Just now, I received an email trying to sell me a research report on the analytics industry. Since I work for an analytics company, I’m probably a good fit for their product. But I have no idea how they got my email. Maybe they scraped it off the KISSmetrics blog, maybe they bought it from someone that hosted a webinar I attended. Whatever, that doesn’t matter.
The copy was awful (and I mean AWFUL). Their headline was “Global Web Analytics Market 2011-2015” with this opening sentence: “TechNavio’s analysts forecast the Global Web Analytics market to grow at a CAGR of 15.27 percent over the period 2011-2015.”
Not only do I have no idea who’s pitching me, I’m having a really hard time figuring out how their product is going to help me.
No worries, I’m curious on what other companies are doing in the analytics space so I’ll cut them some slack. So I click through to this landing page and see a price tag of 1,168 Euros (about $1,500 right now).
Only one thought came to mind: “Holy saint fiddlesticks! No way am I paying $1,500 for a research report. I can go to a conference or buy an entire marking course for that.”
Before they could hook me with the copy, I was gone.
They did have a chance at getting me to buy. After all, I did click through to see what all the fuss was about. But as soon as I saw the price, they lost me for good.
This also happens to your customers. They’ll find you via Facebook, a Google search, or email. Then they’ll get interested and look around a bit. But as soon as they see your price… they bail.
Every product, every price, every business goes through this. When people see the price, they make a quick decision on whether or not it’s worth it, then most of them leave.
I’m going to let you in on a little secret: you have MASSIVE influence on whether or not people think your price is valuable.
Yup, you can get a lot more people to think you have a good price.
But before we dive into the tactics, we need a quick overview on how people make decisions when it comes to money.
People Are Not Calculators
There’s a myth out there.
And it goes something like this: “We are all perfectly, rational people that make purchasing decisions based on value. If that value exceeds the price, we’ll buy. If it doesn’t, we won’t.”
This couldn’t be further from the truth. You see, we cannot perceive ABSOLUTE value. We can only understand RELATIVE value.
What does that mean? Well, let’s say I offer to sell you a completely new product that’s unlike anything you’ve ever seen before. I could ask for $5. I could also ask for $5,000. Either way, you won’t know which one is correct. Neither does anyone else.
Whenever we try to figure out if a price is fair, we have to make a comparison. What other products are similar to this one? How are those products priced? Once we’ve made a comparison, we judge the price from there.
Going back to that research report I didn’t buy. Is a research report worth $1,500? Maybe. If I only consider that report, there’s no way to know. But as soon as I saw the price, I immediately made a comparison that made sense and determined the value from there.
These guys lost the sale because I made a comparison that made the price look outrageous.
But I’m sure there are executives that would look at that report and make a very different comparison (which would lead them to buy the report). They might compare it to the amount they’ll spend having one of their teams perform a similar analysis for 2-3 months. That could easily cost $50,000 in labor and expenses. In this case, the $1,500 price looks pretty reasonable.
This applies to me, it applies to you, it applies to everyone. I’d love to say that I’m perfectly rational when it comes to purchasing but it’s just not true.
When we see a price, we make a quick comparison, then we make our decision.
If you want to dive deeper into psychology, both Thinking, Fast and Slow and Influence: The Psychology of Persuasion will get you up to speed.
How to Control the Comparison
To get people to think our price is reasonable, everything depends on encouraging the right comparison.
Wrong comparison = no sale.
The right comparison = can’t fill orders fast enough.
You have two methods to control the comparison that people make when they see that price.
1. Offer a more expensive product
Let’s dive into both.
Why Offering Most Expensive Products Increases Your Sales
The easiest way to control the comparison of your price is simply offer multiple versions (at different prices) of the same product.
Back in the late 80’s, Williams-Sonoma released a bread machine at $275. At the time, it was the only bread machine they offered. No one had any idea what a good price might be because they didn’t have anything to compare it to.
On a whim, they released a second bread machine at $429. Now, they didn’t sell much of the new one. But sales of the $275 model DOUBLED. The more expensive product anchored customers at a high price point and made them feel like they were getting a good deal with the $275 model.
You can do the exact same thing.
From here on out, you should never ever ever offer only one price. Simply by offering a more expensive package, you’ll increase sales of your original option. You’ll also get a few customers that always choose the more expensive one (woohoo!).
