Do you want
to know how to price your products more effectively?
Choosing
the right price is a common problem for business owners, particularly in new or
rapidly-changing fields, where prices are not set in stone. A popular approach
is just to copy or try to undercut your competitors, but there are smarter
ways.
Academics
have done a huge amount of research into how consumers respond to different
types of prices. Some of the results are distinctly counter-intuitive, and by
equipping yourself with the right data, you can profit from some interesting
cognitive biases. Did you know, for example, that reducing the number of syllables in the price you quote can
make people think they’re getting a bargain?
Paying a
little attention to the details of pricing could make a big difference to your
bottom line. McKinsey & Company has estimated
that fewer than 15% of companies do systematic research on pricing, and yet
studies have shown that small variations in price can raise or lower
profitability by 20% or more.
So in this
tutorial we’ll take you through some key findings about the psychology
of
pricing, and show you how you can use them to set your prices. You’ll
learn how
to reframe the value of your products or services, how to use price
anchoring, how many options to offer your customers, and how to profit
from some strange numerical quirks.
1. Reframe the Value
When we
evaluate prices, we’re not always strictly logical. How you frame the value of
your products and services can make a huge difference to what people are
prepared to pay.
Daily, Monthly, or Yearly?
Imagine that
you’re trying to sell some high-end software at $1,000 for an annual
subscription. You try to justify that high price by telling people all about your
software’s wonderful features, and what it will do for them, and why it’s
better than your competitors’ offerings. But still no sales.
Try
reframing the value, on the other hand, and you might generate a lot more
interest. Say your software costs just $2.99 a day. For the price of a cup of
coffee, you can get complete peace of mind (or simplify your life, or whatever
your software does).
Doesn’t
that sound more compelling?
A smaller
amount is not only easier for customers to rationalize; it’s also easier for
our brains to process. A neuroimaging
study found that high prices activated neural circuits involved with
anticipating loss. Even before we start logically evaluating whether $2.99 a
day is a good deal, we’re already more likely to accept it than a high price
like $1,000.
And the
best part? $2.99 a day actually works out to slightly more than $1,000 a year.
Use Obvious Words
If you’re
trying to sell a DVD subscription, it shouldn’t really make much difference
whether you say it has “a $5 fee” or “a small
$5 fee”, should it?
Actually,
it makes a big difference. In a Carnegie Mellon study using exactly this
scenario, trial rates for the DVD subscription increased by 20%
when the word “small” was added to the messaging.
You may
think it’s obvious that $5 is a “small” amount, but these little words trigger
our buying impulse. Pay attention during the commercial breaks on TV, and
you’ll hear these little words all the time: “small”, “low rate”, “bargain”,
and so on. They’re obvious, but they work. Put them in.
2. Use Price
Anchoring
When you’re
offering more than one product, their relative prices can greatly distort the
perceived value of each individual product. When people are faced with multiple
choices, they often make surprising decisions, so here's what the research
shows about how to price multiple products effectively.
How to Make an iPad Seem
Cheap
When Steve
Jobs first introduced the iPad back in 2010, he gave a masterclass in an
important technique called price anchoring.
Remember
that before his presentation, nobody had ever bought an iPad before, and nobody
had a clue how much it should cost. So it was up to Jobs to set expectations.
“What
should we price it at?” he asked the
audience. “If you listen to the pundits, we’re going to price it at under
$1,000, which is code for $999.”
Having
established that $999 figure in our minds, he then made the big announcement
that iPad pricing would start at “just $499.” It felt like a deal. We were
getting an iPad for half price.
The launch,
of course, was a huge success, and since then, Apple has gone on to sell 225
million iPads. That’s not all down to a single presentation, of course, but
setting those expectations certainly helped.
The
important point is that if Jobs hadn’t given us that “price anchor” of $999,
we’d have found our own, and it may not have been to Apple’s advantage. We might
have compared the iPad to an iPhone, for example, making the $499 seem
expensive in comparison.
So be aware
that your customers are making comparisons all the time. You can take control
of those comparisons by positioning your product next to something more
expensive. If you don’t, your customers will probably find comparisons of their
own, and you may not like them.
3. Understand the Effect of Consumer Choice
In a TED
talk a few years ago, behavioral economist Dan Ariely talked about a mysterious
advertisement he’d noticed in The
Economist.
The
magazine was offering three subscription options:
Web
only: $59
Print
only: $125
Print
and web: $125
Option 2
seems ridiculous, doesn’t it? Who would choose to pay $125 for the “print only”
option, when they could get print and
web for the same price?
He ran a
test with his students at MIT, asking them which option they’d choose, and the
results were roughly what you’d expect, with nobody choosing option 2:
16% chose web only.
0% chose print only.
84% chose print and web.
But when he
took option 2 out of the equation and ran the experiment again with only two
choices instead of three, something interesting happened:
68% chose web only.
32% chose print only.
With only
two options to choose from, people were attracted to the cheaper option. The
nonsensical middle option had served a purpose after all. It made the more
expensive “print and web” option seem like a better deal. In your
business, try running experiments as Ariely did with his students. Offer your
customers different combinations of pricing options, and track the effect on
sales. As the Economist example shows,
the logic behind consumer choice isn’t always obvious. Even offering an option
that nobody wants can sometimes have a positive impact on your revenue.
