The Psychology Of Pricing: Part 3 – RD266

This is week three of my psychology of pricing series. Where I share research-proven strategies to influence people to part with their hard-earned money. Some of these pricing tactics work great with your design business, and many of them are perfect for helping your clients get more sales. If you haven't listened to part 1 and part 2, I suggest you do so before continuing with this one. Let's continue with the series. The Psychology Of Pricing - Part 3 As I mentioned in the previous parts of this series, these tactics were taken from a very in-depth article by Nick Kolenda on the psychology of pricing. Have a look if you want to read through it yourself. Since you're here right now, I'll presume you want me to continue summarizing each pricing tactic. So let's get on with the list. Tactic 19: Raise the Price of Your Previous Product. This tactic applies whenever you or your client introduces a new, more expensive version of a product. Although under certain circumstances, it may also work with the services you offer. If you're introducing a new, more expensive version of a product, what do you do with the old version that's left? Many people would lower the old one to sell the remaining stock as soon as possible. But a 2010 study suggests raising the price of the old product might be a better idea. If you lower the old product's price, you'll be reinforcing the lower reference price, which makes the new product seem more expensive, making people question if it's really worth it. Let's say the old product originally sold for $100, and the new product is priced at $130. If you drop the price of the old product to a clearance price of $80, people are going to wonder if it's really worth spending $50 more for the new product. However, if you raise the old product's price, you also raise people's reference or anchor price, which enhances their perceived value of the new product. So instead of dropping the original product's price from $100 to $80, you raise it to $110. Now, people who compare the old and new versions will favour the higher-priced new version that is only $20 more than the old one. And those looking for a deal will be happy to save $20 by purchasing the old version. Tactic 20: Sort Prices From High to Low. A study conducted in 2012 showed that, on average, customers chose a more expensive option when products were listed in descending price order from highest to lowest. This study was conducted in a bar over the course of 8 weeks. The researchers regularly alternated the sequence of the beer prices. Sometimes the beers were listed from the lowest priced beer at $4 down to the highest-priced beer at $10. Other times they reversed the list putting the $10 beer at the top. The researchers discovered that, on average, the bar generated more money in beer sales when the higher prices were listed first. Why does this work? Once again, it comes down to the ever-important anchor price. Whenever someone looks at a list of prices, the first few prices create their anchor price. If the initial prices are low, it creates a low anchor price which creates an aversion to spending money on the higher-priced items lower on the list. If someone wanted to splurge a bit, they might opt for a $5 or $6 beer instead of the base $4 beer, but they probably won't be interested in the highest-priced beers at the bottom of the list. However, if you reverse the order by placing the highest prices at the top to act as the anchor price, each lower price on the list seems like a better deal. Instead of spending $10 on a beer, someone might decide to save a bit of money and opt for a $7 or $6 beer instead. They feel good about saving money but still spent more than in the previous example. As a species, we have an aversion to losses. When we see a list of ascending prices, meaning from low to high. We subconsciously see each price as we descend the list as a loss. Our motivation to minimize that loss causes us to chose a lower-priced product from the top of the list. But when we see a list of descending prices, meaning from high to low, we see each item as we go down the list as a loss in quality. And since we don't want to lose quality, we are motivated to purchase the higher quality, and hence more expensive product. So if you're putting together an eCommerce site for a client, you may want to put the higher-priced items first in the hopes of increasing the average revenue from each sale. This might also work with the Three-Tiered Pricing System I'm so fond of. I show my three price options from lowest to highest. It might be worth reversing it and showing the most expensive option first. You never know. Tactic 21: Position Prices to the Right of Large Quantities This tactic applies to products sold in bundles. A study conducted in 2012 shows that listing prices to the right of large quantities convert better. 70 items for $29 is better than $29 for 70 items However, the study showed that two conditions must be met for this tactic to work. Condition 1: The unit price calculation must be difficult. Meaning it shouldn't be easy to figure out the individual unit price. The tactic works well with "70 items for $29" because it requires a somewhat difficult calculation to determine how much each item costs. However, "10 items for $10" is too easy to figure out for this tactic to be effective. Condition 2: The item quantity must be larger than the price. Following this condition, "70 items for $29" works, but "3 items for $29" doesn't. This brings us back to anchor prices again. "70 items for $29" works because, as Tactic 18 states, exposing people to any high number creates an anchor that makes the lower price seem more favourable. So $29 seems more favourable when placed to the right of "70 items." Tactic 22: Add Visual Contrast to Sale Prices. When you compare a price to a higher price, people are less likely to shop around for a comparable price. This is the same trick that works with the three-tiered pricing strategy. By showing three prices, you reduce your client's chances of comparing you to another designer since they already have various prices to compare together. Tactic 22 takes another step and optimizes that comparison by visually distinguishing one price from a reference price. As shown in a 2005 study, changing the colour of a sale price triggers a fluency effect. Customers will misattribute any visual distinction to a greater numerical distinction. By listing the original price in black and the sale price in colour, you create a greater numerical distinction making the sale price seem more favourable. Combine this with Tactic 3: Display prices in small font sizes for a double whammy. So not only should you change the colour but also make the sale price smaller to bring home the sale value. Tactic 23: Offer a Decoy Option. We've discussed using your own products as reference prices to prevent clients from looking elsewhere for comparison prices. Tactic 23 says you should consider adding a "decoy option." Back in 2008, Economist magazine did something that many people thought strange. They offered three subscription options. Web Only: $59 Print Only: $125 Web and Print: $125 What? Print Only for $125 and Web and Print together also for $125? That had to be a mistake. Why would anyone chose "Print Only" when they could get "Web and Print" for the same price? That was the point. Further investigation revealed that without the "Print Only" option, people couldn't accurately compare the other two subscription options. How much should a "Web and Print" subscription be? Who knows? Most people had no idea and therefore chose the "Web Only" option. In fact, 68% of people subscribed to the "Web Only" option. But when Economist introduced the "Print Only" option, it helped people compare the other options. Because "Print Only" was the same price but a worse version of the "Web and Print" option, people could now easily recognize the value of the "Web and Print" subscription. With the "Print Only" option available, subscription purchases suddenly shifted, with 85% of people buying the "Web and Print" option. Economist magazine generated 43% more revenue simply by offering a Decoy Option. By offering a similar, yet worse, version of a more expensive product, you influence the comparison process making the more expensive product more appealing. How could you use this tactic for your design business? When submitting a proposal, you may decide to offer a logo package for one price, a website for another price and a combined logo and web package for a very similar price as the website alone option. It might be worth testing out. Motivating people to buy. <p...