How much is a box of chocolate worth? Is $8 a reasonable price? Or is $80.
The answer depends in large part on context. How nice is the box? What is the image? WHO are we buying the chocolate for? (No one wants to give their sweetheart a cheap box of candy, after all). Above all else, however, we depend on memory in deciding how much is too much. By remembering the prices I paid in the past, or prices I’ve seen advertised, I determine how much I’m willing to spend today.
We all struggle with how much to charge. In a very real sense, especially for entertainers, we’ll trying to make a determination on how much we’re worth. And that’s always a tough question to answer. Business 101 tells us our price should be cost plus profit, but in our industry even cost is difficult to determine. How much is twenty years practice and experience worth?
There’s a lot of research available about pricing if we’re willing to look for it.
“It’s Miller time!”
Research out of Stanford indicates we should be focus on experiencing, rather than processing, a product or service.
“Because a person’s experience with a product tends to foster feelings of personal connection with it, referring to time typically leads to more favorable attitudes-and to more purchases,” says Jennifer Aaker, the General Atlantic Professor of Marketing at Stanford Graduate School of Business.
Our relationship with time is much more personal than our relationship with money. “Ultimately, time is a more scarce resource-once it’s gone, it’s gone-and therefore more meaningful to us,” says coauthor Cassie Mogilner. “How we spend our time says so much more about who we are than does how we spend our money.”
In an experiment using a lemonade stand and two six-year-olds, three different signs were used to attract buyers. The sign stressing time (“Spend a little time and enjoy C&D’s lemonade”) attracted twice as many people who were willing to pay twice as much.
According to an MIT study, only 47 percent of consumers buy from the lowest-priced seller.
People have some interesting notions about what constitutes value. If they pay a lot for something, they think they’ve either purchased a high-quality product or just gotten ripped off. Stuff with bargain-basement prices is considered… well… bargain basement. Find a high-quality product at a substantially reduced price, and, hey, you’ve just found value!
There are always “price shoppers,” but they are a minority. Besides, price shoppers are notoriously disloyal, so you are probably going to lose out to someone else with deeper pockets and more staying power.
Truth is, value is so subjective that you can often be more successful charging higher prices, provided you pay close attention to all the other factors that influence the buyer’s perception of your product’s value. A lot of that perception hinges on your market position. If you’re selling coffee, are you a Denny’s or a Starbucks?
Seth Godin said it best: ” Will they switch for cheaper? In fact, most people switch for better.”
Different Price Points
The differences between your price points, as well as the order in which they’re presented, can have a profound impact on your customer’s perceived value of your show.
The Effect of Useless Price Points
A magazine offered the following three options to its prospective subscribers:
- A web-only subscription for $59 (16%)
- A print-only subscription for $125 (0%)
- A web & print subscription for $125 (84%)
The second option seems useless because you can get both web and print for the same price as print alone. However, studies have shown that including the seemingly useless option has a big impact on the buying decisions.
The second option turned buyers from bargain hunters to value seekers. They recognized the real value of option three because it was being directly compared to option two. If option two was removed, the large difference in price between web-only and print-only became more obvious and they convinced themselves they didn’t need to upgrade.
Notice the percentages in parenthesis above? When a researcher surveyed 100 students at MIT, those were the percentage of people who opted for each price point. The best value option won by a large margin. However, when option two was eliminated, 68% of the people surveyed went with the cheaper $59 option. Price, in other words, became more important than value.
The Power of Number 9
Head over to practically any store around, be it online or brick and mortar, and you’ll see prices that end in 9 everywhere. We’ve all heard of the reasons why it’s used (to make the price look lower), but does it really work? Are people really going to be effected by a $99 price point versus paying $100?
As it turns out, this tactic does indeed work, and has been dubbed the use of “charm prices.”
In his book Priceless, William Poundstone dissects 8 different studies on the use of charm prices, and found that, on average, they increased sales by 24% versus their nearby, ’rounded’ price points.
In fact, in an experiment tested by MIT and the University of Chicago, a standard women’s clothing item was tested at the prices of $34, $39, and $44.
To the researchers surprise, the item sold best at $39, even more than the cheaper $34 price.
Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.
“Any time you have to estimate a numerical value, it turns out you’re very susceptible to the power of suggestion,” says William Poundstone, author of the new book Priceless: The Myth of Fair Value (and How to Take Advantage of It). “Any related value that you hear just before you make your estimate really does have this big statistical impact on what number you’re going to estimate.”
The easiest and best way to implement price anchoring is to create a tiered pricing strategy, providing different versions of a core product at different prices. This automatically builds in your anchor prices and allows you to take advantage of the multi-price mindset.
The first option in your tiered prices should be the most expensive one. It becomes the anchor point for everything that follows.
When we sought out sponsors for Michigan Magic Day our price points were:
- Diamond $1,000
- Platinum $200
- Gold $100
- Silver $50
- Bronze $25
Most of our sponsors came in at the $200 level, a few at the $100 level, and only one at the $50 level. No one opted for either the top tier or the lowest tier.
This was a real world event, not a test, so we’ll never really know what might have happened if our Diamond level had been substantially less than $1,000. All the research, however, as well as my own personal experience, suggests that our sponsorship spread would likely have been very different. After seeing the top level at $1,000 the next level at $200 seemed much smaller.
That’s the magic of anchoring.