Regardless of whether it’s a service or product you’re selling, pricing is always a vexing topic.
Even when we’ve done all the hard work of:
- Communicating how that product or service solves a genuine pain point,
- Providing great social proof in the form of testimonials, and
- Being rock solid in our belief that we are providing amazing value for money …
it’s still so easy for a potential customer to click away based on price.
Is there anything we can do to arrest this ‘click away’ rate?
Yes, there is.
We can leverage psychological biases (the ones present in every human head) to make our pricing seem more attractive and help the customer justify it more easily. Here are five to start with:
1. Use anchor pricing
Anchor pricing refers to the tendency of people to rely on the first piece of information offered to them in making a buying decision.
For example, when Williams-Sonoma introduced the first bread machine 20 years ago, at a price of $275, sales were not what they wanted. Their solution was to add a deluxe model at $429 and place it next to the initial version, claiming the first machine was 50% off. Bread machine sales skyrocketed, almost doubling, as a result of this pricing strategy.
Software companies are the people who leverage this approach to best effect. You will always see their pricing tables presented with at least three options as below. Quite often they’ll go the extra step of highlighting the ‘most popular’ option (the one they want you to choose).
It now becomes very easy for you to choose that one because ‘everyone’ chooses it, and it’s ‘heaps cheaper’ than the most expensive option.
2. Don’t compare, provide a reference instead
Research shows that asking consumers to compare prices is not always the best method. In fact, it causes people to lose trust in your message. To do it right you need to tell consumers why your prices are lower, not just ask them to compare.
Take Nordstrom Rack (the discount arm of Nordstrom department store) for example. Every item in the store has an “original price,” as well as an “our price.” Whether the original price noted on the item is accurate or not, shoppers feel like they have stumbled on an unbelievable bargain. This strategy resulted in a record $14.1 billion in sales in 2015
The store uses a similar tactic for their online store like for the product below.
3. Use charm pricing
Charm pricing involves pricing items ending in 9, 99, or 95.
Because research shows that our brains encode the size of the number before we finish reading it.
Studies show this strategy is particularly effective when the left digit is changed by one number.
- Items priced at $1.00 have a conversion rate of 1.88%, while those priced at $0.99 have a conversion rate of 3.06%.
- Items priced at $2.00 have a conversion rate of 2.39%, while those priced at $1.99 convert at a rate of 5.2%.
Items ending in a 9 frequently outsell lower-priced counterparts.
Apple is proof that this approach works. The company incorporates both the left-digit effect and the ‘ending in 9’ element of charm pricing into their entire line of products. Consumers, therefore, perceive the item to be priced lower than it is, considering it a bargain.
4. Deploy the decoy effect
The decoy effect is another effective approach where a second product or extra option is offered that the company knows will not sell, but will instead influence buyers to consider the products they want. Psychologically, this strategy is aimed at our desire to get the most bang for our buck.
Apple has used this method too.
Various versions of the iPod Touch were sold for $229, $299, and $399, based on storage capacity. Consumers were drawn to the perceived bargain of the $229 media player; however, they never considered the $199 iPhone 4, which had more features than the media player they purchased. The $399 iPod was the decoy meant to distract buyers from the real bargain – the $199 iPhone.
The Economist also uses a decoy on their subscription page.
5. Use value based pricing
Value based pricing works on the customer’s perceived value of what you are selling, and their willingness to pay what you are asking. This strategy only works if you have either the dollars or the patience to do extended research about what your customers are willing to sacrifice to obtain something good/avoid something undesirable.
Starbucks uses research results and customer analysis to determine the highest target price that customers are willing to pay without driving them away. They have introduced numerous price hikes since the company’s inception. This has left them with a loyal consumer base that is willing to pay the higher price for what they consider a luxury. Knowing they cannot compete with cheaper brands, they use price increases to maintain their status as a premium brand that caters to the high-end customer. Despite price hikes, Starbucks’ total sales grew by 10% in 2014.
Over to you
Have you used any of the strategies above to good effect? Or some different strategies? We’d love to hear about them in the comments below.