Pricing Quality (Designs) – it’s all about Psychology

2015-01-07

Lee-Bath Nelson  

Piggy bank by Alan Nguyen

To paraphrase Jane Austen, it is a truth universally acknowledged that a single product in possession of high quality must be in want of a price. Pricing is tricky – lower isn’t always better (some examples below) and the price conveys so much more than just cost plus profit, especially when selling to consumers. You probably already know the answers to initial questions (if not, you should decide and find out!): what is your cost basis (we might help with this in a future post), are you selling a physical product or a commercialized digital design, what is the price of similar items, where are you on the quality scale (from cheap value to high end quality to luxury), etc. Armed with this knowledge you come to price your goods – this is where psychology steps in with beneficial tips for pricing.

So, let’s say you have designed a beautiful vase that can be 3D printed, and you want to price it. To make things simple let’s assume you are selling the design (a commercialized digital design) so the additional cost of each item to you is close to $0 (otherwise factor in cost as well). What price should you pick to entice more sales? Is $34 better than $39 or vice versa? Should you bundle it with other products? Sell several copies at once? Similarly, if you are selling design services (for example, customizing your vase to become a corporate holiday gift to high end customers) what service packages at what prices can you sell? Let’s try to learn from the experience of others and apply it to this vase case.

 

bijouets 3D printed glasses designed by exnovo

Framing Expectations – Luxury is as Luxury does

In a famous study in the early 80s, executives were asked: “if you are on the beach how much would you pay at most for a beer?” Each executive was asked about 1 of 2 scenarios: the beer was to be purchased from a run down grocery store or the beer would be purchased from a luxury hotel’s bar. The average price they were willing to pay at a hotel was 75% higher than at the grocery store. Richard Thaler, the economist conducting this experiment, explained that people are influenced by the trappings surrounding the product they are buying and recommends superfluous luxury.

Vase Case: giving an air of luxury to your website or online store will allow you to charge higher prices. A feel of cheap value will lower price expectations. Luxury can come through in the design of the website, its color scheme, the quality of its images, and of course the products it is selling (e.g., by offering limited editions). Another element of luxury is customer service, such as offering customizations, personal suggestions, etc.

 

Studio Droog New Originals 3D Printed Family Vase - yellow

Anchoring

One of human nature’s most basic biases is called anchoring, it is often used by negotiators and marketers. Think about this, without knowing much on the pricing of these items, would you pay $55 for a wheeled laptop bag? How about $19 for a cool iPad sleeve? Without any additional information most people would say no and yes. If you thought differently – congratulations (and let us know in the comment section)! The reason is that we anchor to a price (or even an irrelevant number dressed up as a price – really cool experiment) that we already internalized. Earlier, I mentioned $34 and $39 (we’ll come back to those numbers later) making $55 sound high. With these anchors, $19 seems downright reasonable. In fact, $55 is a steal for a wheeled laptop bag and $19 is more expensive than most iPad sleeves (on Amazon). In restaurant menus anchoring is achieved by placing a high priced luxury item (like filet mignon) in the upper right hand side of the menu and then putting a dish you want to push (with high profitability) just underneath or beside it.

Vase Case: It is a good idea to include at least 1 high priced item in your offering. This has 2 potential effects: the item can appear to be higher quality (and should have the trappings, as discussed above) AND the other items’ prices seem much more reasonable thanks to anchoring. A more subtle way to anchor is to induce people to view an expensive vase (even from another site) in this context. Something like the €950 Family Vase (which is 3D printed) by Studio Droog, seen above. Be careful though, as you will see in the next tip, making a direct comparison on your site will likely not work in your favor, it will make your customers think of what value they are missing in your vase as compared to Droog’s.

 

3D printed sugar, printed on a ChefJet 3D printer.

Comparisons, Choices, and Bundling

Psychological experiments show that choices matter. Famed behavioral economist Dan Ariely noted that adding a seemingly unattractive option can make another option more attractive. He noticed a subscription offer from the Economist that offered: a web only subscription for $59, a print only subscription for $125, and a web and print subscription for $125. The second option is irrelevant, you might say, no one would pick it. This is true 84% picked the web and print bundle, and 16% picked the web only option. So, Prof Ariely devised an experiment: he eliminated the option no one chose, the print only for $125. Now only 68% chose the bundle while 32% chose the web only deal. He explains this effect (and others) in an interesting TED talk, the economist summarized it in a blog post. So, choices and bundling matter. On the other hand, direct comparisons have been shown to only work if they are initiated by the customer. Comparisons are actually detrimental if initiated by the seller. This is why retailers go out of their way to bundle or differentiate their product so it cannot be directly compared. The one exception is generic versions of brand consumer products – there it is all about value (and still research suggests this may not be the best way). However, the same Stanford study suggests that more subtle approaches, like flanking your product with more expensive products (or putting the generic version right next to the brand one) produces positive results.

Vase Case: Try to offer more than one choice. Perhaps offer a bundle of the vase with a branch that goes in it that you designed. Perhaps a set of 3 complementing vases. Finally, try to offer choices: the vase design as is, the vase design with 1 limited adjustment by the designer, or the vase design with as many adjustments as needed (assuming a minimal quantity purchased). If you are offering a commercialized digital design where you can control quantities, you can make the choices or bundles on the number of items that can be made from the design: $19 for 1 item, $59 for 4 items, or $69 for 8 items.

 

9 is special - especially in prices and here in 3D printed cookie cutters

Leftmost Matters, Magic 9 on Right

The specific price you choose also has an influence. By now everyone knows that 9 is a magic number in prices. When offering the same dress at 3 price points: $34, $39, and $44 the dress sold most at $39. This was consistent at other price points as well – 9 beat out 4. Other experiments show that consumers gauge the height of the price based on the leftmost digit and favor 9 in the rightmost digit. More recent studies have suggested that 9.99 is not as effective as it may have been and sticking to the simpler, round dollar numbers makes more sense. The .99 pricing also creates a connotation of cheap, as in low quality, in people’s minds. In many restaurants, where reducing the price by 0.99 can turn a dish to a money loser, they opted for the .95 option which is perceived as more friendly.

Vase Case: choose prices that end with 9 – it’s that simple. If your margins are super low prefer 9.95 to 9.99 .

 

Objet 3D printed wrenches

A Word to the Skeptic

The skeptics might be thinking “if I price fairly and simply with no enticements and will show my customers I’m doing this, they will reward me with loyalty and trust”. Well, maybe your customers are different but in a real life situation, at department store JC Penney, a new CEO with the help of Ellen Degeneres (whose image is trustworthy and straightforward) tried just this and failed miserably. CEO Ron Johnson came from running the Apple stores and wanted to remove all the sales and confusing coupons at JC Penney, providing low prices (on average 40% lower) all the time. He called it “Fair and Square” – sounds good, right? Sales were immediate sharply down, in spite of the logical, common sense steps charmingly promoted by Degeneres. Psychology works and it helps you cater to your customer. Knowing your customer also helps (this will be addressed in a future post in this series).

This post is part of our Make a Living blog series (overview). Check out a useful infographic on pricing on our Pinterest Make a Living board, more will come. What pricing policies and psychological biases do you favor? Did you want to buy the laptop wheeler for $55? Let us know in the comments section.

 

 

 

 

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