Fairy tale pricing

One of the hardest things to get right when you have a new product or service is pricing.

It requires a beautiful mix of art and science. And, even when you think you have it right something changes and it’s probably all wrong again.

I’m no expert. Far from it. But there are a few tips I’ve picked up over the last few years of watching people who are much better at it than me.

1. Experiment

When you stick to one price you only find out about one point on the demand curve. So, don’t be scared to change the price.

There are lots of ways that you can do this. You don’t have to pick just one.

Some examples:

  • Offer limited time specials – a.k.a. “Cinderella” pricing (be quick … offer expires at midnight tonight!) If it works you can always extend the offer and even make the change permanent, but if it doesn’t you can revert to the normal prices without feeling bad about it.
  • Offer discounts to certain groups of people. Student discounts are one common example. But, you can be even broader – e.g. special prices for everybody who is not already a customer.
  • If you have a subscription price offer people the chance to pay more up-front – for example, 15 months for the price of 12, or an annual price to compliment your monthly price.
  • Put the price up! This last one can be terrifying, but if you have a successful product there is every chance that people would pay more for the same thing. At least you should do the maths and understand the impact that different price points have on your total revenue.

2. Step away from your rational brain

Look around and see that most prices end in a 9. The reason this works is not rational, and can often be difficult for smart technical people to get their heads around, but that doesn’t mean you should ignore it.

See: http://en.wikipedia.org/wiki/Psychological_pricing

3. Remember “Goldilocks” 

You know the fairy tale – the little bear’s porridge is too cold, and the big bear’s porridge is too hot, but the middle bear’s porridge is just right.

Seth Godin calls this “triangulation“.

Think about how you can provide different price points. If you currently have only one price point think about how you can introduce a new variation of your product at a cheaper price, and another (with additional features or benefits) at a higher price. The idea is to use these new options to make your existing price look “just right”, so it doesn’t necessarily matter if not many people actually choose them or not.

Obviously this is not a full list.

What other evil tricks pricing techniques have you seen or used?

If you’re interested in the behavioural economics of pricing I recommend a book called Predictably Irrational by Dan Ariely. I have a free copy to give away courtesy of Fishpond.  To go in the draw just add a comment below – the best pricing suggestion wins. 

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14 thoughts on “Fairy tale pricing”

  1. the Cashback offer is a great one i think… pay full price for something and send in the coupon/fill out form to recieve your cashback after a few months…im sure many a people forget about it and end up paying the full price.

    I almost bought a printer which had a $200 cashback but the offer expired in a weeks time and i thought i’d probably miss the deadline so i just didnt bother buying it..hehehe

  2. I’ve always loved the Gillette/HP pricing model. Nearly give away the razor/printer, then skin ’em alive on the blades/ink. All fun and games until someone counterfeits your consumables. Similar in a way to the ‘magazine series’ hook-in from the 80’s. “Hey kids! Learn about the world’s most deadly combat aircraft in this 12-part magazine series. First issue is only $1 and includes a model aircraft!… Pick them up at your supermarket”. Parents must have hated these. All subsequent issues were $12, but by then the kid was well primed to pester for them.

    This is why there is a special level of hell reserved for marketers ;o)

    And real-estate agents. Was speaking to a colleague from finance/banking/property today, and apparently one of the currently popular sales tools is the bulk auction. The agents will auction a bunch of properties at once, across a range of price points. My guess is they are using this format because they get a lot of people along at once to give the impression there is strong interest in each property (social proof) and create a sense of urgency despite the down market. I suspect they’ll also auction the more expensive houses first, to create an anchor to drag up the prices of the other properties.

    [No draw entry required – have the book!]

  3. Product bundling is a favourite.

    Many businesses provide services around the core product that assist the sale or moves the customer through the service.

    Saying that you do these things as a package, even though you’d do it anyway, porttrays greater value.

    It costs you know more but assists you in raising the price.

  4. While studying at Otago I read an interesting article about a pricing tool called the “Price Waterfall.” From what I remember here is how it works:

    1. Use market analysis you determine your products price to consumers.
    2. Walk backwards down your supply chain, subtracting costs associated with each stage (e.g. retail mark-up, sales commission, discount for certain customers …)
    3. Now you have the revenue that your firm receives from that product.

    Not really that life shattering – I know. However, if you use a bar graph to show your price falling along the supply chain then you get a great visual insight into where your revenue is leaking out. Because I learn visually I think it’s a nice trick.

    Admittedly this model is best suited to a traditional bricks and mortar firm supplying a consumer good. In ITC (the focus of your blog?) you often have the advantage of slashing a bloated supply chain meaning your waterfall is smaller … a good thing!

  5. What i find fascinating from this, is that anyone selling anything has pricing issues. From some like me selling selling handmade items to someone selling software services etc. It’s all about hitting the sweet spot, and that spot is never easy to find.

  6. I’ve been using japanesepod101.com for a few months to keep my language skills up to scratch. They make great use of the power of FREE (http://www.neurosciencemarketing.com/blog/articles/the-power-of-free.htm) You can sign up and use the basic service at no cost, but they do very well by offering a ‘Free 7 Day Trial’ of their premium features. Towards the end of the trial period I received a limited time coupon offer which was enough to make me part with my credit card number for a 3 month subscription.

    Take a look at http://www.japanesepod101.com/subscription.php for an example of most of the pricing strategies described by Rowan above.

  7. Back when I worked at a paintball field (I was like 14), we firmly believed that if the customers weren’t complaining about price, you obviously weren’t charging enough.

