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The Psychology of Pricing

July 27, 2009 by Cathy Stucker Leave a Comment

pricing-psychology

The prices you charge are part of your marketing identity. Do you have the lowest prices in town, or are your products seen as high-priced and high-value?

When you compete at the low end, you become a seller of commodities. Whether you offer a product or a service, if the buyer’s primary motivation is price you will always face the possibility of losing business to a competitor who chooses to undercut your price. As margins get slimmer, it becomes harder to sustain your business. A well-funded competitor may even sell below cost for a while to drive you out of business.

On the other hand, there are a number of ways to make sales that do not involve reducing prices. The perception of many customers is that expensive equals good, and more expensive equals better. Reach those customers by showing them why you are, in the words of the l’Oreal commercial, “expensive, but worth it.”

Value. Some unscrupulous merchants mark prices artificially high so that they can offer large discounts and present their pricing as a great value. More ethically, you can show that your product or service provides a better value than others. Your price does not have to be low to be a bargain. For example, although your widget costs a little more than others it has a longer life. Your services get better (and faster) results than those that appear to cost less.

Scarcity. When something is available in limited quantity, or for a limited time, it becomes more valuable. Each holiday season, there is a hot toy that is in limited supply. Could they make more? Sure. But then there wouldn’t be the same sense of drama and excitement as customers frantically buy every one in sight.

You can use scarcity by offering products that have a limited run, or by emphasizing that you have openings for only a small number of new clients. After all, your time is a scarce resource.

Retreat. Many salespersons use the strategy of selling a customer on an inexpensive item, then trying to shift them to a higher-priced choice. Not only is this dangerously close to bait-and-switch, it doesn’t work all that well. A better strategy is to show the customer a high-end product followed by a less expensive item. The price of the mid-range item will seem more reasonable after seeing the expensive choice. Another version of this technique is to show three items at various price points. Customers will typically choose the mid-priced item.

Status. Some customers may be willing to pay more for a label or other display of status. The Porsche Cayenne and the Volkswagen Toureg are almost identical; however, because one is a Porsche it commands a higher price. Status can come from the image of the brand, or even from a location, such as having a Beverly Hills address.

Pricing must be consistent with other aspects of your marketing identity. If your prices are upscale, your products and services, and everything that surrounds them, must be also.

Filed Under: Marketing, Pricing

Successfully Charge More Than Your Competitors

January 19, 2009 by Cathy Stucker Leave a Comment

You can charge higher prices than your competitors–and have customers happy to pay those higher prices.

There’s an old joke about the New York City blackout. Power was out everywhere, and the electric company couldn’t figure out what was wrong or how to fix it. Finally, they decided that the only one who could solve the problem was a long-retired worker who knew the system inside and out. He came out to the power plant, looked around, picked up a hammer and tapped one of the generators. Suddenly, lights came on all through the area. Overwhelmed with relief that the problem was solved, they asked how much they owed him. “$20,000,” he replied. $20,000??? For tapping with a hammer? “Well,” he said, “tapping with the hammer is $10. Knowing where to tap is $19,990.”

There are a couple of lessons to be learned from this joke. First of all, the value is higher when the problem still exists than after it has been solved. After all, if told he could restore the power for $20,000, officials would have written him the check immediately, without question. Afterward, the problem wasn’t so urgent–it was solved. Quote your price and get agreement while the customer still feels the urgency (and the pain that you will remove). That’s when the value is highest to them. Your agreement can include conditions and guarantees, such as the results you will obtain, and deadlines, if they want assurances about results.

Maintain a little mystery. If they hadn’t known that all he did was tap with a hammer, his services would have seemed more valuable. After all, they got the result they valued–the power was restored. Focus on the results, not exactly what methodology will be used. Don’t let customers look behind the curtain. (Remember the Wizard of Oz?)

If you are the only one who provides a particular product or service, or you have skills or training no one else does, the value of what you offer goes up. Highlight your exclusive set of training, education and experience. Use unique language to describe what you do. You can also create an aura of exclusivity by screening clients, and only accepting those who meet your criteria. This can work if you have a reputation already, but it can also help build your reputation, if you’ve got the guts to try it!

Consider what your clients are used to paying, and charge at least that much.
If your clients are used to paying $100 an hour, and you come in at $50, you probably won’t get the job. On the other hand, if you can show that you are worth $150, you may be able to charge more than the going rate.

Another way to get an hourly rate higher than others is to charge by the project, rather than the hour.
For example, maybe you charge $150 instead of $100 an hour, but you get the job done in fewer hours. Get the client to look at total cost, rather than hourly rates. Once again, get them focused on results.

This issue comes up all the time in my publishing classes, where I remind students that they are not selling paper. They are selling the information printed on the paper–information that will improve the lives of the people who use it. Paper is cheap. Useful information isn’t.

