Increase Sales and Profits with Comparative Value Pricing

A couple of weeks ago, our kitchen faucet spat its last and headed for that great Kitchen Sink in the Sky. After a day of washing the dishes in the bathtub (hey, it worked for Tony Robbins ), we realized that this was one house repair that wasn’t going to wait until we had time to research and price-shop and compare features (yes, faucets now come with more accessories than minivans, I soon discovered). No, we needed to shoot out to Lowe’s and get something right away.

So my wife and I spent a rushed 20 minutes in the faucet aisle (this was between dropping off kids at school and my 10am phone call) trying to choose between about 30 different models ranging from $20-300. In the end, we agreed upon a $200 Kohler bar fixture with almost as many buttons as my Treo.

At checkout, the cashier scanned the box, noted the price, and looked up at me with wonder. "Does this come with the sink?" she asked. When I shook my head no, she offered, "At that price it should."

Thank you for the instant buyer’s remorse.

How Much "Should" Something Cost?

I decided not to turn this experience into the obvious rant about training your staff not to engage in Business Prevention. (As in, who cares how good your website is if it leads prospects to incompetent humans?) Rather, I’d like to talk about the fragile and delicate flower we in business call "pricing."

We had no idea how much a faucet should cost before we entered the store. Had the cheapest faucet been $200 and the most expensive $1000, we would have accepted that reality as readily as the one we actually encountered. And we probably would not have bought a $200 faucet. Rather, we would have gulped and chosen one in the $700 range – because we were looking at pricing in relative terms.

We were looking, not for a cheap price, but for a good value. The $200 faucet said to us, "High end so it will last a long time, not so high end as to be a frivolous or boastful luxury."

And then the cashier said to us, in effect, "Boy, you sure must be rich or stupid to pay $200 for something you could get for $20." So all of a sudden I found myself wishing for a $40 faucet. If I hadn’t been in a rush, I might have gone back to shopping.

The Rules of Pricing: There Are No Rules

The first thing to realize is that pricing is arbitrary and irrational. Forget all that stuff you learned in Econ 101 about "supply and demand." That’s good for pork bellies and soybean futures – complete commodities that nobody attaches any emotional significance to. But in the real world that you and I live in, prices are set not by formula but by whim.

As Sean D’Souza points out, the 6 ounce can of Coke often costs more than the 2-liter bottle. And this is for a product that costs almost nothing to produce – the margin on sugar syrup with caramel color is huge.

Nobody knows how much something "should" cost because there is no objective "should" except in pure markets like auctions. (Heck, this should apply to AdWords bids, but we all know how arbitrary our bid prices are.)

Try this experiment, described in Dan Ariely’s excellent book Predictably Irrational: ask a bunch of people of different ages what gas should cost. They’ll all tell you the price of gas when they first start noticing. I was born in 1965, so for me a gallon of gas is priced right at about 47 cents. Ask a European 25-year-old and you’ll get a very different "should." This is a form of imprinting – the first price we see becomes the norm, and all subsequent prices are evaluated relative to this "should" price. If you want to charge more, you need to justify it with goodies. If you can charge less, people feel like they’re getting a "deal."

What’s Your Pricing Strategy?

Higher prices are good for you. When you charge more, you can make more. No, I don’t have an MBA, I’m just a natural at this, I guess .

When you charge more, you can spend more on marketing, on delivery, on customer service, on therapy so you can stay sane, etc.

As an AdWords advertiser, higher prices are crucial to your success. The winner in AdWords is the ad that has the highest RPC (return per click).

Higher prices are often good for your customers. Especially when you sell information or expertise, the more you charge, the more people will value and implement your advice and guidance. I have a $2500/month coach. If he were $400/month, as many coaches are, I probably wouldn’t take his advice so seriously. I’d blow off appointments. I would get much less value from our partnership.

Comparative Value Pricing

So how do you get higher prices? The answer comes from a series of studies reported in Predictably Irrational: use "decoy" pricing – what I prefer to call "Comparative Value Pricing" or "No Duh Pricing."

