Setting Prices An Art Form

January 4th, 2012

Understanding the psychology of the consumer can help maximize your profit.
By John Landsberg
Why do we buy the stuff we do at various price points? Why will we pay one company $5,000 for a service and not one that is charging $3,000 for basically the same service?
For the most part, we make many of our buying decisions based on unconscious assumptions. And the buying decisions one person makes about a product or service may be completely different than the decisions someone else might make.
It’s All Relative
Setting prices is a tricky art form. Yes, it is an art. What else could explain more people buying the same item in the same catalog at $39.99 than at $35.00?
What does a submarine sandwich sell for these days? In many cases, people did not really know the price of a sub, but Subway has pretty much established a key price point at $5 through its extensive advertising campaigns. If you own a sub shop, you had better realize that your customer’s internal reference price for your product is now $5. That means you must adjust your prices accordingly.
Most experts will agree that as consumers we do not have an “inner price sense” on many of the things we purchase. As an example, how many of you know how much it would cost to put a new roof on your home? I certainly wouldn’t.
As wise consumers, we might call three roofers (generally provided to us via word-of -mouth from neighbors, friends, family, etc.). Let’s say one gives an estimate of $10,000 for the work, another roofer says he will do it for $15,000 and the third comes in at $20,000. There is a $10,000 difference between the highest and lowest bid—quite a range.
Now what? Pricing expert Dan Ariely, author of “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” says that most people would go with the roof bid for $15,000. Why? Because in our minds, $10,000 seems a bit cheap and $20,000 is too expensive. The $15,000 is now established as a “safe” price in our minds.
Setting Expectations
Ariely points out that when people see a wine list at a restaurant they rarely buy the cheapest wine on the list. They will buy the second cheapest. Knowing that, wouldn’t you price your cheapest wine a bit on the high side knowing customers will move up in price?
Another pricing expert talked about a restaurant that advertised a $150 hamburger on its menu. Of course, people looked at that and thought, “What idiot would pay $150 for a hamburger?” Customers would then scan down the menu and gladly pay $50 for a steak because compared to the hamburger that was a “good” deal.
When establishing prices for your goods or services, ask yourself several questions:
· Have I done sufficient research on pricing?
· Will I be higher or lower compared to my competitors?
· If I am higher, what am I offering customers that will encourage them to buy my product/service?
· If I am lower, what can I provide to increase my value to customers and encourage them to pay more?
· Can I price my services differently than my competitors? An hourly rate? Cost-plus? Lump sum?
Price Sensitive Customers
When setting prices, it also is wise to realize that it is easier to lose sales to existing customers by increasing prices than to gain sales from new buyers by reducing them. Using that information, you should also realize the cardinal business rule that your current customers are more profitable than new ones. So, think very long and hard before implementing a price increase to existing customers.
Setting prices for your goods or services is not something that should be taken lightly, particularly by small owners who often are faced with razor-thin profit margins. Your pricing decisions can make all the difference in the world in building a successful business.

(John Landsberg is the president of Bottom Line Communications, a Public Relations firm based in Leawood. He is also an adjunct professor of marketing, sales and public relations.

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