Keep in mind that the value of your product or service is related to the benefits your customers receive, and how they value those benefits. Present what you sell as solutions to problems, and you can charge premium prices for your excellent products and services.

Filed Under: Marketing, Pricing

Free or Fee?

January 16, 2009 by Cathy Stucker 2 Comments

money-treeHow much should you give away for free, and when should you charge? This question comes up for service providers when deciding what content to put on a Web site, presenting to a potential client, or even answering the phone.

The justification for giving away free information and services is that by demonstrating your expertise, clients will see how you can help them and will then be willing to pay you. However, every service provider has horror stories of potential clients who strung them along, getting all of the freebies they could, and never becoming paying customers.

It is up to each business to decide how much they want to give away, and when they will start to charge. Providing free information can certainly be an effective marketing method, but when is enough enough? [Read more…]

Filed Under: Dealing with Clients, Pricing Tagged With: consultant, marketing, Service

The Right Price for Your Services

January 12, 2009 by Cathy Stucker Leave a Comment

Having the lowest price is not necessarily the way to get more business. 

One of the ways people get to know you is by the identity you project. Your company name, the way you present yourself, your web site, your business card and brochure, where you work, and other ways you conduct your business create an image that gives your customers information about you.

Pricing is a part of your image, too. Many entrepreneurs make the mistake of underpricing. They believe that the only way to attract customers is to have the lowest possible price. But this attitude can damage your business.

First of all, when you underprice you won’t be adequately compensated for your time. You must be able to make enough money to pay your bills and grow your business, or you won’t be in business very long.

Ironically, underpricing can actually result in getting fewer customers, not more. Think about this from the customer’s perspective. Let’s say you are looking for someone to do a job for you. You contact five companies, and get prices of $4000, $2700, $2500, $2400, and $1000. Which one would you select?

Assuming that the quotes are all based on the same specifications, most people would immediately eliminate the $4000 quote as being way out of line; however, they would also be suspicious of the $1000 quote. Why is it so much less than the others? Do they use substandard materials? Are their workers less skilled? Will they do a poor job—if they do the job at all?

Price isn’t the only factor people consider when making a purchase. You might choose the $2700 quote because you decide the price is reasonable, and someone from the company called you back quickly. You get a good feeling from their responsiveness, and decide they may be worth a few dollars more than the lowest bidder.

Some markets are more price sensitive than others, and there is probably a price point you can’t exceed for your product or service. But coming in far below the “going rate” can be just as harmful to your business.

Remember that your prices tell customers how you value your product or service. If you don’t value them highly, who will? 

Filed Under: Marketing, Pricing

Raising Prices

November 3, 2008 by Cathy Stucker Leave a Comment

How can you get your customers to accept a price increase, or even use a price increase to get new customers?

Your costs are going up, and you need to raise your prices. But how will your customers react to a price increase? If your market is price-sensitive, you may lose business to competitors, or buyers may purchase less frequently than in the past. However, it is also possible that a price increase will bring you new customers.

You might find that your customers understand that costs are going up and take a price increase in stride. However, if you believe your market will be resistant, here are some strategies you can use:

Educate your customers. Without apology or getting defensive, let customers know that your costs are going up and increasing your prices is necessary to maintain the high quality and service they expect from you. Remind them of the benefits they receive from your products and services. Chances are they buy from you because they value the results they get from your products and services.

Add value. Can you increase the perceived value of your product or service without significantly increasing your cost? What would it cost to extend your guarantee or warranty period? Consider offering a free mini-consultation. One seminar promoter charged prices higher than his competitors for seminars by including a free 20 minute phone consultation for attendees. Many people came to the seminar (and paid the premium price) because of the free offer, although only about 10% of them actually took advantage of the consultation.

Offer options. Help purchasers get what they want and are willing to pay for by packaging your products and services in various ways. They only have to pay for what they want and need.

Get customer commitment. Announce the price increase, but offer the current pricing for orders made by a certain date. Or, give them the current pricing through a future date to those who commit to a contract or pre-pay.

Now, about those new customers . . . It may be that your current prices are too low and do not accurately reflect the value you provide. One of my clients was a consultant who sold manuals about running a training business. I suggested that she make changes to the packaging, add a few features, and double the prices to more accurately reflect what the information was worth. Although she was skeptical, she tried it. To her surprise, not only did more people buy the manuals, customers bought several items instead of just one. The new packaging and higher price attracted the right buyers.

A price increase will attract customers who place a high value on the benefits of the products and services you offer. These buyers may also be more sophisticated or experienced and require less support. One company learned this the hard way when they lowered the price on a software package. The bargain pricing not only reduced their revenue per sale, it increased their support costs as the new users required more hand-holding to get the package installed.

Make your prices reflect the value your customers receive, and you will maximize your revenues and profits.

Filed Under: Marketing, Pricing

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