I have just finished reading ‘The Subtle Art of Not Giving A F*ck’ by Mark Manson (which if you would like an alternative perspective on life, I recommend reading). In the book, Mark talks about the Picasso napkin story which was new to me. If you haven’t heard it, the story goes something like this…
Picasso used to draw or doodle on his napkins when at a cafe and one day, he was asked by a woman if she could have the napkin to keep. She offered to pay whatever the napkin with his drawing was worth, to which Picasso responded that it would be $10,000.
Slightly taken aback by the high valuation, the woman pointed out that it had only taken 30 seconds to create the artwork. Picasso promptly folded the napkin away into his pocket and responded ‘no, it has taken me 40 years to do that’.
Depending on what website you visit the story varies slightly, and whether it was dollars, pounds or another currency, it was a considerable amount of money. There is, however, a good argument for not basing the price on how long the drawing took.
When it comes to selling your services, do you quote an hourly rate depending on how long it takes to do a task? Do you price your products on the value to the customer? Or how many years of experience it has taken to learn the skills you have acquired so that you can deliver what you do… and so quickly?
When talking to customers, and in my book Psychology in Marketing and Sales, I discuss different ways to price products to get the right results. A web designer, for example, might be able to create a website in one day and charge a daily rate - but if the customer does it themself, it might take days or even weeks. Added to this, a DIY website might not look as good, It might not function as well and it will most likely not convert web visitors into paying customers as effectively (resulting in lost sales in the long term).
Similarly, a training instructor, coach, consultant or security business (just to name a few specialities!) can make a huge difference to anyone’s life or business, but only because of the skills they have developed over the years. And the prices they charge should reflect this.
It’s true that you need to consider other factors when setting pricing such as what the competition is doing, how much competition there is and who your target audience is, but creating pricing based on ‘cost plus margin’ or an hourly rate could mean you are losing out considerable amounts of money.
Sometimes it can take years of practice and experience in order to be able to continually create masterpieces in a very short time. That experience has a value. What’s your napkin worth, and what are you charging for it?
Consumer behaviour is a tricky thing to understand but then so are the simple mistakes that businesses often make with their pricing.
Last year, I visited a food retailer (who will remain unnamed) that had snacks at £2.20 for one box or £2.00 for two (you may need to read that again, it isn't a typo!). Surely, the price was wrong? If you have read my blog post on What is Decoy Pricing you may believe it's a very clever strategy to make the purchase of 2 or more boxes so irresistible that the consumer will buy them. After all, the theory of Decoy pricing suggests that the consumer stops comparing 'shall I buy the snacks or not' and switches to 'shall I buy 1 or 2 boxes'. The main doubt I had was that this retailer had often advertised offers such as '25% off' on the shelves but the checkout systems didn't reflect the discount so it could be a foolish pricing error.
Recently, I came across another pricing situation that's slightly different. A different retailer was offering a meal deal for £3 consisting of any sandwich, drink and side. It was just before 1 pm and all that was left of the sandwiches were the heavily discounted 'must be eaten today'. 'This got me thinking:
Had people stopped buying the meal deal because they didn't see the value in it with discounted sandwiches?
Although the discounted sandwiches + drink (and possibly a side) were in some cases cheaper than the meal deal, why are they still remaining?
It seems that the idea of one price for everything is so simple and attractive that we prefer to go with that option. Who wants to stand there calculating the price individually nowadays or be lazy but take the risk of buying a discounted sandwich and still end up paying more than the bundled deal? The bundled deal solution is much more attractive when we are talking a few pennies or pounds.
In conclusion, I believe the first retailer was using decoy pricing while the bundled offerings of the second retailer made sense - although if they want to sell off food that expires very soon then a different pricing strategy for these items should be considered. What are your thoughts?
Decoy pricing is a very clever way to make a different product offering more attractive by offering an inferior or decoy price. The term 'decoy pricing' was widely written about by Dan Ariely after he discovered Decoy pricing being used by the Economist magazine. He consequently undertook research which proved that Decoy pricing worked.
Here's an example of Decoy Pricing being used:
Online learning courses: $65
Printed learning materials: $130
Online access and printed learning materials: $130
In this example, the printed learning materials (middle option) is the decoy price. It makes no sense when you can have online access as well for the same price. Without this decoy price, there are two options and most people are likely to order the online learning courses but when the decoy price is introduced there is a significant shift and more people buy the Online access and printed learning materials instead. The decoy pricing acts to move the human mind away from comparing the lower priced option and instead to compare the two options at $130 - therefore deciding to purchase the last option with access to both printed and online learning materials.
The opinions in these blog posts are those of marketing professional and book author Darren Hignett.