Many companies take this a step further by offering 3 prices. Ever wonder why McDonald’s or Starbucks offers 3 sizes for their drinks? It’s because most people pick the middle option. And with anchors on both sides, the price of the middle option seems completely reasonable.
So when you’re listing your prices, give three options. And never display less than two prices. You’ll get customers to make the right comparison and feel much more comfortable with the prices you’re listing.
Positioning Your Product
Every product and service is placed within a category. “Denver Orthodontists” and “smartphones” are both categories.
You will be compared to every other business in the same category as you. If they have lower prices, your prices will seem high.
This is why we want to control which category we get placed into. Brand image, slogans, and marketing creative persuade people to put the product within a certain category. When you can pick the category, you can make sure the comparison is in your favor.
Positioning is one of the core concepts in marketing and I highly recommend you gain a deeper understanding of it. Definitely pick up the 22 Immutable Laws of Marketing (it’s only a hundred pages) and you can find a list of the 22 laws here for easy reference.
Competitors will take advantage of this even if it’s unfair to you. When a major retail brand enters a new area, they’ll often lower prices below everyone else (while taking a severe loss). Sooner or later, they’ll dominate the market and everyone else will close down. Once they have the market to themselves, they raise their prices again since they control the category.
Even if your competitors are keeping their prices artificially low, you will still be compared to them.
This is why it’s essential that you’re aware of who you’re being compared to. Pay extra attention to your positioning and understand what category you’re being placed in.
What if your category sucks?
Build a new category.
Instead of trying to compete directly with the main player in an established category (trying to beat Apple in the smartphone market probably isn’t the best idea right now), go into a different category.
Granted, this is NOT easy. Companies and fancy ad agencies try to create new buzzwords for products all the time. Most of them don’t go anywhere. For example, laptop manufactures are pushing the “ultrabook” category but everything just gets compared to the Macbook Air. It’ll take some trial and error before you find a category that sticks with your target market.
While you can influence your category, it’s the customers that ultimately decide where you belong. I could release a new smartphone that looks exactly like the iPhone, call it a “GeniusPhone,” and no one would care. My product would just be another smartphone.
Positioning your business and building a new category takes a long time. It’ll most likely take years before you get any traction, not weeks or months. So dig in for the long haul.
By getting your product in the right category and anchoring your price with a more expensive option, more people will think your price is reasonable and you’ll acquire more customers. That’s how you control what people think of your price.
Fantastic article Lars! I know next to nothing about marketing (wasn’t a required class in my web design curriculum so I didn’t think twice about not taking it :/) so I’ll definitely be checking out those books you mentioned.
Personally I think I would be afraid to offer 3 price points for a service instead of 2 if my goal is to have people choose the middle price point. I guess it would come down to creating great copy that would persuade the buyer of the value of that middle price over the cheaper option.
Thanks for the insights!
Lars Lofgren says
Glad you liked the post Jen!
Great copy always makes things easier. But the important part is to separate your prices by value. So your top price comes with all the extras. The low price is your budget option. And the middle one is your ideal project. As long as you separate the value in a way that makes sense, most people will go for the middle option.
Casey Gollan says
Great post Lars! Allowing people to select between a small set of choices is almost always a powerful way to increase sales. One thing I would add, which I have no doubt you already know, is that price testing your set is a great way for find your sweet spot and make the most money. For example, should you set be $10, $12 and $20 or should it be $10, $15 and $20? While the small increase from $12 to $15 doesn’t make much difference from one sale – it’s got real scalability potential.
Lars Lofgren says
Absolutely, testing prices is one of the easiest ways to increase revenues. For most people, they’d be shocked to learn how much they’re under-charging.
Avinash D'Souza says
Loved reading this Lars!
Completely agree with some of the points you make viz. ensuring you’re compared against the correct benchmark. And even if there isn’t an existing category that YOU think you fit into, the customer will slot you in somewhere. Makes more sense to control that outcome where you can by pre-positioning.
Not so sure about the pricing alternatives though. If I was to offer a product/service that did not have differentiated levels of service, it would be hard to offer multiple price points. Also, in certain industries(luxury marketing), I’m not sure that would be the best idea.
Lars Lofgren says
There’s a saying in marketing that goes “the best place to sell a $5,000 pen is next to a $50,000 pen.” Even in luxury goods and service industries, anchoring with more expensive products is still a common practice. You just might have to get a little more creative on how to offer the higher price point. 🙂