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How Your Customers Interpret Your Prices

How Your Customers Interpret Your Prices

making pricing decisions

Your customers are weird people.
In fact, you’re a weird person too, especially when it comes to shopping.
We tell ourselves that we’re rational people, and yet when money is involved we become moody and inconsistent.
Dan Ariely ran a pricing experiment with The Economist that went like this:

Digital Subscription: $59
Print Subscription: $125
Digital + Print: $125

Which of those three would you pick?
Which do you think was most popular?
Which is the best value?

 Now what if I told you that the middle one was a decoy, and that is was previously:

Digital Subscription: $59
Digital + Print: $125

Which of those two would you pick?
Which do you think was most popular?
Which is the best value?

The print only option is a gimmick designed to make the bundle look like “Good Value”.
It works because our brains try and make quick judgements, and tend to look for nearby comparisons to determine the level of “Value”.
In fact, customers will buy the $125 bundle and tell themselves that they saved money.
There’s no saving, they spent more than they previously intended.
But the story of paying $125 instead of $184 is a compelling one.

Here’s another example: Let’s say you are interested in going to the NFL in San Francisco.
What ticket should you buy?

Choosing NFL tickets

Which game would you click on?
$28 or $83?
Which one is better value? 
Now let’s have a look at the stadium:

NFL ticket choices

Which ticket would you like to buy?
How will you determine the best option?
Is it the best view?
What constitutes the best view at the NFL?
Is it the discount?
The total price?
The matchup of the two teams?

Seatgeek are colour-coding here based on discount, not on price.
They think that a $200 ticket can be a bargain, while a $70 ticket is an ordinary offer.
Do you agree?
If not, why are you taking their hint?

What’s your decision tree at this point?
a) Ticket to the Broncos-Raiders
b) Ticket to the Steelers-Raiders
c) Watch the game at a sports bar

Or is it
a) Cheap ticket at Broncos-Raiders
b) Expensive ticket at Broncos-Raiders
c) Cheap ticket at Steelers-Raiders
d) Expensive ticket at Steelers-Raiders

Or is it
a) Ticket to the NFL
b) Ticket to Hamilton when I get to New York
c) New pair of jeans
d) Dinner at a top restaurant

Different customers have different decision trees – it depends on which dates you’re in town, which team you support, how well you understand the league, and what else you could do with the money.

Choosing new runners

I’m irrational too, as demonstrated with my recent shoe purchase.
My favourite runners are worn out (Vomeros, Size 12, Black).
They’re at Nike for $220.
My initial decision tree is
a) Buy them at Nike for $220
b) Do nothing.

Two factors come into play; my last two pairs came through a friend who works at a sports store who got me a 30% discount, and now I hate the idea of paying full retail price.
That store no longer carries these shoes, which are potentially being discontinued.
Now I have some more urgency and so browse the Nike website, and they’re on sale:
a) Buy them at the Nike store for $220
b) Buy them on the Nike website for $153 but in blue
c) Buy them on the Nike website for $153 but in size 11.5
d) Do nothing.

This creates a headache, would I rather the wrong colour or slightly the wrong size? Are these worth the extra $67?
So I google the phrase “Nike Discount Code”, and find one for Black Friday, an extra 30% off.
Now the urgency reaches its peak:
a) Size 12 Blue $105
b) Size 11.5 Black $105
c) Try on different brands of runners (ugh)

Then I see their generous returns policy – free returns for any reason within 30 days.
I bought the 11.5’s – the wrong size shoe, through what seemed like the right process.
If I had those same pieces of information in a different order, they would not have been relevant.
When I’m in a physical store, I don’t think about returns – this is it.
I also would not think to ask the team member for a discount, but on google it feels ok.

How to price brand design

Seth Godin argues that money is a story that we tell ourselves.
Prices are prices, and they’re up for interpretation.
You can use your marketing to influence the story customers tell themselves, or you can be subjected to their inconsistent narratives.
It’s hard to see with your own business, because you know too much.
You have a sophisticated understanding of your industry, you know how much things cost, you know how to spend money on what’s important and can spot a genuine bargain.
Your customers do not share this superpower.
They start the process with a faulty understanding of how things are priced, what they’ll get for their money and what they’ll get elsewhere.

If you run a design agency, you might know that $800 for a brand kit is ridiculously cheap, given what it will include.
The average new entrepreneur probably owns 5-7 items that are worth more than $800 (Car, phone, laptop, then the list gets thin…), so the idea of spending that much money on a colour palette and basic shapes could seem like an extravagance (especially since their idiot cousin can probably do it for free).

If you’re a Raiders fan, you’ll have a good understanding of what each seat in the house is like, and whether or not a ticket is a rip-off or a great deal.
The average tourist might be used to paying $20 to go to their local sport, or perhaps not understand which opponent (Steelers or Broncos) will provide a better game.
I’d personally rather a bad seat to a good game, whereas others might want to feel close to the action without caring about who’s on the field – it will make for a better Instagram post.

