contrast Principle
This tactic looks at pricing with relevancy as its perspective. Show an item that sells for $3,000 and put it next to a similar one, and all of a sudden $300 for the same product sounds like a bargain.
The Economist is a master of the contrast principle. Pay for a subscription and you’ll find yourself wondering why anyone would pay $125 for the same content you would get from an online version for $59. All of a sudden that $59 seems like a steal.
This process works through a concept called “anchoring”, or when you start throwing out high numbers with the hope of ultimately settling on a lower (yet still desirable) price. Anchoring is commonly known to influence prices and conversions, because it makes people feel like they got a better deal than they actually did.
Robert B. Cialdini, Ph.D., shows us a great example of contrast in action. In his book Influence: The Psychology of Persuasion, Cialdini talks about a time when he investigated the sales tactics of real-estate companies. He saw that one salesman would always show customers a few undesirable houses, which he called “setups,” before showing them more genuine properties. That way, the real properties that he hoped to sell would benefit from the comparison.
Depending on your business model, you can strategically reference very expensive products that will make your other products look like better deals.
If you negotiate price with your customers before making the final sale, then try highballing your first offer and working them down. Just a reminder to tread lightly on this matter; don’t get greedy, you should be always working towards a fair price. If you compete with other companies over price, try exposing your competitors’ prices relative to your own (assuming that your competitors do, indeed, charge more). If neither of those really applies to your brand, you might include overpriced merchandise beside your more reasonably priced products to increase sales.
Selling Pricing with a 9
Backed by a study on pricing experiments based upon women’s clothing, there’s proof that you should always price with the number 9. Despite cheaper prices being offered, large samples in the experiment decided that a $39 dollar item was a better value than the same item for $40 or one even as low as $34. In fact, prices with 9 increased sales by about 24 percent.
Why do people gravitate toward 9? It’s actually not because of 9 itself, but because of the numbers in front. People are more likely to buy an item for $49.99 than for $50 because 4 is numerically less, so $49.99 seems like a better deal.
We see this in practice almost everywhere we shop. Log on to any name brand ecommerce page – Macy’s, Best Buy and Reebok are good examples – and you’ll see 9s all over. While this using 9’s may seem like common sense to most people, due to our exposure to it in nearly every shopping experience, it’s still a good idea to make sure you don’t miss out on the returns from this simple tactic.
I mean, if FakeJordans.com is smart enough to do it, we should be too right?
Giving Consumers Control
So your prices are working and you’re generating a fair amount of conversions.
…Want to add a little extra to that perfect pricing? Try the Pay What You Want (PWYW) model.
With Pay What You Want, buyers can pay any amount for a given product – if they choose to pay at all. In some cases, a minimum price is set or a suggested price is given and buyers can pay more if they desire.
Take Panera Bread for example. In 2010, Panera began using the Pay What You Want model at its five Panera Cares location, allowing consumers to pay whatever they wanted for every item on the menu. Panera Cares unique stores exist to provide food and dining to anyone who walks through their doors, regardless of whether or not a person can pay. Statistics indicate that about 60 percent pay a suggested amount, 20 percent pay more and 20 percent pay less. Panera Cares bring in about $100,000 a month, $3,000 to $4,000 above costs.
This strategy isn’t exclusive to an offline world. In fact, the wide audience range the internet provides actually lends itself to this tactic. Possibly the most popularized example of this tactic comes from Radiohead’s independent release of their album, “In Rainbows,” after ditching their record label.
On the day of it’s online releases Gigwise.com reported the album had sold 1.2 million copies with the average price being paid around ?4; a significant increase from the suggested price of a penny.
Want to optimize this tactic even more? A study by ScienceNow, indicated that by making purchases anonymous in the PWYW model, customers pay approximately 13% more.
The Pay What You Want model has been profitable for many others as well, but it depends on one important factor: having fair minded customers who can afford to reasonably pay for your product.
Consumers think they want options, but you’d be surprised at how little they know about themselves. Sometimes what people really want is to not have to choose at all.
This goes back to the infamous “paradox of choice”. According to psychologist Barry Schwartz, constantly asking people to make choices can sometimes backfire. Here’s why:
- Freedom of choice paralyzes consumers. With so many choices, people find it difficult to choose at all because they don’t want to risk making the wrong decision.
- Even if people do make a choice, they end up less satisfied than they would have been without a choice at all. People tend to second guess their choices and regret them.
The most important thing to consider in this pricing hack? Your company positioning. Since you’re only offering one price, you need to make sure it’s one that your unique customer base will accept.
Let’s consider Netflix. With hundreds of movies and TV shows included within the product, consumers will be facing more than enough decisions in the future to overwhelm them. Instead of adding to that stress, the movie streaming giant keeps their pricing options simple. You want Netflix? Then $8 please. Wait! I’m getting a better deal than that, it’s only $7.99. Netflix has been reading my blog posts on the “9 Principle.”
To do this you must understand the three main drivers in the purchasing decision; Money, Time, and Mental Energy. Consumers are willing to pay more for something that requires zero mental energy and time (think installation, etc) if those are something that are hard to come by.
