Number One Half-Truth About Pricing
I’ve worked with companies who have great products, great messages, and great customer service, but their pricing just kills their whole marketing package. Customers love hearing about the product, they spend time reading through web materials and brochures, and they even express a desire to buy the product. Then they see the price. They quit investigating the product and go looking for another solution. At this point, you probably think the price was just too high. That isn’t always the case. The problem goes back to trying to apply rules for macro-economics to the psychology of buying.
#1 Half Truth: We’ll sell more volume if we lower the price.
A major computer manufacturer came to me with a sales problem. They had a server and software package priced so low that their sales people were having trouble convincing buyers that it was a good value. The buyers just didn’t believe it could live up to the product claims at that price. My initial response was to suggest they raise the price. They said that they couldn’t raise the price because they wanted to stay competitive. They didn’t seem to realize that their own low price was their biggest competitive barrier. They asked me to write a marketing video that explained what the value was and why it was priced so “competitively.” Since they were normally such a good client, I agreed to help them execute on this bad idea with the caveat that I still thought they should raise their price.
On another occasion, a sales representative took what we felt was a very innovative product to a major department store. We felt it had value in the marketplace beyond standard cost-plus-margin model and had even packaged it to appeal to consumers at a higher price point. Unfortunately, the product manager, who generally had last say on pricing still had blind faith in the idea “we’ll sell more volume if we lower the price.” The salesman presented the product to the department store buyer and told him the retail price was $89.00. The buyer considered it for a moment and then said, “I can’t sell that for $89.00. But I think it’ll sell great at $119.00.” That buyer understood the psychology of buying.
When people see what they perceive to be a good value, they will reconsider their decision if the price is too low. They will begin to doubt their initial impressions. They will start to imagine that there must be some catch they did not see, some quality issue. Haven’t we all been burned, especially as children, by buying cheap stuff that just didn’t last or didn’t perform the way we thought it would. All those things come back to us when we see a price “too good to be true.”
Now before you go off thinking that I have no clue about basic economics, let me say that this half-truth is true some times. It is true that lowering the price on a commodity will increase volume. If you are selling wheat, gold, or 2x4s, and you lower the price, you will see an increase in volume. Likewise, if you are selling a known brand that already has a value associated with it because of long-standing brand development by the manufacture, you will see an increase in volume when you lower the price. The automotive industry knows this and can use price-breaks to sell off year-end stock. Customers can judge the value by something other than price.
One last example on the price/volume relationship: a friend of mine, Michael Rutter, who is a freelance writer, remembers being overwhelmed with work requests early in his career. Following the old rules of economics, he raised his rates 50%. To his astonishment, his requests for work increased. He had put himself into a bracket of higher perceived quality where buyers were more comfortable. He kept raising his rates until his workload finally dropped to a manageable level. It has become part of his practice to continue to raise his rates to keep his workflow manageable as his reputation increases.
Consider your marketplace. If your strategy includes being at a lower price than the competition, don’t be too low. And never be so low that your deal seems too good to be true.