The choice in getting your price
On February 2, 2013 the CBC aired an episode of Terry O’Reilly’s programme, Under the Influence. The theme of the programme was choice and about how a customer makes a decision when a marketer gets a product in front of you, the buyer. Do I buy or not?
Given too many choices of products or services a customer will simply NOT make a decision and walk away. We are, in this modern world, bombarded by radio, TV, junk mail, and spam to make a decision and buy something. Instinctively we tune out rather than make a bad decision. This is because, according to Terry O'Reilly, we, as humans, have an innate ability to make a fixed number of great decisions per day. After that, decision fatigue sets in and bad choices are made. The example he offered was of President Obama who has only two colours of suits to choose from in his wardrobe – blue and charcoal. Why waste energy on something so insignificant when America’s deep financial crisis awaits him?
There are deep parallels with how the same process of making a choice works in the pricing world as well. Do I pay this price or that?
In my observation with clients and in my own research, offering too many price points on your product or service leads to decision overload. When one of our clients confronted his customer with 14 different price points on similar products, sales stagnated. The customer walked away rather than make a decision.
To solve the problem, we reduced the list to three prices and sales improved.
Why three prices? A single price is a take it or leave it ultimatum. No one is comfortable with that and it is simple to say NO. Two choices are still a bit black and white. Three choices appeals to our very human need to be in control, to make an informed decision that can be explained simply thereafter to a spouse or business partner. Moreover, the three choices could be framed as good - better - best.
Done correctly, most customers will choose the middle item or service. Conventional wisdom makes us suspect of the lowest price. We have a tougher time justifying a high price unless it is a luxury or “occasion based“ item like champagne. The easiest choice should be the middle price. But in order to improve profits with my client we deliberately offered the middle product with the highest percentage gross margin. The middle product had a combination of useful but not too elaborate features. The middle offering was qualitatively better that the plain Jane econo model. The middle product was priced closer to the high end model rather than the econo model.
Since most people equate quality with higher prices, we strategically placed the middle product to be an easy consumer choice. By the way, it was also the most heavily inventoried product.
This is the path to improve profits. Your company product and service must stand out but when the customer is considering the pricing decision, there must be a choice, just not too much choice.
Read more Build your Business articles
- Turning on the profit tap Feb 21
- Using cash flow tools Jan 31
- Results based pricing for professionals Jan 17
- Cash and flow pricing Jan 3
- The choice in getting your price Dec 20
- Borrow money & turn around business Dec 6
- Five keys to profitability: Part 5 Nov 22
- Five keys to profitability: Part 4 Nov 8
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