Tuesday, 12 November 2013

Billy's Fifth Law: The Law of Comparative Pricing

The First Immutable Law of Price...Prices are comparative.

The only people who care about your costs are you, me and your mother...and if you are from a dysfunctional family, it's just you and me!

Price is one of the most important and at the same time least understood concepts in all of business.  On the one hand, you may know your costs cold...in fact it is crucial you know your costs, however, your customer neither knows nor cares about your costs.  The customer cares about the price they pay for your goods or services.

To truly understand price (besides taking my pricing seminar or hiring me to advise you on price strategy) begin with the single most important concept in pricing:
Price is always comparative, never absolute.
In order to form an opinion of your pricing, your customers are comparing your prices to something.  Sometimes it is a direct comparison with a competitor.  Sometimes it is with alternatives you offer the customer or with a previous price.  Sometimes it relates to some level of affordability or even a false notion of what the price should be, but in any event, too expensive or too inexpensive is  compared to something.

In a restaurant, people tend to order from the central price points of the menu.  It is amazing how often the modal price point is very near the median price point.  The comparison moves the customer towards a central price...neither too expensive nor too cheap.  The wine list is another matter all together.  The modal wine price point is the second cheapest bottle on the wine list. 
This has implications to menu design and price mix.  You can move your customers knowing where they are most likely too look.  Another tidbit, this one from William Poundstone's book Priceless. Price plays a greater role in decision making when the prices are right justified on the menu.  (The price is more distinguishable and easier to compare to other prices.)

The pricing principle of price lining is based on customers choice.  The notion of three price points representing good, better or best, tends to move the customer towards the centre, unless you move the middle price point. Moving the middle price point can affect buying behaviour, as good can look like better or better can look like best depending on where you have centred the middle price point.  
Even a sale uses the notion of price comparison.  This price is 25% off of the regular price. 

I once taught a youth entrepreneurship here in British Columbia.  We did a special version of the program at the Emily Carr University of Art + Design.  As a part of the program, we applied classic pricing theory to art marketing.  One of the participants held a gallery show about six months after the program and invited me to the opening.  As the artists entered, she enquired how they liked the art...I got, "So Bill, what do you think of my pricing?"  It was perfect. She offered a good price range, multiple items in the middle and one item at a very high price in order to frame her other paintings.  In short, she applied classic price theory to her gallery showing. 

So ask yourself, can you provide your customers with choice.  In marketing, this is affected through your product mix... in sales it can be done using your sales presentation. (A mortgage broker may not affect interest rates, but can show the customers the rate, a price for money, )  
Remember, if you do not offer your customers with choice, they will seek to find a price frame through comparative price.  Create price within, and you can keep the customer from 'shopping around' as they feel they have shopped around within your 'store'.  This provides your customer a sense of control meeting one of the most crucial needs in customer psychology.


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