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bugsybunny

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@Vigilante mentioned in this thread how he set the price for his new book, and mentioned price points in consumer psychology: Vigilante's Book "Vigilant Kids" Step by Step

I used to consult for a major fastfood chain, and was responsible for pricing with all new franchisee's in the USA. Figure I'd share the knowledge. Of course, I use all this in my B&M too. I assume most of this knowledge would also work for ecom, and I know for a fact they work with selling services as well.

Caution: Long post!

What is a price point?

A price point is just that, the retail price. However, a price point is much more than just the sale price, and there are several strategies you can use when pricing to create the effect you want.

1) Charm Pricing

Charm pricing (also called psychological pricing) is using the specific digits of the price to affect the consumer, and sales, in the way that you wish.

a. Ending pricing.
This is where the price ends in either a '9' or a '5'
Several studies have shown that ending prices in a '9' has resulted in increased sales volume of up to 60.7% compared to evenly priced products. This is why you see $19.99, instead of $20.00

Prices ending in '5' are less common, but have also shown to have positive impacts on sales in the +30% range, again compared to even prices. Obviously, the "best practice" is that if you can price it ending in '5', you can price it ending in '9' and increase your margin with no negative impact.

(Fun Fact: this is why gasoline is priced in the USA with tenths of a cent in the price. $2.299 seems cheaper than $2.30. Also, gas stations used to compete using lower tenths of a cent, like .498 per gallon instead of .499)

Example: A product with a $5 cost and you are after a 50% margin. An exact 50% margin would be $10.00. In this case you would price at $9.99 (seems much cheaper, no?)

b. Dollar Digit
Charm pricing also involves excluding odd numbers in the DOLLAR digit of your price. The theory is that consumers are turned off by odd prices in the dollar digit, and you should hit an even dollar whenever possible (far from a hard and fast rule though)

Example: Instead of pricing an item at $13.99 (an odd '3' in the price) you'd price at either $12.99 or $14.99

2) Price Limits ("that's too expensive!")
This of course depends on what you sell. However, there are several "limits" that consumers will be hesitant to purchase if your price crosses, and your price should be set below or above these limits to account for them.

Common limits are: .50, $1, $5, $7, $10, $13, $15, $20, (every $5 thereafter)
After that, major ones are at $50, $100, $500, $1000

Example: A product with a $6.50 cost and you are after a 50% margin. At margin, your price would be $13.00. $12.99 would work well here as it keeps you under the $13 limit, ends in '9' and has an even dollar digit. Another option if you feel the market would support it is to go to $14.99. This is just like the $12.99, but falls just under the next mental "that's too expensive!" price limit.

As a very soft rule: If they will pay $13.99 (odd dollar), they'd pay $14.99
If they'd pay $15.99 (odd dollar), they'd pay $16.99

3) Decoy Pricing (I use this OFTEN)

This is where you use 2-3 products at different prices, to intentionally drive sales for a certain product.

Example: I'll use Vodka, as Vodka is all pretty much the same...but has multiple price points.

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99

In this example ^^, most people will buy the cheaper option as it is below the $10 mental limit and is cheaper than the only other option. But what if the mid-tier has better margin and you want to sell more?

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99
The good stuff: $19.99

With this example ^^, what mental effect will these prices have on the consumer? The first two Vodka's are exactly the same as the first example after-all...

The result will likely be that most people will purchase the mid-tier Vodka. Why?

1) The cheap Vodka now looks low quality compared to the other two. "I deserve better than that!"

2) The mid-tier Vodka is under a lower mental price barrier compared to the higher priced Vodka. "That's a good deal!"

3) The good stuff looks rather expensive, as it is above the mental price limits of the mid-tier Vodka and the cheap Vodka. "Ohhh that's too much...maybe after my next paycheck!"

You sell more of the product you want to sell, and the others are directing the consumer in the direction you want!

Keep in mind this all applies whether you are the one selecting brands to sell and pricing them (like me), or if you are the brand owner and need an MSRP, or are deciding on pricing compared to the competition for direct sales.

If there's any interest in this, I can cover other strategies I often use(d) like:

Skimming
High-low
Penetration pricing
Price discrimination
Yield management pricing
So if you're selling a $100 product you're better off pricing it at $95 or $105?
 

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MidwestLandlord

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@MidwestLandlord
Is it equally applicable to service based businesses, as well?

Coaching, copywriting, web design, etc?
Applicable? Yes.

Equally applicable? No.

All else being equal, the customer will buy the cheapest option if they know a cheaper option is available. But when does that "all else being equal" ever really happen?

I'll give you a real life example:

This week I had to put a new furnace in a rental. True, I'm buying a product, but the install is a service.

Cheapest was $1,900

I went with a guy that was $2,500 though, spending $600 more.

Why? Because he could do it this week and no one else could, and the high temp yesterday was -5 Fahrenheit where this rental is at.

I paid $600 more for the value he provided in rushing the job and keeping my tenants happy (and keeping me legal)

I paid for value and was happy to do so. (not really happy, but you get my point)

***************************

I think the most applicable part of all of this, when it comes to service based business, is avoiding psychologically jarring numbers.

About to send out a $1,000 quote?

Maybe it should be only $950 or similar.

Would "losing" $50 on that example lead to more quotes being accepted?

