“How much does it cost?”
It’s a question that traces back for millennia.
Going back to the first time money was used (which many scholars believe is Mesopotamia circa 3000 B.C.) human commerce has depended on setting prices for our goods that accomplish two things:
- Generate interest from a pool of potential buyers
- Are sufficient enough to ensure we realize a profit
If “you-know-what” is the oldest profession in the world, then those trailblazing ancient entrepreneurs had to figure out how to find the right price so the lady in the hut across the way didn’t steal the “market share.”
Next to developing a great product or service, there may be no more important of a function you face than finding the right price. Miss the mark here, and you’re toast…even with a great product.
Your price is—technically—just a number. But tied up in your price is a whole barrel full of your prospects’ perceptions. Ultimately, it’s the determining factor of valuation, of what people think your stuff is worth. And as we know: perception is reality.
Now, this post could run long as hell if we looked at every variable in the pricing equation. So our intention here is to look at how psychological factors come into play when someone’s eyes first gaze upon what you’re selling… and how you may be able to use these factors in your favor for greater profitability.
The Price Is Wrong, Bitch…
Viewed in the simplest equation, there’s a positive correlation between how rare something is and its price.
Precious gemstones carry high price tags due to their finite supply. Wine is priced based on its vintage and year. You may have heard of Martin Shkreli, the pharma-bitch who acquired the patents on drugs used to treat rare diseases and then raised them by 20x.
For better or worse, when something is in limited supply and in demand, the distributor almost has carte blanche in setting its price. And on the other side of the coin: when what you offer is not as high in the exclusivity meter, there’s going to be some more strategy put into pricing.
How rare is what you’re offering?
Or, better yet…
How rare can you make it seem?
Before we talk about enhancing the perception of value you can add, let’s look at two of the most basic pricing considerations:
- Cost-Plus Pricing. As the name hints, you add up all of your costs including overhead and all operating expenses you currently have…and then setting a profit margin where your final price is higher than all costs. Obviously, there’s a huge difference between a brick-and-mortar store vs selling info products online here. So make sure you don’t leave any costs associated with how you do business out of the equation.
- Competition Pricing. You have to be aware of what others in your space are charging. When you’re the new kid on the block, pricing your goods under the average can help get the ball rolling. But go too low, and you eat away at your profit margins or dealing with “tire-kicker” customers. Set your price above average and you better be able to justify it in the minds of consumers.
There are also factors such as how extensive your line of products or services is. Restaurants are able to use menu items as “loss leaders,” or items that are intentionally underpriced just to get people in the door. The strategy is that they’ll spend ending up purchasing more profitable items once they’re there.
This isn’t really an option for an online service provider. But here, bundling different services into attractively-priced packages can be a good route.
There sure as hell isn’t any one-size-fits-all approach. While the flexibility in setting your prices allows for creative ways to find a competitive edge, finding your ideal pricing is as much art as science.
However, no matter what market you’re selling to, there are ways you can use psychology to enhance your perceived value, and fatten up those profit margins a bit with better pricing.
What A Deal!
I’ve mentioned the importance of first impressions before. It only takes someone 1/10th of a second to judge whether we like someone or not. The same thing applies to your website. If you’re able to pass that first litmus test, it’s not realistic to think that you’ll have too much additional time when people see your pricing for the first time.
Knowing how fast the human brain reacts to certain stimuli, businesses have leveraged neuroscience to work in their favor when it comes to price. These tactics may be viewed as “tricks,” but they’ve become so common that we don’t even realize their intent.
And they work.
Let’s look at some examples.
Playing to the good old Fear Of Missing Out (FOMO) has become textbook marketing. Think Black Friday. Or Cyber Monday. Or anytime you’ve gotten a sales email with a subject line saying something like, “Last chance!” or “Closing soon!” with some stupid shocked-face emoji at the end.
It’s in our nature to not want to miss out on a deal, and finding ways to use this in your promotional pricing can be very effective. And limited-time pricing works no matter what market you’re in.
Throw some 9’s at them.
Say you’ve done your Cost-Plus analysis and determined that a decent profit margin would put your price at $200 for a service you offer. Science says you’re better off going with $199.
Numerous studies have determined that, since people read from left to right, seeing the smaller number first (in this case, a 1 instead of a 2) drive demand. Now, if you’re looking to position your goods as luxury items, this may work against you. But this ubiquitous practice remains strong today… and businesses would keep it around if it didn’t work.
Take the numbers out of the equation?
Remember what we said about how fast people make first impressions.
So it should come as no shock that there’s another psychological pricing factor concerning the snap judgements we make.
Say you were having a promotion where you’re proclaiming, “buy 2 and save 50% on both.”
You don’t see that phrasing much, do you?
But you probably recognize the slogan, “Buy 1 and get the second FREE!”
They’re both advertising the same deal. We respond to the word “free.” We also would rather not have to do math if at all possible. And the second phrase hits both checkmarks. What not being able or willing to do simple math says about our society, I’ll leave up to you.
Do Your Own “Price Check”
This article was intended to open your eyes to just how malleable your pricing strategy can be. As mentioned already, there’s no cookie cutter formula that will dial in the perfect racing strategy for any business. If I had such a recipe, you bet your ass MY prices would be sky high!
But like so many other elements of running your business, it comes down to testing.
Psychological pricing tactics can help create a new buzz. They can give your business a shot in the arm of new interest, leading to new profits.
If you’ve hit a plateau or are just starting out, see how you can use your prices to differentiate. It’s worth taking the time to find your own strategy.