What’s the best strategy for pricing products and services online?

It’s all about context

Bargain-bin pricing is old school. These days, entrepreneurs boost their bottom line by providing customers with context.

Consider the price of a unicorn

That’s hard to do because you’ve never seen a unicorn at the shop. You don’t know its value.

But wait! You’ve got mail:

An email newsletter showcases horses, donkeys, and unicorns. The donkeys are $400.00 and have limited mobility. The horses are $549.00 and are advertised as strong and easy to care for.

And then those unicorns: $780.00. The ad boasts horse-like health and mobility, with the added features of fantastical beauty and endangered species status. These unicorns make doves cry.

Okay, so now you’ve got some context. Unicorns are basically luxury horses. If you were looking for an animal for transportation, the horse is probably your best bet. It’s just $149.00 more than the donkey. Compared to the unicorn, the horse is a great deal.

“Price and value is insanely contextually determined”

Context allows you to make comparisons. “What you compare something to completely changes the human perception of value,” says marketing guru Rory Sutherland. We don’t have an innate gauge of value. It needs to be created for us.

Sutherland talked about how perception and context impact our decision making process at the European Zeitgeist last year. You can check out the video here.

He highlights the importance of context with a critique of United Kingdom-based music streaming service, Spotify. Currently, users can access an infinite number of songs for 9.99 (GBP) per month. Sutherland sees a flaw here, because “nobody knows what an ‘infinite’ number of songs is worth.”

He suggests that Spotify marketers create an artificial limit to help customers gauge the price value. One hundred and fifty tracks at the same price is a recognizably great deal, when you compare it to how much you’d pay per track on iTunes.

Startups and small businesses have an edge on context

A study done by the Journal of Marketing Research shows evidence that “in deciding whether or not to select a particular option, people commonly compare it with other alternatives that are currently available as well as with relevant alternatives that have been encountered in the past.”

Here’s where startups have an edge. If you’re marketing a product or service that consumers have never encountered before, then you have complete control of its price value.  Take this opportunity to define the standard for your industry, and gain higher revenue for your business.

Here’s how it works

Put context into action. Make your new product or service accessible by providing choices. It’s like the donkey-horse-unicorn example. Here’s how you do it:

1. Start with the product or service that you think your customer needs. This is your standard.
2. Flank the standard with a lower price option and a higher price option.
3. The lower priced option should offer less than the standard package or product. It’s cheaper, not as awesome, but still beneficial to customers who want to be thrifty.

   The price difference between the lower price option and the standard should not be extreme. It should be close enough to tempt customers to throw in the extra cash for the standard.

4. The higher priced option is pricey because it has premium benefits. Perhaps the product materials are higher quality than the standard, or the service includes luxury perks- V.I.P. treatment.

Customers gauge the standard price in comparison to the ‘premium’ and the ‘cheap route’ and are more likely to take the middle road.

The proof is in the (bread) pudding

This pricing strategy works. The Journal of Marketing Research report cites an example from high-end American consumer retail company, Williams-Sonoma. They used to offer one bread-baking appliance for $275.00. Then they added a second, larger model for $429.00. Sales for the cheaper option almost doubled. This is a result of the “tradeoff contrast”: the customer’s tendency to prefer the lower option is enhanced by the tradeoff within the set of considerations. Next to a $429.00 appliance, the $275.00 option looks pretty good.

Conclusion

Pricing for context is more productive than “forever driving down costs or engaging in a tedious, irrational battle to improve everything,” says Sutherland. This way, you maintain higher profits while providing an accessible shopping experience for your customers. Indeed, with more pricing options, you open up your business market to a wider audience. You empower customers to decide what works for them.

The next time you’re making a marketing decision for your business or startup, consider the human psychology side. It could be the crucial factor in the sell.

How will you create context for your customers?

References

Simonson, Itamar and Amos Tversky. “Choice in Context: Tradeoff Contrast and Extremeness Aversion.” Journal of Marketing Research 29.3 ( August 1992): 281-295.
Sutherland, Rory. “Rediscovering a Lost Science.” Presentation. 16 May 2011. Youtube. 30 October 2012.
Image credit: themoderndaypirates.com