Here’s the study, which explored reactions to two different subscription models for The Economist magazine:

Scenario #1

Option A – Internet-only subscription: $59
Option B – Print-only subscription: $125
Option C – Print and Internet subscription: $125

100 students at MIT’s Sloan School of Management were given these three options, with the following results:

Option A: 16 students
Option B: 0 students
Option C: 84 students

Total sales: $11,444

Scenario #2

Option A – Internet-only subscription: $59
Option B – Print and Internet subscription: $125

Results:

Option A: 68 students
Option B: 32 students

Total sales: $3776

The two "real" options (Internet for $59 and Print/Internet for $125) were identical in both scenarios. And when the "decoy" option (Print-only) was offered, nobody took it. But the existence of the decoy served to highlight the most expensive option as the Best Value.

And that’s what people are looking for: the best value. A great deal. Something for nothing.

How to Use "No Duh" Pricing on your site

The simplest model was taught to me by Sean D’Souza of Psychotactics.com. Almost every one of his products comes in two versions: Regular and Premium. The premium costs a little bit more than the regular, but contains much more value. When you see the two of them side-by-side, you immediately perceive the premium "great deal."

I copied his model for my Look Over My Shoulder (LOMS) AdWords Videos product. If you go to http://askhowie.com/loms, you’ll see two options: one for $42 and the other for $47. And yet the Deluxe version includes a couple of high-value bonuses. It’s as if The Economist offer was: Internet-only for $110, Print and Internet for $125.

This method, when done correctly, achieves two crucial things:

1. It increases your conversion rate. Instead of asking, "Should I buy this?" your customers are now asking, "Which one should I buy?" Sean refers to this as the Yes and Yes factor.

2. It increases your profit per sale. In the case of LOMS, I get an extra $5 per sale. In the case of a recent product, AdWords Ball, the difference in price was $200 – and over 85% of the participants chose the Deluxe version.

Does This Apply to You?

It’s easy to see how "No Duh" pricing works in my case, or in Sean’s. We sell information – air – and so to add a bonus doesn’t cost us anything. It’s all digital, or if a physical product like a CD or binder, the cost to produce is a tiny fraction of what we can charge. Can this work for a store selling physical goods?

Absolutely. You just need to think creatively about bonuses. Better warranty? A dedicated customer service line manned by humans? A tutorial on how to get the most out of your product? A forum? A premium provided by someone else? 

So – your homework is to choose one product and create a Deluxe version. Then test that offer against your regular offer and see what happens. You may discover that this technique does more for your bottom line than all the sales copy improvements in the world. 

After all, everyone wants to feel that they’ve gotten a great deal – "including the kitchen sink."

This Week’s Product Offerings

1) Look Over My Shoulders – AdWords Success Video tutorials

Look Over My Shoulder (LOMS) AdWords Success videos. Avoid mistakes and confusion. See exactly how I find keywords, split test ads, spy on the competition, assess market profitability, and much more.

The quickest way to get going with AdWords – the most important skills and tactics, in short, easy-to-consume videos.

http://askhowie.com/loms

2) Ring of Fire – a new monthly coaching club

First month free – find out more at:

http://askhowie.com/ring2009

BONUS BOP QUOTES (for reading this far)

There is no "value" in life except what you choose to place upon it and no happiness in any place except what you bring to it yourself.
– Henry David Thoreau

I’d rather be smart than ugly.
– Unknown

A cynic is a man who knows the price of everything and the value of nothing.
– Oscar Wilde

The bitterness of poor quality is remembered long after the sweetness of low price has faded from memory.
– Aldo Gucci

Certainly there are lots of things in life that money won’t buy, but it’s very funny…
Have you ever tried to buy them without money?
 – Ogden Nash, The Terrible People

John and I literally used to sit down and say, "Now, let’s write a swimming pool."
– Paul McCartney

Whoever said money can’t buy happiness didn’t know where to shop.
– Gertrude Stein

Wealth is any income that is at least one hundred dollars a year more than the income of one’s wife’s sister’s husband.
– H L Mencken

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