What to charge for a product or service is a paradox that stumps even the most confident businesspeople. Beyond the hard costs, pricing strategy gets into grey areas like value and worth. Behavioral economics--which considers the psychology of buying decisions--has uncovered something many of us knew intrinsically all along: people are not logical.
This goes for consumers buying products, sure, but there are all sorts of psychological impacts going on in the brain of the person setting and maintaining the prices as well. Biases swirl around in the form of questions and fears:
- "Everyone else is charging X...what will customers think if I charge Y?"
- "People must know they could make this for $2...why would anyone pay me $10?"
- "If I raise my prices, will everyone leave?"
I've personally consulted on pricing strategy to everyone from solopreneurs to global corporations. Even when we know our product or service is solid and of great value, we struggle in the fear of what someone might pay for it. Our brains are wired for it.
5, 7, 9 or 0?
The most common problem I see people struggling with is what number their pricing should end with. The truth is, this is one of the least important pieces in pricing strategy and is actually the brain playing a trick on you.
This happens because of Parkinson's Law of Triviality (also known as bikeshedding), which is when the brain focuses on small details and blows them out of proportion to avoid making bigger decisions that it should be working on. The term "bikeshedding" comes from Parkinson's example of a committee devoting far too many resources to the materials used for constructing a bike storage shed than their true task of designing a new nuclear plant.
Focusing on the trivial detail (5, 7, 9 or 0) keeps you from taking on the bigger task: establishing a solid strategy that is right for your brand. To help you move past this point to the bigger question, the general rule is ending with:
- 5, 6, 7, 8 or 9 - signifies a deal, bargain or discount
- 0 - best for luxuries (wine) and gifts
- 1, 2, 3 or 4 - can feel like penny pinching, generally best to stay away from them
Using Behavioral Economics For Confident Pricing
Now that your bikeshedding problem is solved, let's move on to the true task. And don't worry, even though your brain wants you to think it's a big deal, this is much easier than it seems. Use these three tips from behavioral economics to help you be more confident in setting prices:
Pricing is not about price. Everything that comes before the pricing matters much more than the price itself--one reason for this is priming. Our brains work on associations, so even tiny cues (like holding an iced drink before evaluating someone's personality) can lead someone to say the person is more cold than if they had held a hot drink. If you show uncertainty in your prices (say, when quoting them on the phone) the person you are speaking to will pick up on that and doubt the value.
The brain can't value one-off items. If something is unlike anything else in the world, it will be hard for people to see the value until you put it in terms they can understand. Relativity allows people to see their best option and make a choice. For example: if you want to sell an espresso machine in your store, putting a single model on the shelf will lead to few sales. However, if you put a second one next to it that is double the size and twice the price? Now that first model looks like a great deal relative to the item sitting next to it, helping the brain to make a decision.
Set a high anchor. Anchoring and adjustment goes hand in hand with relativity--especially when talking about pricing. The first number someone hears becomes their anchor, and the brain will latch onto that number even when it doesn't make sense on a logical level. If you start low and work your way up, people will choose lower priced items. If you start on the high end and work down, they will choose higher priced items. There is a reason for putting $5000 televisions at the front of the store--it sets a high anchor and a relative comparison for when someone is looking to buy.
For your business, determine your best item and make sure it isn't your most expensive offer. Instead, create an additional product or service (that people would still want) that is similar to your best offer (relativity) and always talk about it first so it becomes the high anchor, making the best offer look good. And, of course, say it with confidence.