Do you ever wonder how much more profit you’re missing out on by ignoring the science of pricing?
KEY FACT
A 1% increase in price can deliver an 11% profit improvement so it’s time to check out the power of profitable pricing.
What matters most…
Like most business owners you want to achieve three things:
- Happy customers who come back for more and recommend others
- Healthy business profits
- Capital value growth for your business
The way you price your products and services has a massive impact on all three.
So you’d be passing up on three big business wins if you let these pricing insights slip away.
IN A NUTSHELL
Pricing is too important to ignore or treat lightly. Build your pricing toolkit around top-down pricing options and you tap into windfall profits for your business.
Short on time? Start with 4 helping hands here or read on for the full article.
Can +1% really deliver 11% profit increase?
KEY FACT
Two studies by global consulting firms, McKinsey & Co and A.T. Kearny – suggest that pricing has a bigger influence over your profits than reducing costs or increasing sales volumes.
| McKinsey | Kearny | |
| Reduce fixed costs by 1% | +2.7% profit | +1.5% profit |
| Increase volume by 1% | +3.7% profit | +2.5% profit |
| Reduce variable costs by 1% |
+7.3% profit | +4.6% profit |
| Increase price by 1% | +11% profit | Fe+7.1% profitature 4 |
Just think – what impact could better pricing have on your bottom-line profits?
You, me, everybody, we all want to choose…
In the 17th Century, Thomas Hobson rented horses to Cambridge University students. The students were offered just one horse – take it or leave it.
And so was coined the phrase ‘Hobson’s Choice’.
We resist ‘Hobsons‘ Choice’ because of a deep-rooted psychological need we all have to feel a sense of control. ‘Hobson’s Choice’ removes our sense of control.
Knowing this, why would you want to offer a buyer just one price?
Providing your buyers with well-thought-out pricing options puts you in successful company. TripAdvisor, Apple and EasyJet all use tiered pricing options. But there’s more to price options than meets the eye.
As we have demonstrated, mastering the art and science of pricing options can seriously boost your business profits.
HERE’S THE PROVEN SOLUTION FOR YOU…
Use top-down tiered pricing options and bring a barrow-load of pricing insights to radically improve your business profits.
Compared to what?
Have you ever, after a bracing wintery run or bike ride, stepped into your shower that’s set at your normal shower temperature?
It feels ridiculously hot.
It’s the same temperature as normal, but you’re much colder, so it feels much hotter.
Humans are tuned to changes in temperature, not absolute temperature.
The same can be said for assessing weights – you know which is heavier but not what it weighs.
And the same relativity applies to prices.
This relativity is important.
STOP offering one price and taking a sense of control away from your buyers.
START giving your buyers top down, three-tier pricing options, so they feel in control and are more likely to buy from you.
Click here to get to the checklist for profitable pricing.
Comparing prices works
Ever wondered why sale prices work so well?
It’s not because they are cheap, but because they are cheap relative to the full price.
Offer only one price to a buyer and you make it difficult for them to assess the value, as they can’t compare prices.
The thing is, they will compare prices anyway – with a competitive offer, or a previous purchase. In fact, with online price checkers and automated quote websites it has never been easier to track and compare prices.
Offer one price and you run the risk of losing out to your competition.
Provide options and you give buyers a reference point.
This relative reference makes it easier for them to decide in your favour – and you also put them in control.
You win twice.
The personal appeal of your price…
How good are you at second-guessing the price an individual buyer will pay?
Offer one price and you have one guess, one chance to get it right.
Offer three prices and your odds improve, don’t they?
Offering price options makes sense because different people pay different prices. Improve your odds of success by offering options.
Choose your options very carefully…
Getting your price options wrong can severely reduce sales income.
For example:
What would you pay for a glass of beer?
Would you go for the premium option or the standard option?
Here are the results of a test carried out by two university professors and reported
in William Poundstone’s landmark book on pricing ‘Priceless – The hidden psychology of value’.
In the first test four out of five people chose the premium beer option (at £2.50) and produced £236 for every 100 buyers.
| Standard glass | Premium glass | |
| Price | £1.80 | £2.50 |
| Buyers | 20 | 80 |
| Sales | £36 | £200 |
Three-tier pricing should help improve profitability, so a third lower priced option was offered:
| Small glass | Standard glass | Premium glass | |
| Price | £1.60 | £1.80 | £2.50 |
| Buyers | 0 | 80 | 20 |
| Sales | £0 | £144 | £50 |
See how the cheaper option reduces revenues by 18% to £194?
Would a more expensive ‘premium plus’ option work any better?
| Standard glass | Premium glass | Premium plus glass | |
| Price | £1.80 | £2.50 | £3.40 |
| Buyers | 5 | 85 | 10 |
| Sales | £9 | £213 | £34 |
Revenues up 8% from the original two-option offer (£236) to £255.
Getting your price options right can severely increase sales and profits.
How do you construct your tiered pricing options?
Managing and planning numbers is what we do.
So, if you want to do some work on your pricing why not contact us to give you a sanity check or some help?
Mind-blowing power of pricing anchors…
Anchoring is profoundly important to pricing for profit. Here’s why…
When a goose chick hatches from its egg it associates the first moving object it sees as mother goose.
Consider the chick that anchors itself to the farmyard Land Rover (the first moving object it sees) – it’s a wildlife cameraman’s dream.
Those close-up camera shots of flying geese on natural history TV programmes are
geese flying to keep up with ‘Mum’ driving along at 30mph!
