5 Psychological Ways to Help Price Your Products and Services
One of the most difficult situations many novice marketers and business-people of all kinds are faced with is how to price products and services. Charging too much will hurt your bottom line and reduce your profits, but so will charging too little. Finding the right price to charge can be tricky, but multiple studies have been conducted to help find the best way to price products and services, revealing a number of useful insights about the human mind in the process.
Understanding how customers view the price and value of your products, and using proven pricing strategies, can help take the guesswork out of pricing and selling your products and services.
1.Forget saving money, save time instead!
New research indicates selling time over money may be the best way of attracting leads. Jennifer Aaker and her co-author Cassie Mogilner found that “Because a person’s experience with a product tends to foster feelings of person connection, referring to time typically leads to more favorable attitudes and more purchases.” Why does selling time savings or personal experience work better in some cases than discussing the price? Aaker found that around 48% of ads reference time-savings, indicating that many marketers understand how important time is to consumers compared to price alone.
Sadly, few peer-reviewed studies have been performed to support these findings. In an effort to fix this, Aaker and Mogilner set up a lemonade stand with the help of two 6-year-olds. During the experiment, lemonade could be purchased for $1-$3, decided by the customer. One of three signs was used to advertise the fact.
- The first sign said “Spend a little time and enjoy C&D’s lemonade”.
- The second said, “Spend a little money and enjoy C&D’s lemonade.
- The last said, “Enjoy C&D’s lemonade” (neutral sign).
The sign stressing time lured in twice as many customers, who were willing to pay twice as much.
Another study was conducted to validate these results, one involving college students with ipods. Only two questions were asked:
- How much money have you spent on your ipod?
- How much time have you spent on your ipod?
Students asked about their time demonstrated far more positive opinions of their iPods than those asked about money. According to the researchers, “One explanation is our relationship with time is much more personal than our relationship with money. “Ultimately, time is a more scarce resource…and therefore more meaningful to us…How we spend our time says so much more about who we are than does how we spend our money”.
But Aaker and her co-author weren’t done yet. Wanting to know if all references to money led to more negative output, they conducted another experiment, this one at a concert. Here, the cost was actually time, as the tickets were free, but people had to spend time waiting in line for seats. The two questions asked in this case were:
- How much time will you have spent to see the concert today?
- How much money will you have spent to see the concert today?
Even in this case, asking about time increased favorable opinions toward the concert. And in fact, Aaker found those standing in line the longest actually considered their satisfaction levels higher than those spending less time waiting. “Even though waiting is presumably a bad thing, it somehow made people concentrate on the overall experience,” Seem strange? Maybe it’s because people attach meaning to the products and services they use, and if marketers fail to understand what their goods actually do for customers, and how their customers feel about those products or services, they can’t market to them as effectively as someone who better understands those customers.
It should be noted the one exception to Aaker’s studies related to prestige value, or paying extra for goods because just having them makes the buyer feel better about themselves, like exotic sports cars or expensive watches.
Remember, your customer’s most precious resource is time, and if you can show how your products or services can save them time, you may find it to be a more effective response than even drastic price cuts.
2.The Comparative Pricing Trap
Those trying to decide a price often look to others selling roughly the same thing to get an idea of what to charge. Seeing a competitor charging $5, they decide to charge $3. While matching or undercutting competitors may seem smart, it can actually be a terrible mistake. First, such pricing isn’t always reliable; maybe the numbers you’re basing your prices on are inaccurate, perhaps deliberately so, and if you attempt charging such a price, you’ll almost certainly go under.
Another problem with comparative pricing is that customer perceptions can be changed as a result. Stanford marketing research has shown asking consumers to directly compare prices may have unintended consequences. Consider the situation when you visit your grocery store to buy frozen vegetables. You see a sign comparing the price of store brand beans to the more-expensive national brand. Clearly the marketers think people will prefer their cheaper option, but studies have shown that people often avoid the cheapest option, thinking it’s inferior to more expensive options. Buyers will often be happier to buy the more expensive product, thinking higher price=better; they consider the more expensive option a safer buy, or might become overwhelmed and decide to buy nothing at all to minimize perceived risk, instead of doing what you, the marketer, want.
To test this tendency of human nature, Itamar Simonson conducted research to show the effects of implicit and explicit comparisons in decision making. Implicit comparisons occur when a customer compares two or more products on their own, without being told to do so by anyone else. Explicit comparisons, on the other hand, are those specifically brought up by sellers, as in the case of advertisements asking you to compare prices with another brand.
