Predictably Irrational and the story told by price
Everything about a business helps tell its story. Price is no exception. Pricing strategy can help customers understand where your greatest value lies - and help them make good choices for themselves and your business.
Predictably Irrational is a fun read by Dan Ariely about the true nature of what determines our decisions and actions. One of my favorite chapters touches on price and how we as consumers make judgments and decisions on value.
In short, everything is relative. The prices we charge tell a story about value - both relative to the competition and within the set of offerings from a given business. People can't make judgments about worth without a comparison point. Customers will make those comparisons using competitive information - but also within your own business's product and service line.
Predictably Irrational uses a great pricing example from The Economist to illustrate our need to compare. Ariely noticed that readers of the publication could choose from three annual subscription options:
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Internet only: $59.00
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Print only: $125.00
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Print and internet: $125.00
No typo there. Options two and three were the same. Intrigued, Ariely ran a test with his students to see how they would judge value. He asked 100 of his students to choose from amongst the three options above. Then, he asked a separate group of another 100 students to choose from only two options:
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Internet for $59.00
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Print and internet for $125.00.
The results? The group with three options chose as follows:
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Internet only: 16
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Print and internet: 84
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Print only: 0
The group with two options make these selections:
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Internet only: 68
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Print and web: 32
The first group could make a quick relative comparison: that the print and web option offered more value than the print-only option. The vast majority chose the higher-value option.
But the second group had a tougher time - it wasn't as easy to make a relative comparison. The majority of those folks chose the lower-cost option.
Ariely sites other useful examples to illustrate his point. Restaurants that want to sell a high-margin, higher-cost item can price a similar item at a slightly higher cost. People will order the slightly-lower-cost, higher-margin dish much more often. The comparison makes it easy for customers to choose.
As marketers, we need to understand the role that relativity plays in purchase decisions and create options accordingly. We don't necessarily need to go the extreme of The Economist, but by pricing strategically, we can help smooth and guide customer choice. We can tell a story using price that helps our customers and our businesses.