The same principle, anchoring, applies to pricing your products.
…try the wheel of fortune
Nobel prize winners on this subject, Tversky and Kahneman, rigged a carnival style wheel of fortune to show only a ‘10’ or a ‘65’.
Let’s say you’re playing, and the number wheel shows up as 65.
Now answer question 1: Do you think the percentage of African countries in the UN is above or below this number?
Then answer question 2: What do you think is the percentage of African countries in the UN?
Before you read on – what’s your estimate?
Tversky and Kahneman recorded the estimates of people playing this game.
The average estimate of people who saw the wheel show 65 was 45%; the average
estimate of subjects who saw the wheel show 10 was 25%.
These gentlemen proved that being exposed to a high number then anchors our response to the next (pricing) judgment we make.
Can you now see how important top-down pricing tiers then become?
And how bottom-up pricing can undermine the prices you want buyers to pay?
Be very careful how you introduce pricing and how you want buyers anchoring themselves.
What would happen to Starbucks’ profits if they adopted top-down rather than bottom-up three-tier pricing? (you’ll find an example Starbucks’ price list in the download support tools).
Try the ping pong game in the downloadable support tools for a bit of fun with this concept and you’ll prove to yourself, and the group you work with, the power of anchoring.
KEY FACT
Nobel prize winners Versky and Kahneman proved that being exposed to a higher number then anchors our response to the next (pricing) judgment we make.
4 HELPING HANDS FOR YOU…
Mastering the science of pricing and applying it to your business is a source of far greater profits. McKinsey, the global consulting firm, suggest pricing has a bigger impact on your profits than anything else.
Every business owner who is serious about profit growth should be equally serious about the science of pricing.
To start with…
1
Collect 3-tier pricing examples
2
Build a ‘pretend’ tiered pricing offer for your business
3
Test and measure with real-life buyers
4
Keep testing. Make price testing something your business does regularly
TIME TO DISAGREE
“Pricing cannot work in isolation. There’s more at play than simply adding 1% and watching profits increase.”
Couldn’t agree more. Thomas Edison thought the same:
“The secret of staying afloat in business is to create something people are willing to pay for.”
Yes, you have to create your ‘something’ and you have to get people to pay and make a profit.
But how much will they pay?
Applying the science of pricing is worthy of your attention because it influences what people will pay (even if your ‘something’ stays the same).
Please don’t take our word for it – test and measure one or more of the ideas here, or ideas you’ll find in the downloadable support tools.
It pays to assume that your current pricing process could work better and deliver greater profits.
So, test an alternative way of pricing.
When you find a pricing model that delivers greater profitability, it’s time to adopt it wholeheartedly.
And then test again to find an even more profitable pricing mode.
“Being clever with pricing feels unfair on our customers!”
You’re right to consider fairness when pricing.
Violate your customers’ view of fairness and you’ll soon be fighting to stay in business.
You manage fairness when you’re seen to deliver genuine and relevant value at the price options you offer.
A hidden benefit of pricing options is the transparent fairness it gives buyers at different price points.
“The price is the price. People will pay it or they won’t pay it, I can’t influence them.”
The thing is, the way you present your price does influence your buyers.
The earlier beer exercise and the wheel of fortune anchoring exercise prove this.
What’s certain is, if you present your price clumsily, without care, and without following the science, you will sell less.
You’ll probably sell less at lower prices too. And so, your profits will be much lower than they could be.
All you need to do is take the science of pricing seriously.
Then take testing pricing seriously to find ways to sell more at higher prices.
ULTIMATE ARGUMENT:
“How do I know that using three-tier pricing options will make my business more profit?”
When you take pricing options seriously, you’ll stutter and stall making it work.
This is normal; just like learning to drive a car.
But only when you start testing customer response to different pricing options will you discover which options deliver the best profits for you and your business.
Your ‘Make It Happen’ checklist:
Prevent profits slip sliding away by mastering the science of pricing…
If a 1% price increase results in a profit improvement of 11% (as a McKinsey study suggests) then it pays to know more about how to price your goods and services, don’t you think?
But where to start?
1
Start collecting three3-tier pricing examples in your industry or related industries
You’ll find several examples of pricing options being used in the downloadable support tools.
Start collecting your own examples and learn how other businesses make the science of pricing pay off for their business.
2
Build a ‘pretend’ three3-tier pricing offer for your business
There’s no harm creating one or two different pricing tiers for your business.
It will prompt you to work out different ways of ‘bundling’ or ‘scaling’ your offers to reflect value across your three pricing tiers.
Then you can…
3
Test and measure with real life buyers
Why not test the power of your ‘pretend’ tiered pricing?
Asking people ‘what they’d choose if they were buying’ is an academic test.
Only when you ask people to choose an option in real-life will you know how well your pricing options work, and whether they’re profitable for your business.
4
When your price testing delivers a more profitable pricing process, spread it across your business and cash in
5
Make testing pricing improvements something you and your business does every year or every quarter or every month!
YOUR SUPPORT TOOLS ARE HERE:
Go to the link below and you’ll find a selection of practical support tools to help you get a deeper understanding and develop greater business strategies.
Download the support tools to help you
How can we help?
Our business advice specialists can help you identify your challenges and opportunities and create good strategies that help you achieve your ambitions. A small investment in professional advice and analysis could have a monumental impact on the overall success of your business.
We have a long and successful history of helping hundreds of businesses improve their profits, build resilience and flourish, based on industry research, our own experiences and the expertise of our team.
Contact us to find out more.