As part of the experiment, Simonson’s group listed Cds on Ebay that always started at $1.99. They then tried to sell the CDs using two different plans. Option one involved adding two more identical CD’s, one placed on each side of the test $1.99 CD. The two identical copies had a starting bid of $0.99.
Researchers also auctioned the CD in a second experiment, but this time placed on either side of the test CD copies starting at $6.99. Those CDs flanked with expensive options ($6.99) consistently brought better prices than those next to the $0.99 CDs. In this case, the shoppers themselves were comparing options (implicit comparison), as opposed to being told to compare.
Next, the researchers asked the subjects to compare the $1.99 CD with other CD prices. When this happened, the price of adjacent CDs stopped mattering, and consumers became much more cautious about buying at all. Such individuals submitted fewer bids, took longer to decide on their first bid, and were less likely to participate in multiple auctions.
What does this tell us? Instead of asking your customers to directly compare your offerings to your competitors, instead try highlighting your unique strengths, and place an emphasis on saving time and trouble over saving money. Let them draw their own comparisons. If you’ve given them everything needed to make a decision, they’ll be much more likely to trust their own conclusions over yours.
3. Where you sit = How much you’ll pay
A good price for a product in one place may be terribly high, or suspiciously low, in a different context. Take clothing as an example; would you expect a tee-shirt to be cheaper at a small, run-down store, or at a classy, high-end boutique? Even though the shirt is exactly the same in either case, people are consistently willing to pay more if they think the additional cost is justified, either because of where or how it was obtained.
Think of NFL-licensed apparel; clothing of equal quality can be purchased elsewhere, but people will still pay more simply because the tag says “NFL”. Price differences can also be helpful when selling cheaper items. Trying to sell a $100 cellphone when it’s next to a $600 one is typically easier than selling the same phone sitting next to a $50 alternative. Even if you don’t plan to make much sales from premium items, consider carrying just a few; it’ll make your cheaper items look better in comparison, and possibly lead to increased sales.
4. The power of number 9
You’ve seen prices ending in “9” your entire life. You’ve probably heard it’s to make the price look lower, but it that really true, are people really that easy to food? Evidently, yes. This practice has become known as “charm pricing”, or deliberately using the power of the number 9 to increase sales, and it works rather well.
William Poundstone, in his book Priceless, investigated a number of studies on charm prices, and found that on average they increase sales by 24% versus “rounded” price-points.
Experiments conducted by MIT and the University of Chicago tested the price of a women’s clothing item at $34, $39, and $44. The researchers were surprised to find the $39 price sold better than the $34 price point. While researchers have also found prices that emphasize the original price did better than using charming number 9, unless you include 9 in the sale price, where it once again outperforms every alternative.
The next time you have to price a product or service, consider using the number 9 to make your prices more attractive and easier to deal with for customers.
5. Why you should embrace “Useless” prices
Sometimes the differences between your pricing will substantially alter customer perceptions. Occasionally, some prices may seem “pointless” compared to other, existing options. For example, recently a web developer offered the following plans at different prices:
- Basic Website for $39/month
- Advanced online marketing for $125/month
- Website and marketing combo for $125/month
The second option seems silly, since you’d be getting both a website and online marketing for the same price with the third option, but something surprising happened. The middle price actually helps convince customers to choose the more expensive option. They see no additional risk in getting something for free, like the website in option 3, and they see it’s a better deal than either option #1 or #2, so they’re more likely to make the purchase. Without the middle option, the difference between prices seems higher, and shoppers were more likely to talk themselves out of “upgrading”.
In effect, “useless” price-points help convert consumers from cautious, conservative shoppers trying to save money into reassured customers looking for the best value possible for their money. Who would you rather have for a customer?
If you don’t already, consider offering a “useless” price situated properly between other other options, and see if sales of the more expensive choice increase. With multiple pricing options, you can offer solutions to fit different customer budgets, increasing your market saturation and convincing buyers to pick the better value over the cheaper choice.
Despite covering only a few in this article, there are many factors to take into consideration when planning how to price your products or services, and there are many peculiarities you can leverage to potentially influence buyer behavior. What other considerations do you ponder when pricing? What techniques have you found that help you satisfy customers while enriching your bottom line? Tell the world in the comments below.
by Eric Streeter