There is an important difference in the decision-making process between buying two items at once and buying them separately. If buying the teapot and biscuit together, people are likely to add both prices together and subconsciously compare the total to the size of their usual purchase. If the teapot is bought alone, the price of the biscuit then seems much smaller – relative both to the teapot and to the innate thresholds within our minds. These thresholds vary from one person to another, but a purchase of less than £1 or less than 50p is evaluated by many people as a trivial decision, barely worth thinking about. Sometimes, therefore, you can more easily sell a product at £1.99 and another at 75p than both together at £2.74.
The thresholds will be different for services, and for business purchases. For example, a hairdresser whose main service is a wash and cut at £40 could offer an upsell based on the experience of the cutter – a senior stylist at £50 or a salon director at £70. Or they could add extra services or products: a head massage for £15 or a bottle of salon-quality conditioner or mousse for £12. Once the main purchase decision has been made, and is treated as a sunk cost, the additional purchases will be perceived as relatively minor, inexpensive ways to enhance the experience in comparison to the original purchase amount.
A software company that has sold a £30,000 project to its client will probably be able to sell several additional features at £2,000 to £5,000; again, in comparison to the project size, the additional features are cheap. And there are similarly likely to be decision-making thresholds – perhaps below £1,000 or £500 – where the normal processes that can slow down or veto a purchase are suspended. Sometimes these are formally laid down in the organisation’s policy, and sometimes the limits are more informal, based on the instincts of the decision-makers in the company.
How to apply it
Examine the benefits and value tables from Chapters 1 and 3. You should by now have a clear idea of which product versions are strong on each value attribute.
In contrast to the free offers in the previous chapter, you should choose upsell opportunities that do match the key value dimensions of your product or service.
Look at the value chart and choose one of your products that satisfies some of the value dimensions but not others. Then choose one of the values that is not provided by that product.
When someone has bought the product or is in the process of buying it, you can then offer them extra items that satisfy the missing values. As these are optional, you can set a high margin on them without increasing the perceived price point of the core product. Even if only a small proportion of customers choose to take up the optional item, you are likely to increase margins significantly.
Take one of your key products and list in the table below the values that it satisfies. For each value where it is strong, look at what new item you could add to intensify this value. For example, a chocolate biscuit to intensify the ‘sweetness’ value of a teapot, or a head massage to intensify the ‘pampering’ value of a haircut.
Then look at values where the product is weak, and look at what you could offer that might improve the product on those dimensions. Typically the upsell on weak dimensions will achieve a higher price than that on strong dimensions, but this is not always the case – you will need to test against real customers to find out how much they are willing to pay.
Product
Price
Values
Upsell item
Add-on price
Teapot
£1.99
Sweetness (strong)
Chocolate biscuit
75p
Hunger (weak)
Scone
£1.60
Use the following blank chart for your own analysis, or visit www.psyprice.com to download more blank templates.
Product
Price
Values
Upsell item
Add-on price
Chapter summary
• Once someone has invested in your product, the opportunity to enhance it with (relatively) low-cost add-ons is very attractive.
• Upselling can give you a way to intensify the product on any of the value dimensions that you have defined: for example, for customers who like the sweetness of tea, offer a chocolate biscuit that is even sweeter.
• Upselling makes your price discrimination more effective, giving wealthier people a way to spend more money with you.
In focus
Occasional versus frequent purchases
A major question in the behavioural economics research literature is: do these psychological effects last a long time, or do they disappear quickly as people visit the same shops or interact with the market frequently? Maybe Starbucks can get you to spend £5 on a latte the first time you visit, but once you realise they’re available for £2.50 elsewhere, competition will start to work in the way we’d expect and prices will be driven down.
There’s certainly some truth in this. The better you know a market, the standard commodities for sale and the prices they sell for, the more you are likely to behave like a ‘rational’ consumer. If you are buying something unfamiliar, you have less information and you are more likely to be guided by the unconscious cues of positioning and relative price.
But do these ‘learning effects’, as the literature calls them, eliminate all the effects of pricing psychology? Not at all.
The approach in this book is mainly designed for those who are selling a product into a market of regular purchasers. Some parts of it, in fact, only work when you can both create a first impression and then reinforce it, training your customers to know what to expect from you through consistent positioning and brand communication over a period of time. The chapters on ‘positioning’ (Chapter 1) and ‘memory’ (Chapter 6) are all about how to first create these impressions by leveraging customers’ knowledge of existing categories, and then sustain them by being consistent each time they encounter you.