    Seems to work pretty well, if customers are happy with the price, keep uping it untill you get complaints.. you’ve now got the optimum price point ;-)

  8. Is it just me or is this 2.0 age of transparency making it harder to experiment with prices? People are so aware of raw costs and a better deal always seems to be around the corner, unless you’re in a completely nebulous field like consulting, where pricing is inspired guesswork and trying to prove the value of the price you’ve picked.

  9. Hi Rowan

    I think everyone has an opinion on price, because everyone has a sense of value, whether it’s from the food you buy, the shelter you keep or the stuff you buy or sell in search of happiness :)

    There plenty of good pricing tactics and promotions listed in the comments above.

    My pricing suggestion specifically for ‘new products’ (your opening statement above), is to consider a principle before selecting your pricing tactic:

    “Consider what the customer is giving up, or taking on, in their mind”. Then price either tactically or permanently in a way that acknowledges that how customers will approach valuation of your stuff. Deliver a price that emphasizes, signals or promises value in that customer’s mind.

    New product marketing often has to overcome “switching costs” in the consumer’s mind. For example, it could be the hassle that prospective customers see in switching from MYOB to Xero, if they have to change accounting practices, spend time on learning it etc.

    Aside from overcoming switching costs, prospective buyers of a ‘new product or service’ are essentially taking a risk. They try to collect info (in their mind) on what they’ll get in return if they take a punt on the product offered. If it stacks up in their mind, they’ll buy it. Pricing tactics like Japanesepod’s 7 day free trial work on mitigating that. Web-based firms have an advantage there – their business would have relatively low additional distribution or product costs from having lots of free triallists. And any firm with an established trusted brand also has an advantage – consumers have plenty of background info that says ‘I can trust these guys’.

    For moneyback coupons such as Paul’s example, these are fine if the product quality is pretty high and a redemption rate is a reasonable hassle, so that likelihood of redemption is low.

    Considering that consumer mind’s value-equation again, plenty of segments don’t need a discount (that’d be a mistake). There are pricing opportunities out there for versioning high or premium prices to those (fewer) customers that want it now and are prepared to pay for it. For Fishpond, (or, faced by Fishpond in purchasing) this principle would apply to hardback books vs paperback, for known authors. First edition is often hardback & priced high – for those that want it and are prepared to pay that price. Paperback comes later, cheaper – for the masses.

  10. A few more thoughts having considered your excellent wee section on experiments:

    Offering discounts to different price-sensitive segments is a good idea if you want to maximize sales $. Make sure there is credible qualifying criteria to keep the segments separate (like student discounts for students with id only, thanks).

    Credible, acceptable criteria that define those price experiments is important. Fishpond could note Amazon’s infamous pricing experiment a few years back, where customers in one area found they were paying a different price for exactly the same product (I think it was actually dvds, from memory), and took a disliking to Amazon based on the perceived breach of ‘treating customers fairly’ (denied heavily by Amazon of course – but I remember plenty of critical coverage in the media at the time, and plenty of write-ups in the subsequent pricing literature!)

    For goldilocks pricing (aka versioning, aka menu pricing), I’d add to your comments by noting it’s important to make sure the cheap version is of a lower quality/feature-set that discourages happily-higher-paying customers away from it. We don’t want 99% of customers switching from buying that high-margin, premium product to a newly introduced, lower value product.

  11. At the risk of being blacklisted for spamming this topic, here are some more pricing books I’d recommend (they are a bit old-school, but they’re good). I am dead keen to check that new “Predictably irrational” book though!

    Nagle & Holden – ‘The strategy & tactics of pricing.’ Very popular with evil pricers, this one. Great reference on the dark arts of pricing and very readable. Offers some theory & suugestions for lots of the tactics mentioned in the comments above (Paul’s, Julian’s, Edward’s, Julian’s, Kunal’s).

    Monroe – “Pricing”. This one is your hardened pricer’s bible. Monroe is an authority on pricing and the book is worth checking for sections on pricing research (like ‘what price are people willing to pay’). In depth coverage here – not a light read but authoritative. Good for corporate types.

    Morris Engelson – “Pricing Strategy” – Straight-talking Morris talks like a businessman, not a consultant. Extremely readable and analytical in a straight-up way. Most relevant to manufacturers this one, because of the cost-analysing techniques and the (very good) assessment of selling into competitive markets. No waffle in this book.

    Shapiro & Varian – “Information rules”. Not strictly a pricing book but has good sections on product/price versioning, (goldilocks) price discrimination etc. Written especially for information-based product firms (e.g. software) – is a superb book on the behavioural economics of those types of firms. Also very readable.

  12. The supermarkets and book stores in the UK are huge fans of the ‘3 for the price of 2’ approach. I guess this is great way of shifting volume (I only wanted to buy one but now I’ve got three) as well as perhaps introducing consumers to products they may otherwise not try. i.e. I probably know 2 books I want, and I’ll get a 3rd I know less about.

    This interview with the author of the book you’re giving away is a pretty interesting teaser: http://online.wsj.com/article/SB122160024323844777.html?mod=googlenews_wsj

  13. “2. Step away from your rational brain

    Look around and see that most prices end in a 9. The reason this works is not rational, and can often be difficult for smart technical people to get their heads around, but that doesn’t mean you should ignore it.”

    Also the other reason why prices end in a 9 or a 5, is to ensure that the checkout staff at the store are actually entering things properly in the POS and handing out the correct change, if there isn’t coinage its all too easy to get the change wrong.

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