4 ideas for improving your pricing structure today

I like to read a book month, but this year I’m challenging myself to two books a month. In March I started to read Dollars and Sense by Dan Ariely and Jeff Kreisler. My kindle says I’m only 12% into the book. However, this book is so jammed packed with fantastic money psychology I had to write a blog post about it right away. So here we are! In this post, I am going to examine a few different ways in which you can strategically position the pricing of your products or services.

1. People want to pay for the perceived effort

Who do you think most people would say was of better value? A locksmith who charges a flat $100 fee and does the job perfectly in 5 minutes or another who still charges $100 but take one hour to get the job done? Believe it or not, people would say the locksmith who took longer was better value. People assume that quality takes time and they want their money’s worth. The reason the first locksmith was able to do a perfect job was due to his skill – he’s either naturally talented at breaking into places or, more likely, had been on the job for very long and he’s got skills. People take that for granted. To them, the first locksmith cheated them out of $100 bucks because he was so quick.

This is an excellent lesson for service-based companies, entrepreneurs or freelancers. Don’t price yourself per hour. Instead, price your services for the value you’ll be providing to your clients. If the locksmith example’s prices were per hour, I bet you the people who used the first one would be pissed that it only took 5 min yet they’re paying for an hour. Or worse, make up some unnecessary calculations that he charges $1,200 (5 min x $100). When a client is paying per hour, they will observe you carefully. For example, a developer can charge $500/hr and work on a WP widget for an hour and it’s all nice and perfect. The same developer can also charge a flat fee of $500 for solving their client’s problem instead. The second pricing option is a lot more valuable to the client without them needing to know whether the job takes 1 or 10 hours to do.

2. People have different mental spending accounts

People value things differently depending on how they categorize a purchase. A guy enjoying a weekend vacation in Vegas won’t mind losing $500 in a casino because it’s “entertainment money”. That same day, that same guy will refuse to buy a $4 Starbuck coffee and instead make his own for free in his hotel room. Why is that? Money is money after all, right? That’s because people see the item being purchased differently from one another. People view entertainment and daily expenses differently even though its paid with the same money.

That is one of the reasons we designers and marketers rely on storytelling on our landing pages. People will find mundane and everyday purchases, like the $4 coffee purchase, acceptable if they mentally change the purchase’s category. Selling anything through a story changes the narrative of a purchase. I’m not suggesting that we go ahead and brainwash the general public into buying stuff. But, when selling to the right people who would benefit from your product or service, a good story will convert the people who are not 100% certain on buying the item.

If someone were to sell the $4 Starbucks coffee to our future gambler friend as another part of Vegas’ entertainment, he would have easily bought the coffee without much hesitation the same way he will lose that $500 in the casino.

One more thing on storytelling

In the casino, our friend can be anybody. He can be James Bond, he can be a Wall Street Banker, a rich kid, or anyone. It’s a fantasy; he loves it! Storytelling can be compelling, but only if they resonate with the person you’re telling the story to.

To find the right story to tell you will have to understand your customer’s expectations around your product. If you know their pain points, feelings, wants, needs, goals etc…, you will be able to tell the perfect story and sell the perfect fantasy. Don’t forget, people buy from brands that make them feel understood. Obviously, the casino understood our friend, whereas Starbucks here does not.

How does your product or service fit into your customer’s life? How does it make it better? How can it change the reality of your own customers the way a casino changes our friend into James Bond? Sounds a little ridiculous but that’s okay. Seemingly insignificant fantasies such as a clean home or a done to do list can too be powerful purchasing story too.

Just another food for thought.

4. The true value of free

People don’t always realize that free isn’t always actually free. Let’s keep going with our future gambler friend enjoying his time in Vegas. Like most people, he enjoys the casino because he gets free stuff. First, there was the free parking (probably valet too) and then the free drinks! What’s not to love?! Those things aren’t free; he still lost the $500 to the casino. The free parking was to entice people to come to the casino, and the free drinks get them to stay longer and even spend more money – especially if they get super drunk.

Whether you’re selling products or services, you’re more likely to convert sales if you give away something of value for free in addition to your purchase. The higher the priced item you’re selling, the higher quality the freebie ought to be. Don’t forget that the key here is something of value. People won’t be interested even towards the free stuff, if they aren’t relevant and of value.

For instance, if a casino were to give away free horses instead free parking, no one would take them up on it! A horse is irrelevant to enjoying one’s time in a casino – not to mention a hassle afterward too. Free parking is of great value because it’s a great convenience – even more so if its valet because you drive up and walk right in. Free drinks are just a cherry on top. These free items, or perks, just make sense. The same applies to your freebies.

Don’t be fooled that a no-cost digital item is free either. Both as a customer and as a business owner. Many people have to tweet or like something, use a hashtag, or an all too common, give you their email. It’s not a monetary price, but it’s not without its cost.