However, some techniques do work particularly well for one-off or unusual purchases. Imagine a customer is in a new environment, say a music festival or West End theatre, and they want to buy something. Perhaps the product is also unfamiliar – a souvenir brochure and DVD – or perhaps it’s something they regularly buy but in a different context – a glass of wine. In both cases they will have little idea of the appropriate price, and use of techniques such as anchoring and decoys will be very powerful. It is relatively easy to get someone to pay a high price when they encounter something for the first time. I recently paid over $10 for a cup of diet Coke in a theatre on Broadway, and I’m supposed to be trained in this.
Customers’ defences are down in these situations. They return to a more natural mode of behaviour: the simple consideration of whether a product provides enough enjoyment to be worth paying the price asked. It takes away the strategic consideration that consumers always subconsciously apply: ‘Is this a good deal? Could I do better somewhere else?’ This is partly because there often is nowhere else, and partly because they have a lack of information about the situation they are in.
This doesn’t mean that consumers will forget about it afterwards. I certainly don’t feel that theatre was generous to me with their $10 Coke, and I will keep telling people about it. But it probably won’t stop me going to the theatre; and even if it did, that particular theatre probably would not mind – they have their $9.80 profit from me already. If you have the courage to take the money and accept the perception of being expensive, go for it.
If, on the other hand, you want customers to believe they’ve got a good deal, and come back to buy from you again, you need to be more careful. If they can compare your product directly with that of a cheaper competitor, even after the fact, you may lose their future business. This is one reason why the ‘positioning’ chapter is so important: make sure that you differentiate your product or service from low-cost competitors, and anchor its value to that of a more expensive category.
Don’t let your product be seen as a c
ommodity. Sell the teapot, the chocolate biscuit and the tea all together so that the combination is unique. Turn your legal services into a membership subscription with a unique combination of options, distinct from what any other law firm provides. Or sell books, but sell them with an interactive review section on your website, and the option of a face-to-face meeting with the author, and the possibility that readers will be mentioned in the sequel. This way, you get to control the perceived value of your product, and all the techniques in this book will keep working, no matter how many times the customer has bought from you.
2. This research by Chapman and Bornstein was carried out in a mock courtroom. The experimenters described a lawsuit to several juries made up of volunteers, giving identical details about the scenario, the victim and the guilt of the defendant, but with one key difference. In some cases, the prosecuting lawyer asked for a compensation award of $100; in others $20,000; and in some cases $5m or $1bn. In every case, the higher the request, the higher the award – even when the amount requested was a patently ridiculous sum like $1bn. To be sure, the juries did not award anywhere near the amount actually requested, but a $1bn request still got a higher result ($490,000) than a $5m request ($440,000).
Chapter 15
Absorption and value pricing
I didn’t see Maggie for a couple of months that autumn. She was travelling a lot and when she got back she seemed preoccupied with a lot of financial meetings. But I did see a lot of teapots.
She seemed to have struck distribution deals with at least one train company and one airline; I saw teapots on their menus on more than one occasion. The prices were higher than the price points at retail, I assumed because of the need to pay a margin to the transport company.
On one of my visits to the factory while Maggie was busy, Sandra from the marketing department stopped by her waiting room. She spotted me and invited me to have a walk with her and look at some of their new strategies. It would be nice to have a new face in my article, so I gladly took the chance to speak with her.
As we walked towards the marketing office, I asked about the deal with the airline.
“I can’t tell you the exact percentages, but they don’t take a much higher margin than any other retailer. It’s our decision to raise the price in that market.”
“Because they’re captive and can’t go elsewhere?”
“Not really. We wouldn’t want to risk the brand by making people feel exploited. Here’s the reason why we do it.”
We arrived at her office and she found a chart in a filing cabinet.
What you spend on holiday:
• Flight: £400
• Hotel: £600
• Taxis: £150
• Meals: £525
• Chocolate teapots: £7.18
“Easy to see the point now, right?” she asked.
I nodded. “In fact, the teapot looks almost comically cheap now. Don’t people want to spoil themselves a bit more when they’re on holiday?”
Sandra smiled. “Yes they do. And as it happens, we have developed the perfect product for them.”
With a clear sense of pride, she opened a box – covered in metallic foil – and pulled out a teapot in a colour I hadn’t seen before: orange.
“Are you driving, by the way?”
I shook my head. “On the train this time.”
“Good. Fill it up then.”
As I poured hot water into the teapot I could smell the familiar aroma of tea leaves and lightly melting white chocolate. But this time there was something else: an orange aroma, and a sense of something sharper, more pungent.
A minute passed; I poured from the pot to a fresh cup and sipped. A flood of warmth abruptly filled my mouth and stung my throat as I swallowed, slightly taken aback. “Has this got alcohol in it?”
