A Common Pricing Mistake
thinktraffic.net
thinktraffic.net
If you're going to have different pricing tiers, the higher tiers need to ostensibly have more work put into them. You can't just say that if you fit into one bucket of people we know you have more money, so we're going to charge you more (e.g. DVD regions). You need to give them something more for it, so that your customers don't hate you (e.g. HD movie downloads).
Nobody likes to feel like every possible penny is being wrung out of them, or that they're being unfairly targeted to pay more. Measuring happiness of customers or how likely they will refer others is more difficult than measuring which product each customer bought, but just because it's harder to measure doesn't mean it's less important.
His response was something similar to what you said about not feeling the need to make every bit of money possible. The Basecamp prices felt right to him and he was comfortable leaving money on the table to stick with pricing that matched his gut feeling.
That's not exactly what you were talking about, but I liked his way of thinking.
Also, do you have any data for a lower price = happier customer = more referrals who pay?
That's a lot of assumptions built into that premise, each one of which could be tested.
If we're going to pretend this is all a priori knowledge and not something that can & should be tested, then let me try!
Here's mine: "People hate to feel like they're having every penny rung out of them… so they probably love buying the middle tier and enjoy laughing at the silly people who would pay $100 extra for something they don't need." Works just as well as your theory.
See, I used to think this until I heard a talk by Kendall Miller in which he described his pricing experience.
He had an enterprise tier that was orders of magnitude more costly than the other tiers. Executives would skip straight over the other tiers and buy the enterprise level happily. Customers would come to him and say "I love you guys! You really understand the enterprise."
That tier did have extra features, just like you're encouraging. But the punchline is Miller logged the use of every feature and discovered not a single one of his enterprise customers was using the extra ones. They simply wanted to pay more.
An informed title would probably be "Useful pricing techniques" or "Have multiple price points", although it really is a balance between headline accuracy and user interest. I suppose what I hate the most is that this less accurate title works better, and that's our fault.
Pricing is a big topic in itself and I think it's worth taking the time to look at it more closely. As I always say when pricing is raised on HN, no decision you make will have more impact on your profitability.
(I also usually link to my review of an entire book devoted to pricing, here it is: http://chester.id.au/2012/09/12/review-the-strategy-and-tact...)
Just think about it. Pricing is a decision that gets made infrequently. It sets the upper bound on potential profitability; whereas costs have in theory no upper bound.
People think about costs more because those are hidden from the customer and can be constantly twiddled. But it's meaningless without a smart price structure.
Right now I'm working on a little niche web application. What will I be doing in the new year? Well, coding on it, sure.
But I will also be getting a new, well-fitted business suit, going out to my customers, and finding how much Problem X is costing them. I'll adjust my pricing scheme to match, because my intention is to capture a fraction of value, not to pluck a number out of the thin air.
Seriously. Buy that book if you have a business, any business. Use my Amazon referral link or the non-referral link, I don't care. Just get the book.
The prices of the author's packages are $39, $79, and $169. The differences are $40 and $90, respectively. According to Ariely, in this situation more people will consider the $39/$79 pair (because they are more similar, in this case based on price) rather than the $79/$169 pair, and, in fact, this is what the author reports.
That's funny. As soon as I saw this, I knew I was going to ask about the Jam study... which after reading further was already mentioned.
Three seems to the magic number. For a project where users are presented with several options (unrelated to price) I had already made the decision to use three. But is there any objective reason three works better than say four? All I have is a gut feeling right now.
If we assume that people can hold about 7 +/- 2 items in short term memory, you can see why the decision process becomes mentally tiring after 3 or at most 4 items.
1. http://www.freakonomics.com/2009/12/02/is-the-paradox-of-cho...
>It is of course important to make a distinction between choice and complexity. One reason behind the smart nudge of having new employees at a company be automatically enrolled in a 401(k) plan is that the stack of paperwork and the large, complex set of options will turn some employees off from joining if left to their own devices. But asking someone who knows nothing about investing to suddenly think about asset allocation, to choose between fixed-income and equity products, between value and growth funds, etc., is a lot more complex than asking her to choose between strawberry jam and marmalade. So even if jam studies of the future prove inconclusive, it still seems wise to streamline choices whose complexity might otherwise hamper a good outcome.
http://www.americanscientist.org/issues/id.3268,y.0,no.,cont...