The power of relativity

Okay, it turns out relativity comes in many different forms or scenarios. Just so you know, this one is going to take a little longer to explain in full but that’s okay. Let’s go with the first one.

The $300 CD credit

Like a majority of people, if you were given an option between stereo A at $1,000, stereo B at $700 and $300 for CDs, you’d pick stereo B and the CDs. People are still more likely to pick stereo B + CDs even if they were offered stereo B + $300 on anything in the store. Why is that? There is a simple explanation. You’re given multiple ways to spend the same amount of money. But choosing to spend it on the option with $300 of CDs is easier to conceptualize – you know exactly what you’re getting – even though the option of $300 on anything in the store is worth more because you can spend it on anything, including CDs. But if you don’t know what you could buy for that money, it would be hard to conceptualize it. Whereas telling a buyer it’s only for CDs; it’s much easier to evaluate its value. Basically, you know what you’re getting, and that’s why you end up choosing that option.

This means two things for pricing strategy. First, if you’re ever giving away free credits for your products or services, make sure they are specific. Say you’re doing a contest, more people are likely to sign up if you’re giving away $100 worth of free fonts instead of just a $100 credit. Same goes if you want to include a promotion with a purchase. It’s likely you’ll get higher conversions if you’re going to be giving away free $100 font credit instead of just free $100 store credit.

The perception of sale item price

Say there is a shirt priced at $100 with $40 off with a $60 final price. Say there is another shirt just priced at $60. The shirt on sale will sell more quickly and will be perceived to be of greater value. People just love promotion; they love the idea of getting a deal. Back in 2012, JCPenny’s new CEO changed its prices from discounted prices to just the final item price. The prices didn’t change just the pricing tags did. The company lost $985 million in sales in 2012. Yup, that’s right. JCPenny lost almost a billion dollars because it changed its price tag structure. This shows us that $100 > 50% off $200 when it comes to shopping.

There is a false emotional connection to a price, and it does odd tricks on our brains. For instance, Groupon found out that people browse less and buy more quickly if something is on promotion.

This also shows us that promotions, sales, and markdowns are significant in driving sales for businesses. Use them to your advantage.

Lastly, if you’re trying to test a new product or service, have a soft introduction with a heavily discounted price for a limited time. It’s a great way to test it.

Drive for ten min to save 2¢ on gas but won’t shop around for a cheaper mortgage

In the previous example, $100 > 50% off $200 because you’re comparing $100 to $200 instead of either one of them to $0. So, consider this: you’re buying a coffeemaker at $60 in a store and you find out it’s $20 cheaper in another store 5 minutes away. Chances are very, very high you will go to the other store to buy it at $40. However, if you’re buying a stove for $2,060 and find out there is one $20 cheaper 5 min away, chances are you will not drive over for the cheaper stove, unlike the coffee maker. This is odd because $20 is $20, right? Most buyers don’t see it that way. They compare the money saved to the total purchase. If the percentage saved is worth it for them, then they will act on it. You’d save 1/3% on the coffee maker but only saving 1% on the stove. That’s a strange mentality. But it happens very often.

This means that you’d better consider your promotional campaigns. If you’re selling expensive products, such as $1,000 coaching session, a person is less likely to work for say $10 off then they would be for $100 off. This is true even if “acting upon that saving” is just giving you their email to mail the discount code.

Additionally, there is the reverse to this concept too. Say that you’re buying something costly like a $25,000 car and a salesperson gives you a list of fun upgrades. Adding something you’d not normally buy by itself for $200 is nothing compared to the $25,000 you’re already spending. Yet if you’re buying a mattress for around $600 and the salesperson is trying to upsell you some super special pillows for $200 you will think twice about it. In both cases the upsells aren’t compared to the $0 you’d not spent on the item if you don’t purchase it but to the relative amount of money already being spent in that specific purchase as a whole.

This means that any purchase adding or upselling, albeit it in products or services, need to be relatively small to the amount of money a customer was willing to spend overall. Otherwise, it’s going to be disproportional and probably intimidate the customer instead of selling them on the upsell.

That’s why people will go out of their way to drive around and find the cheapest gas station but will be hard press to put in the same amount of effort into researching a better mortgage, credit card or refinancing rate. It’s all relative.

The takeaways

There are a lot of things that go into a good pricing strategy. As you can see, there is a whole lot more that goes into perfecting it. Don’t sweat it though; these are just ideas for you to try out!

Dollars and Sense by Dan Ariely and Jeff Kreisler is an extremely well-written book. It has given me a lot of insights on the psychology of money as both, a buyer and a seller. It’s a fantastic book; your first takeaway is to go and read it yourself.

The second takeaway to implement one or two of the small changes to pricing I’ve discussed in this post – they can have a significant impact on your company’s bottom line.