Sandra smiled. “Yes, this is our Tea Cocktail. We nearly called it a Cocktea, but that seemed kind of risqué – especially in the plural. It sells for £9 in-flight or £8 on the train. We find that consumers who have paid over £100 for their flight don’t see a £9 extra purchase as expensive. We try to communicate the price as part of the whole package. And if you travel in first class on the train, we have an agreement with the train company to include the price in the ticket instead – which makes people even less price-sensitive.”
I could see the potential. Tea Cocktails in a hotel minibar would work well – next to a £200/night hotel, £9 more for drinks is insignificant. Maybe in restaurants too.
Sandra nodded. “That’s our next rollout – we think the restaurant market will be huge for us. Incidentally, there’s an anchoring effect as well – when we sell regular teapots alongside the Tea Cocktails, we can get £4 for them – much more than the standard price.”
How to apply it
To apply this in your own business, you will probably need to find another company to partner with. Choose one whose product or service sells for much more than yours – for instance, if you’re a removals company, try working with an estate agent; or if you sell a software package for £50, talk to a shop selling computer hardware at £1,000.
The other company needs to attract the customer: there’s no realistic way for you to translate your customers’ desire to buy software into a requirement to spend 20 times more on hardware, so the relationship is going to be asymmetric. Once they have an interested customer, who wants to spend £1,000 on a computer or £350,000 on a house, your purchase will appear relatively small and they will be much less price-sensitive.
You still need to distinguish your product from the alternatives with other attributes – quality, taste or functionality – but the customer will be more willing to pay a higher price for these attributes than if the product is sold on its own.
The more important sales job, in fact, may not be on the customers themselves but on the partner. You need to show them how offering your product to their customers will be in their interest.
Often they will expect a margin on sales, and in the case of the airline and the Tea Cocktails, they certainly would. However, this is not always true: some professional service firms, for example, prefer not (or are not allowed) to accept sales commissions.
In all cases you should consider how your product will enhance the customer’s experience of the partner’s product. The removals company should show the estate agent how working with them will make the moving process easier and less stressful. The software company should make sure that they choose a computer hardware partner whose target market fits their product. Your goal is to help the partner turn their product from a commodity into a unique product or experience.
You should work hard to present your product in turn as a distinctive, non-commodity offering. This will have the same effect on the partner as on the consumer: when seen against the price of their more expensive product, the quality attributes will become relatively important and your price less so. This leaves you in a stronger negotiating position to maintain your margin: the partner may otherwise want to push you down on price, either to improve their own profit margin or to use you as a sales promotion to attract more customers.
In some cases you can apply absorption pricing yourself without partnering. If you sell a variety of different products at diverse price points, you can use this approach to reduce price sensitivity on the lower-valued products. This has the same effect as upselling (see Chapter 14).
Alternatively, you can position your product in a channel where it is likely to be bought alongside a more expensive item. When your product is an accessory for another item – for instance car tyres – this is natural and easy. Otherwise, you have to be creative. A book about marketing might be sold next door to an expensive business seminar. Or a hair straightener could be offered to buyers of prom dresses.
Case study
Software company
XSQ, a small software firm specialising in selling to car leasing companies, was unsure whether its licensing model of a one-off fee per user was the correct approach.
Smaller clients had been pushing back on paying the full licence fee, and XSQ had a suspicion that some of them were sharing logins in order to get the benefit of the software without paying the proper price. On the other hand, some larger clients were paying the licence fee without question, and XSQ felt there might be room to charge them more. The question: how to design a model to capture more from the bigger clients without losing all the small ones?
XSQ examined the high-level values of its clients:
• increased residual value on post-lease vehicles
• winning more customers
• leasing more cars
• achieving higher margin on each car.
They realised that none of these values were closely related to the number of employees using the XSQ software package. This created a distance between the pricing policy and the way they communicated value to the client.
Using a new project with an existing client as a pilot, they tried linking the price to the amount of financial value generated through the software. They created a measure of financial margin per vehicle and average residual value, generated some statistics for the previous year and created some spreadsheets to measure the same statistics for the coming year. XSQ asked for 30%, but, after negotiation, the client was willing to pay only a 12% share of the additional value generated.
Over the next year the money started to come in, but XSQ had to sit down with its client several times to renegotiate details of the deal. It turned out there was a high demand that year for smaller cars which would naturally have a smaller residual value anyway, so XSQ wanted to adjust the formula to take that into account. And market interest rates rose, meaning that the margin on finance automatically increased – inevitably, the client wanted to rewrite the deal to reflect that.
The Psychology of Price Page 14