If you run a price comparison site, you might know which deals are unusually cheap.
The average customer might just be picking the lowest price, or the brand they’ve heard their friends use, even though these are worse offers.
If I feel that the product or service is a commodity, I’ll take the one that looks cheapest.
Someone else might be offering the same thing $5 cheaper on another site, but I won’t go hunting around – my aim is to end the shopping process as quickly as possible.

Choosing NFL seats

What’s missing here is the reality check.
I might not know much about design prices, but if you show me that you’re charging $1,200 for something that’s usually $4,000 then suddenly you’re affordable.
I might not know much about stadiums in Oakland, but once I can see the view from the seat I immediately have a strong reaction to the offer.
I might not know much about the intricacies of insurance policies, but if you point out that I can save $50 in 5 minutes then I’ll happily invest some time in your website.

Here’s an experiment I recently conducted, try it for yourself:
Ask a 24-year-old single guy how much they would spend on a pram.
“$150-$180, more than $200 would be ridiculous”
Then ask them how they would do their research:
“type “pram” into google”
Which result will they click?
“The first one”
So we did, and he saw the first results:

Choosing prams

He was stunned, the first three listings were 10 times his price limit.
This is known as “sticker shock”, the horror of discovering that your assumptions were completely out of line with reality.
It turns out that the filter was set to show the highest price, so we went to change it:
Which of these would your customer sort by?

sorting options on a website

50 seconds later, I asked what he would spend now:
“Probably $350 to $500”
In the space of two minutes, this company has re-set the customers worldview.
The truth is that a website doesn’t do a pram justice – if you really wanted to educate your customer you should have them carry a watermelon up three flights of stairs in it, then see what they value – our willingness to pay changes when we have some skin in the game.

There are probably twenty other customer archetypes out there who would handle the process differently.
Some would borrow a pram from a friend, some would go to Gumtree or Craigslist, some would ask for one as a collective baby shower present, some would want the top-of-the-line carrier for their darling angel.
All of these people attack the research/shopping process differently, and your job is to feed them the right information at the right time.

We have this in our business – how do you sell an incubator program to someone who has not heard of you before?
We learned how to have good conversations, usually over coffee.
The first 45% of the meeting is us listening, the second 45% is us asking good questions, and the last 10% is us making gentle suggestions about what we will be encouraging them to do if they were to participate in our program.
Our customers do not want to be “sold”.
They want to be understood, and they want advice from a trusted source.
Without trust, our opinions are not worth paying for.
Once we determined that a customer was a good fit, the price conversation changes completely – both for them and for us.
Their willingness to pay increases, and we’re also more likely to offer a discount.
It also works to our advantage, the kind of customer who only wants free advice is probably not who we’re looking for.
But we make a mistake with our figures: We’d quote a price, then later tell them about the additional GST.
Now it feels like we’re asking for two purchases – the program and the tax.
I hate this when I’m a customer, I rationalise the price of a garment or book, then get hit with a shipping cost at the checkout.
I process this as a slight deception, and am suddenly more likely to close the tab and do something else.
Our customers are similar, the minor change of quoting a tax-inclusive price reduces the chance that people will flinch, even though the maths hasn’t changed.

The advertising legend John Hegarty famously made a small change to the way they pitched to new clients; they started their meetings with a highlight reel of the agency’s top ten ads.
At the end, the client is excited – could they have something like this for their brand?
Now that they are trusted, the process is so much easier for the agency.
What’s your equivalent?
How can you boost your credibility from the start of your customer interactions?
If you get this right, it can prevent customers from shopping around, increase their willingness to pay, and boost the chances that they’ll take your advice on what is best for them, even if it’s a little different from what they previously assumed.

customer making purchase decisions

David Ogilvy pointed out: “People don’t think what they feel, don’t say what they think and don’t do what they say”.
We tell ourselves weird, irrational stories about money and price long before we encounter your company.
Your job is to understand how customers behave, speak their language and show them what they actually need, even if it’s different to what they first asked for.
Try it out – ask people about the process they went through with similar purchases, and get into the details.
What swayed them?
What sealed the deal?
How did they feel throughout the journey?

Then track their behaviour – are they still customers of that brand?
What did they look for in their second, more informed purchase?

Then check your own website – where are customers coming from?
What are they typing into google?
What are they searching on your site?
What path do they follow before making a decision?
Which pages are killing their enthusiasm?

Yes this is a vague, murky process, but it’s better than assuming that your customers know what you know, or that they’ll behave in a logical and sensible way.
It’s probably easier to account for their weirdness and tell them a story that resonates, one that builds trust and gives people what they really need.

Lessons From The YGAP First Gens Accelerator

Lessons From The YGAP First Gens Accelerator