Avoiding dumb pricing mistake

| November 5th, 2017

There’s a dumb pricing mistake entrepreneur’s make when they price their products and services that leaves a tremendous amount of revenue on the table Are you making it? Probably

A few months ago I was talking to a friend who creates this high-quality demo videos for huge companies and start-ups He’s got two packages one for about ten grand another for fifteen grand I cringed He was leaving a few hundred thousand dollars a year on the table easy

What’s worse I see so many entrepreneurs who sell information, software, freelance, consulting making this same exact pricing mistake day in and day out Why? Because of most business owners –hey! pay attention– because most business owners don’t know about the psychology that goes into setting profitable pricing strategy for their products and services Most business owners actually just sit back and think to themselves hmmm, what should I, they just pull a number out of a damn hat and that’s it That might work for some people who like losing out on money but for smart entrepreneurs that’s dumb as hell I’ll explain, in a study by Simonson and Tversky they share a story about William Sonoma which was then a mail order company

They talk about how William Sonoma introduced a new bread machine into the market and this bread machine they thought was going to sell extremely well Well it didn’t It didn’t sell well at all However, this is when they decided to introduce a new bread machine A bread machine that costs fifty percent more than the original bread machine

The first bread machine cost two hundred and seventy-five dollars The second bread machine cost four hundred and twenty-nine dollars and what happened? Sales of the first bread machine the cheaper bread machine almost doubled It’s not what they were expecting but what happened was people were exhibiting this like trade-off effect They didn’t wanna buy the most expensive option so they decided to buy the cheaper option This happened for a couple of reasons the more expensive option acted as price anchor making the cheaper bread machine appear cheaper and look like a deal but as Simonson then went on to point out in his paper there’s a tradeoff effect happening where people would rationalize purchasing the less expensive option by avoiding purchasing the most expensive option

Now take this back to my friend, my friend with the ten K package and the fifteen K package What was going down as people were avoiding the fifteen K package and then taking the ten K package and it was killing his average price per transaction but it got worst People didn’t even just pay for the ten k package they would try to haggle that package down even further So what did I tell him? I told him to create three packages one for ten, one for fifteen and one for forty-First, there are companies and idiots like me who would always take the most expensive option no matter what

So you might as well have it there and there’s an added benefit Now people would be trading off the forty K option for the fifteen K option instead of trying to trade off the fifteen K option for the ten K option And there’s also one more benefit when my friend instituted these three packages people stopped trying to haggle his prices down How annoying is that? You don’t want someone telling you how much you are worth But check it in a total twist of fate the following day right after he implemented these three packages the next day he was landed a contract for thirty thousand dollars

YES! Now let’s take this back to you How are you pricing your products and services are you offering multiple levels of service? Are you offering three separate packages? If you’re not you should test using three or even four packages as soon as possible to help prevent the trade-off effect for minimizing the amount of revenue you pull in per customer I’ve known for these psychological studies for quite some time but I always assumed that everybody knew about it but when I told this to Chris and he didn’t know I was shocked This is why I am creating this video right now So for you, do you know a friend that you think could benefit from this pricing knowledge? if so go ahead send them a quick little email, give them the URL to this video and send it their way you might be saving their business

 

Comments are closed.