Avoid Option Overload
But in case
you’re now tempted to start cramming in lots of new subscription options, be
careful. “Option overload” can put a real damper on sales.
Have you
ever spent ten minutes standing in the supermarket aisle, gazing at 24
different types of jam and finding yourself unable to pick one? Don’t worry:
you’re not alone. In fact, you were suffering from a common complaint: option
overload. You had too many choices, and you couldn’t perceive the difference
between them, so you did nothing.
Researchers
have studied this very phenomenon, believe it or not. They gave shoppers 24
different flavors of jam to sample, and found that only 3% of them went on to
make a purchase. But when they reduced the number of flavors to six, suddenly
the purchase rate jumped
to 30%.
So if you
want your customers to make a decision, offer three or four clear options, not
nine or ten.
4. Profit From
Numerical Quirks
We all know
that $19.99 seems significantly cheaper than $20, even though it’s only a
one-cent difference. But there are more numerical quirks to be aware of. Here
we’ll take it one step further, and look at some less well-known ways to set
your prices based on the way our brains process numbers.
The Rule of Nine
First of
all, does that $19.99 trick really
work? Yes, it does.
Researchers
at MIT and
University of Chicago had a national mail-order company mail different
versions of their clothing catalog to randomly chosen customers. In one, the
prices all ended in nine, and in the other two, the prices were raised or
lowered by $5. So, for example, the same dress would be $39 in one catalog, $44
in the second catalog, and $34 in the third.
The results
were astonishing: the catalog with the prices ending in nine resulted in 40% higher sales than both of the
others.
The
fascinating thing is that the $39 dress not only outsold the $44 dress; it also
outsold the $34 dress. Remember, it’s the same dress in each catalog.
It seems
we’re so culturally attuned to prices ending in nine that we respond to them,
even when it means the product is more expensive. The "nine" price outperformed
both its cheaper and more expensive competitors not only at $39, but also at $49, $59 and $79.
Bottom
line: it works. Make your prices end in nine.
There’s
just one exception. Companies selling more high-end items often avoid prices
ending in nine. They want to come across as exclusive, and appeal to customers
who don’t need to hunt for bargains. If you want to buy a Gucci
bracelet, for example, it’ll set you back an even $10,900. You won’t see
any 99-cent tricks here. It’s the same at a high-end restaurant, where your
filet mignon will almost always cost $40, not $39.99.
Say it Out Loud
But what
about those other quirks I mentioned?
First,
think about the number of syllables in the price you’re quoting. In a 2012
paper, researchers found
that “consumers non-consciously perceive that there is a positive relationship
between syllabic length and numerical magnitude.”
Translation?
If a price takes longer to say out loud, people think of it as more expensive.
That’s why
on the car commercials on TV, they always say “from ten nine nine nine” instead
of “from ten thousand nine hundred and ninety-nine dollars”. It’s exactly the same
price, but five syllables sounds cheaper than 13.
So when
you’re writing prices on your website or marketing materials, imagine your
customers saying the price out loud. If you write a price as “$1,599”, for
example, people will say, “one thousand, five hundred and ninety-nine” in their
heads. Remove the comma, so that it’s “$1599”, and they’re more likely to read
it as “fifteen ninety-nine”. You might just make some more sales as a result.
Other Quirks
Here are a
few more surprising research results to consider:
One piece
of research at Cornell found that diners in a restaurant spent more money
when given a menu with no dollar signs on the prices (for example, when the
price of a steak was written as “32” instead of “$32”). Deleting dollar signs
from your website could confuse people, though, so be aware of the context!
Another study
found that if you want people to pay attention to a sale price, you should
write it in a small font. This probably runs counter to your instincts, and is
certainly the opposite of most marketing practices, but the research found that
“in our minds, physical magnitude is related to numerical magnitude.” In other
words, a bigger font makes us think it’s a bigger number.
And still
on the subject of sales, try to make the math as easy as possible. Reducing a
price from $10 to $8 is actually a better idea than reducing it to $7.97. With
the $8 price, we can instantly calculate the $2 saving; when it’s $7.97, it
takes our brains that bit longer to process. So we see $8 as the better deal,
even though of course $7.97 is cheaper.
Next Steps
So
now
you’ve learned what the research says about the psychology of pricing.
You’ve
learned how to reframe the value of your products and services, how to
use
price anchoring, and how the choices people are given can affect their
buying decisions. You've also seen examples of how the human brain
responds to numbers in sometimes
surprising ways.
The next
step is to put all of this into practice in your business. Don’t be afraid to
experiment here. While major price changes should of course be carefully
thought through, you can easily make minor tweaks without alienating your
customers. And you can present them as special sales or promotions, to run for
a limited time, so that you can always go back to your initial pricing if
things don’t work out as you’d planned.
For
web-based businesses, it’s even easier. You can easily vary the prices, bundles
and offers on your website, and track which ones perform the best. And of course
with some of the strategies, like price anchoring and reframing the value, you
can even keep your prices the same, and just vary how you communicate them.
So why not
get started? Make a plan for how you can start using these insights into
consumer psychology to boost your business’s bottom line.