Base 3, on the other hand, does have a genuine mathematical distinction in its favor. By one plausible measure, it is the most efficient of all integer bases; it offers the most economical way of representing numbers.
(Culturally, I think any reduction to 2 choices calls to mind simplistic patterns of 'only 2 directions'/1-axis/1-line, or 'good'/'evil'. You expect one option to dominate. As soon as you reach 3 choices, people recognize that evaluation may require 2 or more dimensions of balancing, using curved preference functions and more thought.)
This is a sophism called "False dilemma". Survey callers use it all the time.. it's so annoying. For instance:
<caller> Hi Mr X, I'm working for blabla. This survey will take 1 minute, shall we start?
(Note: They make it explicitly rude for me to say "No"; I.e. they don't open any door such as "Are you interested in continuing, etc.").
<me> No thanks, I'm busy! Have a nice day.
<caller> Sure! Should we call you Tuesday or Wednesday?
(Note: Bang, the false dilemma sophism. The caller tries to limit the option to *only those two!*. But obviously, there are hundreds of other choices.. such as:)
<me> No thanks, don't call me back I'm not interested.
<caller> (Try another annoying tactic)
<me> (Being really tired of being manipulated decide to let the phone open but not listen to it anymore. After 15 minutes, I check back to see if the caller is still here (he's not)).
In your example, your false dilemma is trying to remove the possibility of dont answer survey (instead, you consider which day do I answer survey). That's a false dilemma.
But that's not the case here. The article isn't about trying to remove the option of don't buy book. This article is about using pricing to anchor a customer's expectations of what the product should cost by offering multiple price points.
That's not the point. What matters is the value to the customer, not the cost of production. Cost of Goods / Services is not the smart way to price.
In a few weeks I'll have a blog post on this, name checking my new best friend Hayek.
It's possible to wring a lot of money out of people or corporations that don't have the capacity to replicate your work by opining the virtues of yielded "value." It isn't possible to do that when selling to technical people. At that point, cost of production needs to be taken into account. This is also why soft features like polish and convenience become significant in differentiating products.
EDIT: Also, you never refute the argument in the original article decrying your stance because value is idiosyncratic.
Such estimates are routinely utterly wrong. People underestimate the cost and difficulty of pretty much everything.
The book I reference elsewhere includes an entire chapter on explaining value to customers.
Not always useful or even possible (here we pass into the world of marketing, advertising and salesmanship). And yes, there is a market-clearing price which may be below what you want to make. Either you accept a lower profit or you do something else. That doesn't change the concept of charging for value vs charging for cost.
However you seem skeptical about the idea of charging for value -- to the point of calling it "value", with what I presume are quote marks intended to convey sarcasm.
The joelonsoftware article and this one are both good reading. And both underline the concept that pricing, like software, is never 'done'. You always need to be working on it.
The story starts out talking about how value is relative to each purchaser, so with different price points you can draw out the more valuable customers with tiered pricing and get more than your original pricing from those who opt in for the higher price point.
The glaring omission is not testing just the highest price point. The author explains he didnt want to price out interested readers at lower price points. I don't understand why though. The people who appreciate your value will pay a premium, and others who are not willing to pay a premium, or not really worth having as customers for many reasons, if not for the simple reason that if your goal is to create value, why wouldnt you focus on the areas you can create the most value? There are other reasons I would be glad to share...
The strategy of "comparing apples to oranges" so you can sell an ebook for $39 instead of $10 is a sound one, but the same strategy could work with only one price point at $179 or even $1700 if the value is there for your audience. In this case, the best comparison would be, "you can pay $10,000 or more to learn how to develop apps at college, or you can pay a developer $100k a year to develop for you, or you can buy a proven strategy on how to develop apps from me for only $1799."
Would everyone pay? of course not. Would some people pay? All you need is less than 20 for it to be a bigger blockbuster than his original sales.
I would personally be shocked if he only had the highest priced point bundle as the only option if he didnt generate much more revenue. Arguably, atleast a few of the people who bought at other price points would come around and spend more.
So, this article is absolutely right, draw your customers away from being able to compare your product to other products in the same category, and focus on the value proposition to them... But, dont take his tiered pricing proof as set in stone, odds are it cost him more revenue by doing it than if he didn;t.
Packages / price points are built into kickstarter, and seem to work pretty we..