Billy's Thirty-seventh Law: The importance of urgency...the effect of scarcity

 Everything I learned about marketing I learned by watching infomercials and direct marketing ads.

The first law about pricing was about the importance of choice.  The second speaks of urgency.  Urgency forces the brain away from the timely rational and towards the impulsive emotional.  This is an important part of all buying behaviour, and has a special effect on price sensitivity. 

When we panic, our brain chemistry changes.  This reaction, part of the fight of flight response, moves our brain into a reactive mode.  This is crucial when confronted with say…a sabre toothed tiger.  It is not so important when the announcer tells us that this is a ‘Limited time offer…quantities are limited…call that toll free number in the next five minutes.  The same brain chemistry kicks in…all be it in a limited way. We react rather than acting rationally. 

The twin of urgency is scarcity.  The laws of supply and demand tell us that where there is high demand, and limited supply, prices begin to increase.  In a great podcast from Planet Money, from National Public Radio in the US there was a great story on the reselling of Nike sneakers.  Those who purchase limited edition shoes early can often double or triple their money at resale. (I have referenced the website below…check it out it is very interesting.)

http://fivethirtyeight.com/features/you-see-sneakers-these-guys-see-hundreds-of-millions-in-resale-profit/

During the 2010 Olympic Winter Games, tickets to the Gold Medal between Canada and the USA sold for thousands of dollars, due to the high demand (the host nation in the gold medal match) and limited supply.

Sometimes, urgency and scarcity just happen.  Sometimes we can work to make them happen.  Limited editions of prints are an attempt to limit supply.  Time limited availability creates urgency.  You can use these techniques to influence demand or supply and therefore move your prices higher. 

Trying to create scarcity can backfire.  In anticipation of demand for the 2015 World Junior Hockey Championships, the Montreal organizers raised ticket prices to a rate much higher than the NHL Canadiens.  The result was empty seats in the stands…taking away for the overall hockey experience.

Scarcity and urgency affect consumer behaviour and price sensitivity.  Creating, or at least understanding these two pillars of your customers' mind will help you develop a more robust pricing policy.

Happy New Years.  I look forward to more posts as the year progresses.  This is a great time for forward planning, change and business development.

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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