On the flipside, if consumers have more time and less expendable cash, they’re generally willing to put more time into making their product work in order to save the cash (ex: buying a bike and assembling it yourself).
Because time and money are related, you must evaluate the state of your target audience. If your target audience has a lot of time but not very much money, make sure you have a cheap price. If your customers don’t have a lot of time but can afford to pay more, worry less about price and more about making the actual purchase as thoughtless as possible.
Adding Charity to Your Business Model
Try to incorporate packages in which a portion of the price is donated to charity. This strategy usually works best in combination with the Pay What You Want model. By giving consumers the notion of greater good, they’re much more likely to pay higher prices for products.
TOMS is an excellent example of a successful charity model in action. TOMS is a company that sells a variety of trendy footwear styles, and for every pair that you buy, a pair is donated to a child in need.
At $48 a pair, TOMS aren’t necessarily the cheapest shoes in your closet – yet, since 2006, TOMS has sold over 10 million pairs. The math isn’t hard; TOMS is definitely making a lot of profit in the name of social enterprise.
As with the Pay What You Want model, there are several factors that make this strategy successful, and TOMS meets them all. Listed below are the 5 factors for smart pricing through the Charity Model as outlined in the book, Smart Pricing.
1. Working in a very competitive marketplace – Shoe Retailer
2. Having a product with low marginal cost – CNBC reported it only costs $9 to produce a pair of TOMs shoe.
3. Having a product that can be legitimately sold at a wide range of prices – Reports show shoes range from $20 – $450 from retailers.
4. Selling that product to a fair-minded customer
5. Maintaining a strong relationship with that customer – TOMS was able to maintain a profitable business, even in the economic downturn in 2008.
If these five factors describe your business as well, give the Charity and Pay What You Want model a go.
To prove that you don’t need to be a big brand to pull this off, check out Mosquito Magnet’s campaign which employed this approach to great success. The mosquito trap producer found a charity that was relevant to their industry and struck a chord with their consumers; malaria. Support for the Facebook page as well as increased sales meant the company would donate mosquito nets to the grassroots campaign, Nothing but Nets, to aid the fight against malaria.
Introducing products in threes is a great tactic to maximizing your conversions. By offering just a few options, online businesses have found they have significantly increased revenue compared to any standalone product. That’s due to the consumers’ inherent desire to have the best product on the market; meaning they will always buy the “top product”.
Behavioral economist Dan Ariely discusses this concept in his book, Predictably Irrational. His research showed that giving three options increased revenue by 43 percent compared to only giving two, with 52 percent fewer customers choosing the cheapest product.
You can test this yourself by offering three different packages, and if there’s something you really want to sell, make it the middle option.
Perception is Everything
This strategy more challenging to implement than the rest. Why? It takes a strong understanding of consumer psychology in order to capitalize on this hack; however, this experiment arguably produces the greatest profit, because if you’re able to build an image in a new category, there’s no price reference and people are willing to accept any price you name.
People base their perceived values on reference points. If your product is more expensive than common reference points, you need to change your customers’ perception.
National Public Radio has mastered price perceptions. NPR stations ask people to donate by joining their dollar-a-day club. When you put it like that, the donation seems reasonable. However, contrast that with the “$365 a year” club? Not so appealing.
By changing the time reference point (days versus a year), NPR effectively used language to change people’s perceptions on their pricing model.
If you’re looking to change your customers’ perception, try changing the context. For instance, consider this example from respected economics professor, Richard Thaler. Two friends hoped to have a beer on the beach. One would go to a run-down corner store to grab the buy theirs. The other found a luxurious resort bar to order the drink. Both were to meet up on the beach so the ambiance provided by the buying locations was irrelevant.
When experimenting with this theory, Thaler found that subjects indicated that they would pay more for the beer at the luxurious resort vs. the run-down corner store. Moreover, paying the same would simply strike them as unfair; insinuating that consumers car just as much about “fair treatment” as the actual value of a product.
To make more money that run-down corner store could simply invest in a more luxurious image, by adding a bar, cleaning up the look of the store from the outside, etc just to have more sales. In the online world, this translates to a better designed site, or better product photography or understanding the psychology behind colors and language to instill a feeling of “luxury.”
How to Experiment
If you want to test your prices, remember that A/B testing is dangerous. While it seems like a natural first step, several companies have upset a lot of consumers when the WSJ exposed some top brands showing different prices to different visitors. Instead, try to test some of these pricing hacks on your own.
Instead of playing with different versions of a product page, try the safer approach of testing prices across different products. If you sell mugs, make sure not to sell that same mug for $2 to on person and $5 to another. Instead, find a product that offers the exact same purpose and test price changes on that. Keep your main product price constant and study price changes on the test subject.
Individually, each of the pricing hacks mentioned carries a lot of support to recommend implementation, but it’s important to be selective with the pricing strategy that will work best for your brand.
Remember that all hacks do not work perfectly in conjunction with another and can result in damaging effects from upsetting your brand loyalists that may notice price changes, to sending conflicting messages to consumers. Follow this guide, implement, and test. And make sure do it individually to end up with the perfect pricing strategy in the end.
Author: Shane Jones