This issue of Pricing Pointers is a set of five quick pricing insights. (Maybe it’s because I grew up on a farm in South Dakota, but #3 is my favorite.) Here they are:
1️⃣ When a customer pays for “better quality,” what are they actually buying?
Quality attributes are attributes of a product or service that buyers pretty much think about the same way.
Consider a commercial airline flight for example. Given the same air fare, every flier would prefer a seat with more legroom compared to a seat with less. And, for the same fare, almost every flier would prefer a flight with fewer connecting flights compared to one with more.
Legroom is a “positive” quality attribute. Everyone pretty much agrees that more is better. The number of connecting flights is a “negative” quality attribute. Everyone pretty much agrees that less is better.
Here’s the thing: selling different levels of quality, as in Good, Better, Best pricing, is really about offering different quantities of the product’s quality attributes.
Purchasing more quality is really purchasing more of a positive quality attribute or less of a negative quality attribute.
2️⃣ Without clear trade-offs, customers naturally gravitate toward the lowest price point
Do you want to prevent high-value buyers from defaulting to your entry-level price tier? Then create clear trade-offs that give buyers a reason to spend more money.
Spending less should always mean getting significantly less value in return.
3️⃣ Which comes first, the horse or the saddle?
In economics, two products are considered complements if an increase (decrease) in the sales of one leads to an increase (decrease) in the sales of the other.
But we can take this a step further and ask “Which product comes first in the purchasing sequence?” That is, which product stimulates the sales of other products?
Which comes first, the cows or the cowboy hat? Lots of people buy cowboy hats who don’t own any cattle. (Maybe you’ve heard the American expression “Big hat, no cattle”?) That’s because you can enjoy the benefits of owning a cowboy hat without owning a single cow. Likewise, you can get all the benefits of owning a cow without ever buying a cowboy hat. Here, the purchase sequence can flow in either direction.
Which comes first, the horse or the saddle? I suspect it’s pretty rare for someone to buy the saddle before the horse. There’s not much use for a saddle if you don’t have a horse to put it on. On the other hand, a horse is still valuable without a saddle. Here, the purchase sequence flows in one direction. First, you buy the horse, then you buy the saddle.
So what? Who cares?
If I know which products drive the sales of which other products, I know which products to accept a lower margin on and where to aim for higher margins.
Sell the “horse” at an attractive price, and make your profits on the accessories.
4️⃣ 3 ways to change your offer’s value without changing the product itself
There are four ways to change the value of your product or service.
One way is to modify it.
The other three are variations of simply moving it — no product modification required.
1. Move it to a different set of buyers and uses.
I have an artery forceps. I have a use for it. But I’m not a doctor and I didn’t buy it from a medical supplies dealer. I found it at a sporting goods store, and I use it to remove fish hooks (out of fish, not out of my hand).
I have a dental pick. I have a use for it. But I’m not a dentist and I didn’t buy it from a dental supplies dealer. I bought it at a hardware store, and it’s been infinitely useful doing odd jobs around the house.
Yes, it’s true. I didn’t pay the same price for an artery forceps that a hospital does. And I didn’t pay the same price for my dental pick that a dentist would.
But simply by moving their products to different users, the manufacturers are creating and capturing entirely new value. They’re increasing their sales and profits selling the same item to different people at different prices.
People buy your product because they have a particular use in mind for it. Who else could use your product or service? For what end?
And the other two ways?
2. Move it to a different time.
3. Move it to a different place (like a sporting goods store or a hardware store).
5️⃣ Thinking about bundling your products to boost order sizes? Stop and check your marginal costs first
Mixed bundling is the practice of selling items either separately at their à la carte prices or together, as a package, at a discounted price. An overlooked consideration about which items to bundle together is their respective marginal costs. By marginal cost I mean how much your total costs go up every time you produce one more unit of your product or service. All other things being equal, you want to bundle items that have relatively low marginal costs.
The bundle discount is the buyer’s incentive to spend more. No discount, no incentive to buy more. But that price discount also means you’re giving up some of your margin.
High marginal costs leave you with very little price flexibility. Even a small discount can turn mixed bundling into a money-losing idea. Or, to put it another way, the higher your marginal costs, the more bundles you’ll need to sell to make the same profit as selling only à la carte.