Here is a recent question by email.
Thanks Mark for great blog and insightful book. I’m currently working my way through a Kindle edition, learned a lot about pricing that’s for sure and will definitely recommend to clients. One thing I didn’t see you talk about on your blog is the 9 vs 7 pricing gimmick. In the real world, most prices will end with a 9 or 5 occasionally (9.99, 99, etc.). But, online and especially with info products, there has been a trend to end price with a 7. For example, most ebooks and programs are 17, 27, 47, 67, 97, and so on. What’s your expert opinion on this? Have you seen any credible research that clearly shows which one is better? I know why we use 9.99 instead of a 10, but how effective is 7? Thanks a lot!
This question hits me close to home, particularly because my dissertation was on why firms use 99 cents as their price endings. Although I’ve blogged on this before, here is a quick review.
The driving factor behind the effectiveness of 99 cents is that was are bad or lazy subtractors. For example, a product that normally sells for $400 on sale for $299 feels like a much better deal than a product that normally sells for $399 on sale for $299. The same happens when people are choosing between our product and a competitors.
That driving factor has led products that end in 99 to look to people like a good price. The opposite of that is we have learned to associate prices that end in 00 with higher quality.
However, none of that answers the question posed above. And unfortunately I don’t know the answer. First, after searching on Amazon and iTunes, I still found that most prices end in 9 rather than 7. Please feel free to share sites with prices that predominately end in 7.
I searched the academic literature and didn’t find anything either. If you know of something, please share.
I found a couple discussion sites on software on this topic, and the conclusion was you should A/B test it to see which works for you. In other words, there wasn’t a conclusion.
Don’t forget that many retailers use the right hand digit of a price to indicate the state of the product. For example, Costco uses prices that end in 7 to indicate that the price has been marked down from the regular price (which ends in 9). Gap and Old Navy use prices that end in 7 to indicate they are the final markdown, the lowest price they will go. This means to me that they don’t think any psychological effect is very big, so they use the digit for internal communications.
At this point, I’m not satisfied with any answer. If you have an answer, or evidence, or research, please share it. We would all like to know.
Photo by thebayentrepreneur
Last week, the least expensive paperback version of my book on Amazon was $236 even though the cover price is $20. Wow. The Kindle version was reasonably priced at $9.99. But $236? And it wasn’t just one company. There were multiple vendors offering my book in that price range.
You may or may not know there are software applications vendors can use to automatically reprice products on Amazon, eBay and other online retail sites. These applications monitor competitors’ prices for products and then adjust the vendor’s prices up or down based on the situation. As examples, check out Appeagle, Feedvisor, and Repriceit.
First thing to know, about a year ago Amazon ran out of stock of my book and the publisher decided against a reprint. Amazon no longer has stock. The only new paperback versions you can buy are the ones in inventory at some smaller resellers.
Even with limited inventory, no sane person would price my book for $236 (even though it is surely worth it.) Instead, every Amazon reseller that has inventory of my book is also using one of these these software repricing applications. The software, without human intervention, slowly worked their price points up to unreasonable levels.
When I saw this, I decided to sell what small inventory I have just so more people can have a reasonably priced book, and because I wanted to watch what happened. I priced the book at $22 plus $3.99 for shipping and handling.
(As a quick aside, it was very easy to set up an Amazon reseller account.)
In the week since I listed my book at $22, the other resellers have started slowly lowering their prices. As of this writing, the next least expensive vendor now sells it for $118.50. It would not surprise me if within a few weeks other resellers have undercut my price. That would actually make me happy both because I was able to manipulate other vendors’ prices and because more people will get the chance to read it.
The lesson: Is it possible to use some algorithm to constantly adjust your prices relative to competition and the market conditions? If so, it is probably a better bet than using the set it and forget it strategy (i.e. never change your price). However, even if you can use automation, you should still monitor the prices for ridiculousness. Although I’d like to believe that the information in my book is worth way more than $236, I doubt anyone buys it at that price.
