Choosing a price is not easy. Asking too much or asking too little, is bad business. Not sure on pricing your product? Let’s take a dive in product pricing psychology.
When picking a price point for your product or service, you likely started with calculating the financials. This includes performing a comparative analysis of similar products sold by competitors.
Next up, calculating the total cost to produce and deliver your product. For example, if you are a consulting agency, calculating what your time is worth and depending on the clients’ profile, your price maximum varies and has a minimum. You could probably charge a corporate more than a startup, as it also requires a different approach.
Pinpointing a price
In behavioral economics, the willingness to pay (WTP), it is the maximum amount an individual is willing to sacrifice to buy a product. The willingness to accept (WPA) is your point of view towards your service or product, the price point you are willing to give up your product.
The price point is found between the WTP and WPA, with your client willing to come closer to your defined pricing by the social surplus created by the trading of goods in our society.
Your branding, your message, your company’s market value, etc. They are differentiators for pricing. Hence why consumers are willing to pay more for an Apple product.
Back up your pricing point with evidence found in the market.
Validating a new venture, product, service or an innovative idea, run a choice experiment to estimate the value your market is willing to give. We have talked about WTP and WPA, which is called a contingent valuation. You could find out by asking 4 questions in a survey.
- At what price would you begin to think the product or service to be a bargain and a great buy for the money?
- At what price would you begin to think the product or service to be so cheap that you would be suspicious of its quality and not consider buying it?
- At what price would you begin to think the product or service is getting expensive, but still not out of the question?
- At what price would you begin to think the product or service to be so expensive that you would not consider buying it?
To follow up your qualitative research, collecting quantitative data based on the survey’s results will support your pricing validation. You can set up a test with Facebook Ads, a landing page or other media.
The basic principle is to find out where your target audience hangs out, and to perform an objective testing. The challenge here is, if you are testing off-brand, and your brand is established, you are not considering branding value. The benefit is you remain anonymous to your competitors.
The Pricing Effect.
Check out this amazing video from Business Insider explaining the pricing effect. More expensive products are perceived as better, yet this is not always the case.
Neuroscientist Hilke Plassmann’s research found that marketing actions can modulate neural representations of experienced pleasantness. There is much less brain activity when people are tasting less expensive wine, even though it might be just as good.
Performing quantitative research leans much closer to the principle of choice modeling. Choice modeling, in its essence, is giving your test audience X number of choices.
For this example, let’s say there are 2 varieties of a product, and the third choice being the willingness not to pay. This is important because if they do pick a product, we know that the net value they feel they are receiving, is greater than they are receiving from the other choice.
Meaning that if they choose your product over not paying, there is a willingness. More choice sets and more varieties of your service or product will give you a lot of quantitative data on what the consumer is looking for.
What are the values of certain attributes or features added to your product or service? With choice modeling we are not asking: are you willing to pay, but rather, what option is the best option for you?
We take away the social obligation to answer ‘yes’. Careful with too many choice sets, you would want to fatigue your test audience.
The moment you make a mistake in pricing, you’re eating into your reputation or your profits.
5 learnings from doing pricing tests
1. Price anchoring
Anchoring is a cognitive bias to make decisions and rely on the first piece of information that is given. So what is the best way to sell a 30€ bottle of wine? By placing it next to a 100€ bottle of wine. The 30€ bottle of wine would seem like a bargain, but if placed to a 10€ one, it would be a premium sale.
With restaurants, this is very common when choosing a wine. The cheaper ranged wines seem like a bargain and give a good feeling when chosen. Yet, the cheapest one is is not always chosen, as it can be perceived as less qualitative. This brings us to my next point.
2. Test different levels of pricing
According to William Poundstone, author of the book Priceless: The Myth of Fair Value, offering more pricing options could bring more revenue. Here’s an example from the book.
When it comes to beers, 4 out of 5 people chose the premium beer. What happens when we add a cheaper beer to target people looking for one.
Say what! The cheaper beer is completely ignored. Adding a cheaper beer took away the perception of the premium beer, and it was now easier to chose the the middle-ranged priced beer. So what if we just up the pricing?
Awesome. This test clearly shows you should be hacking your pricing. Now that we have learned to price beers, let’s open a bar!
3. Less is more. It really is.
€1,099.00 €1,099 €1099
What pricing do you choose? Well, you are probably biased now. Published in the Journal of Consumer Psychology, the structure of your pricing plays an important role. The first two pricings are perceived as a lot more expensive. The more syllables your pricing is, the more expensive it is perceived. This effect occurs when we process prices internally.
4. After adding choice in pricing, reduce pricing similarity.
According to a study from Yale if two similar products are priced the same, consumers are less likely to buy.
When buying a pack of gum, only 46 percent made a purchase when both packs were priced at 63 cents. Surprisingly, when the packs of gum were differently priced—at 62 cents and 64 cents—more than 77 percent of consumers chose to buy a pack. What a difference!
5. The power is in the details
There is so much stimulus our brains receive when shopping online. Are you aware of how many things are going on at the same time? By reducing pain points in the sales process, it is much easier to make a choice. It is true what they say. Keep it simple, stupid. Here’s a few tricks:
- Trial rates increased 20% when the message was changed from “a $5 fee” to “a small $5 fee”
- Bundle things that are often bought together
- Reframe subscriptions. Looking at the benefit from a subscription per month is much easier than looking at the full years total.
My advise is to take a 5 minute break, grab a piece of paper and a pen, and write down some ideas that could benefit your pricing, even if everything is okay. Can you validate your current pricing model or should you think of different pricing tests? Ping me and let’s spar ideas!