The Psychology of Pricing

by Ken Evoy

While you can price your product to cover your costs, you can also price to get into the heads of your customer. Naturally, you don't decide whether to penetrate or skim your market on this basis alone. But once you're in the ball park, it helps to have a keen understanding of human nature.

Let's start with the most well known example ...

9 or 8 or 7 or 5, but not 0 or 1

Some prices just sound like less money than others which are very close to them in value. Take the price of 99 cents. It sounds a whole lot cheaper than a dollar -- the same way that $19.99 does with $20. Humans buy on emotion first, rational thought second. If they can say "and it's under $100," it's one more plus for you. Point to take away? End your price in a 5, 7, 8, or 9 and be on the right side of human nature.

Value Bundle

Something for nothing. Don't we all love that? Yup. But how do you achieve that perception? Value-bundle, if possible. What's value-bundling? Simple, really. Group related products and set one price for the combination. This works best if the grouped products have a logical association with one another.

Customers tend to assign value to a bundle, based upon the probable cost of individual "pieces." Essentially, value-bundling is a powerful method if the price of your bundle equals the price of the most expensive component.

Offline example: You commonly see vacation packages where air tickets and ground arrangements (e.g., hotels, meals, tours and so on) are advertised at one simple eye-catching price. Everything you need for the perfect vacation. If the price of the bundle is just a bit more than what your customer would pay for the air tickets separately, your customer has that wonderful "something for nothing" feeling!

Online example: AOL bundles a number of information products and interactive services together, and charges one price for all of them. And, the company keeps adding to it ... All for one low price. The bigger the bundle, the better. For more information about online value-bundling, read Evan Schwartz's fine book, entitled "Digital Darwinism: Seven Breakthrough Business Strategies for Surviving in the Cutthroat Web Economy" (published by Broadway Books, ISBN 076790333).

Schwartz makes one fascinating point. A bundle of digital goods will make more money than if you sold the each of the pieces individually ... Even if not all the grouped pieces are seen as valuable for all customers. He, also, suggests selling ultra-high value products outside of the bundle and marketing them as a premium product -- at an extra fee.

Here's another online example: Online brokerages bundle new features by the minute, it seems. Real-time quotes were the expensive domain of pros only two years ago. Now they're free, as part of immense "investor bundles" where all the parts fit together beautifully ... And are included free! Or, at least, in return for super-cheap commissions.

Discounting

You'll always find Ken Evoy over by the "SALE" rack. "I love a good bargain," he'd say. Most folks do. On the Internet, you start a product launch with a huge advantage -- you can reach all your previous customers with the click of a mouse. When you introduce a new product, offer them a discount off the regular price. Send these supporters to a special discount URL. Do the same for your affiliates. Both deserve it. They'll appreciate that you appreciate them.

Quantity discounts are really worth considering, especially if you are shipping hard goods. But go beyond the obvious reduced "per unit shipping charge" -- for example, offer "three for $20" (or even better, for $19.95) for that $7 bottle of wine. Sure, the margin is a bit less. But your gross is much better. Your customer saves on shipping, product cost, and gets that "under $20" psychological boost. And your competitor? That's two bottles of wine that he is not selling to your customer!

Discounting can be used in a variety of other ways ... For seasonal deals, special markets like seniors and students, affiliate (or distributor if you are offline) network.

Whether you use it to build existing customer loyalty, for quantity savings or for competitive reasons, discounting can be a strong tool. Define the goal clearly, though, before you discount. Otherwise, you're just giving money away.

Perceived Value Equals "Reverse Discounting"

"Geez, it has to be good -- look how expensive it is!" some people say. In truth, quality is in the eye of the beholder. It is perceived, not real. And a high price tag can certainly help create a high perceived value. After all, is Mercedes really worth three times a Ford? Is a Tiffany's diamond really worth five times more than the same one on the web?

This can work if you are selling the snob appeal of a status symbol to the wealthy, or a high-priced, big-name service to multi-national companies. But don't try this for most products on the Internet, especially if you sell digital products -- unless, of course, you enjoy the feeling of your head being clamped in a vise. If you simply set a high price for a new product with the hope of increasing web sales due to a high perceived value, you're headed for pain. Big time.

Yes ... If your site makes a great sales effort, you will be able to build a higher perceived value. And that will support a higher price. Whatever that value is, when it comes to selling on the Internet never price beyond the value that your website creates and that your product supports. Not if you want to build a successful, growing, long-term business.

The Infamous "Plus S&H"

"Plus shipping and handling." That famous phrase! Everyone's aware of these hidden charges, of course. But somehow S&H is just not part of the price. It should be separate.

Let's say that you charge $39.98 for a Crocodile Dundee knife. Plus, of course, a shipping and handling charge of $9.98. "So, Mr. Smith, what does that knife cost? $49.96?" No, by the time Mr. Smith has decided he must have the "That's-Not-a-Knife-Now-That's-a-Knife" knife, it only costs $9.98.

Including shipping and handling in the price of your product is a big boo-boo. It can only mean one of two things ... Your product looks $9.98 more expensive, or you're losing money.

You can only do that for a while. If you build customers on the basis of price, be prepared to lose them when you have to start making money. We should add one warning. People do notice shipping and handling if you gouge them. Don't make a profit on shipping and handling -- just cover your costs.

Naturally, if you're shipping digital products directly via the Internet, shipping and handling is free! In that case, sure ... Be generous. Go ahead and tell your customer, "Shipping and Handling Included."

Price Elasticity

If demand for your product drops when you increase the price by only 1%, you have a product that is very price-sensitive or price-elastic. If, on the other hand, doubling the price only causes a slight drop, you have a price-inelastic product -- that means that it almost doesn't matter what price you charge because people will still buy it no matter what.

Elasticity is largely driven by customer perception of your product and the competition. For example, if you are a grocery chain selling your own private brand of instant coffee, your coffee better sell for less than other brand names. Bump that price up and watch your inventory sit on the shelves. But if you sell a top-of-the-line, in-fashion, gourmet brand of coffee, it can be a license to print money.

What kind of products are price-inelastic? Products that deliver important benefits to the customer. Therefore, offer uniqueness that is understood and valued by the customer.

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About the author

Ken Evoy is the author of "Make Your Price SELL!" Why reinvent the wheel -- wasting time, effort and money going at it alone -- when a bunch of highly successful webmasters and marketers have SPILLED THE BEANS at a new Private Web Site? Learn our secrets and especially from our mistakes, and you'll have more time to actually grow your business! Click for INSTANT access.

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