Determining the most effective way to deliver a complete solution to an identified market problem can prove challenging. It’s important to analyze whether it is most effective to buy, build or partner to complete the solution for your market—especially when you have gaps in your offering. This month’s deep dive offers some great best practices and real-life examples to help, and here are some resources to get you started:
• Two to Tango: The Art of Crafting, Building and Maintaining Business Partnerships
• A Fact-Based Approach to Outsourcing for Product Managers
• Marrying Up: Partnering with Big Companies
• The Trophy Spouse: Partnering with a Startup
• Breaking Through Boundaries
A student recently asked, “when does it make sense to use two-part pricing?”
First, let’s define two-part pricing. It is when you charge one fee up front, and then another fee as the product is used.
For example, popular bars have a cover charge and then charge for drinks as the night goes on. Health clubs have initiation fees then charge monthly rates. Country clubs have large initiation fees with monthly or annual dues.
In each of these examples, a customer cannot access the facility or the product without paying the up front fee. This works because customers get two different pieces of value, both of which they are paying for. For example, they get value from going to the bar and they get value from the drinks. They get value from having access to a workout facility and they get value from working out. They get value from saying they are a member of a country club and they get value from using it.
Of course this only works when you can control access to your facility or product. People who have not paid the upfront fee cannot purchase the other products.
Two part pricing can also be used as a technique for price segmentation while building loyalty and increased demand. Amazon Prime is an upfront fee that gives you free shipping as you buy goods from them. But you don’t have to use Prime to buy from Amazon. Amazon gives you a choice.
Infrequent buyers or people who are not price sensitive probably will not purchase Prime. However, heavy users who are price sensitive will pay the fee to join Prime. Once these people have joined Prime, they are more likely to shop from Amazon than elsewhere.
So should you try two-part pricing? Sure, if your market conditions allow you to meet one of these two scenarios. Do you have a popular product that provides a lot more value to your customers than just the use they get? If so, you may try charging an up front fee, just like a country club.
Do you have a product that is frequently purchased and you have some users who are heavy users and price sensitive? Then try imitating Amazon Prime. You don’t have to force everyone to go this way. Let the targeted segment reveal themselves.
Photo: “Cycle Class at a Gym” by www.localfitness.com.au
Those of us not in sales often make fun of salespeople, well … because it’s fun. Our first gut reaction says of course we can’t give pricing authority to sales. They will only sell on price and we’ll be giving huge discounts to too many clients. Unfortunately, a lot of salespeople do sell on price. Besides, every customer asks for a discount and it’s easiest for sales to give them one.
However, who better to figure out how much a customer is willing to pay than sales? They have the relationship with the client. They have direct knowledge. If only we could find ways to keep salespeople from selling on price and instead use their close knowledge of the customer to discount when it’s needed.
The hard part is balancing these two opposing forces. The trick is to provide incentives and tools to help the sales people sell value instead of price. Here are four tips to help.
- Distribute authority throughout the sales hierarchy. You may give your salespeople the ability to discount 5%. Your sales managers can go to 10% and your sales directors down to 15%. Anything lower than 15% off has to be approved by headquarters. (The numbers are an example. Use what makes sense for your sales team.) The good thing about this is that one salesperson alone can’t do a lot of damage.
- Monitor, on a salesperson by salesperson basis, how much discount they tend to give away. Report it. No salesperson wants to be on the bottom of any list. Hopefully those salespeople who discount less can help the rest of the team learn how they do it.
- Talk to your sales team about NOT jumping to the maximum discount. Instead, start small. Every percentage can have a big impact on company profit.
- Create an incentive program that rewards the salespeople with the smallest discounts. We often hear the saying, “salespeople are coin operated” meaning they do what they are paid to do. Let’s pay them to not discount.
Finally, it is our responsibility to make sure sales has the right tools to be able to sell on value. Take a hard look at what you give your sales people and how that helps them sell value.
When we give sales the tools to sell value and the incentives to not discount too easily, we maximize our chances of winning business at the highest possible prices.
Picture by 92Five