It's generally harder to comparison shop with services, so the question that unconsciously runs through their head (maybe consciously, but I think that's rare haha) is "Does this service fill my needs well enough to warrant the price?"

Avoid the gut reaction of:

"Oh shit, he wants $1,000...I'll have to think about that"
 
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So if you're selling a $100 product you're better off pricing it at $95 or $105?
Do you have a $100 product? (don't share what you sell please)

If so, what do you think your price should be after reading this thread?

Likely $95 would sell better, but that depends on your product, selling environment, etc.

What do you think?
 
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MidwestLandlord

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You've talked a lot about pricing under $20. Can you talk a little more about pricing $20 to $100 or more? That is where my online products are priced. If, for example, I'm selling well at $29.99 and I want to test whether the market will bear more... I could raise it to $30.99, 32.99, or 34.99 before hitting the next $5 hurdle.
Yeah, I can expand on prices above $20

The individual mental hurdles just get more spread out, and end up being $50, $500, $5000, etc.

$169 vs 170
249 vs 250
645 vs 650
1,900 vs 2,000
14,900 vs 15,000
375,000 vs 400,000
1,450,000 vs 1,500,000

Take the 1,900 vs 2,000 for example...

$1.90 vs 2.00
19.00 vs 20.00
190.00 vs 200.00
1,900.00 vs 2,000.00

All of those are decent prices. Just moving the decimal point really.

It's more and more common to round off with higher numbers too:

$149 vs $149.99

$14,900 vs $14,990 or $14,999 or $14,999.99

The first price just physically looks smaller and less mentally jarring.
 

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Thank you @MidwestLandlord. Both for the time that you took to right this up and also for the amazing value that you gave. Right after reading this I went grocery shopping with my wife and the prices that i saw took on a whole new meaning.
Ditto on never getting the small fry, but for different, unfortunate reasons :wideyed:

@MidwestLandlord, this is one of the most golden threads Ive read. Thanks you so much for this. Rep+, I feel like someone just gifted me with a degree in pricing.
 

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Not sure I understand the question fully.

Are you adding 20% (or whatever) and that is the final price after all payments?

If so, add whatever percentage gets you to a good number.

If adding 20% gets a payment of exactly $600 for example, maybe adjust the percentage for a payment of $590 or something similar.
I'm referring to the monthly payment scheme. For example, please check the pricing here - I believe in speed to implementation, so adopted your ideas immediately :)

For monthly, I've given 50% above the retail single payment offer on the whole.
 

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Thank you so much @MidwestLandlord for this AWESOME thread. High-class education for sure.

I have a product priced for $3,364 and want to increase its price. Which of the following should be more attractive/ profitable? (not US dollars, but Mexican pesos)
  • $ 3,499
  • $ 3,599
  • $ 3,699
Or do you have any other suggestion?

Thank you again for your golden input!
 
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I have a product priced for $3,364 and want to increase its price. Which of the following should be more attractive/ profitable? (not US dollars, but Mexican pesos)
  • $ 3,499
  • $ 3,599
  • $ 3,699
For profitability, that's something you'll have to put a pencil to and figure out. See comment #119 in this thread, where I discuss maintaining revenues and gross profits with @StompingAcorns

As for attractiveness of your pricing:

$3,364 is a decent price already. Good work on that!

$3,499 is the most attractive of your suggestions (without knowing anything else other than the raw pricing)

It's less than the mental hurdle of $3,500, so that's good.

I don't care much for $3,599, but it could work if you need a price increase above $3,499, but the market won't support any higher.

$3,699 is a really decent price too. It's far enough above the mental limit of $3,500 and still below the mental limit of $4,000

Other options would be to leave off one or both of the 9's. ($3,400 or $3,490)

In US dollars, it would be pretty common to leave off the 9's with US $3,400 (66,250 peso's equivalent. Your price is roughly $179 US equivalent)

But maybe it isn't common with peso's since people are accustomed to having more digits with a currency that has less buying power? That's a question I can't answer.
 

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Thank you very much @MidwestLandlord for your input.

I have decided to go with $3,490, since it sounds less "walmart/target" as $3,499. Also it's more specific as Kolenda states in his guide:

pricing-tactic-9.png
 

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Re: Decoy Pricing

If your brand is the product being used as a decoy, this can obviously work against you.

I spoke with the CEO of the brand I distribute. He wanted to know why my retailers are selling almost 2x as much product as others in the country.

We discussed decoy pricing.

We sell a premium product. Left to their own devices, retailers stick our product in the same section as our much cheaper competitors. This actually leads to an increase in sales...for our competitors!

I figured this out by standing in the isle of one of my retailers for 4 hours and watching how people shopped. They would pick up my product, compare it to my competitors, then buy the competing product instead.

Our higher price was pushing people into the cheaper product. And since this is a grocery item, and grocery stores are where price and utility reign supreme, we were struggling.

So we created our own product displays and got our product away from the competition where it could not be compared to other product prices. (I had to teach everything I know about decoy pricing to these retailers in order for them to make the change. It wasn't an easy sell)

Doubled our sales instantly.

This CEO decided to spread the info around to the retailers I don't service, and see if he can get them to make changes in product placement and specifically explain how we are unintentionally becoming decoys for our competition. Said he would report back if it successfully increases sales our not (it will)

Lessons here:

You can overcome pricing difficulties (challenging consumer's sensitivity to price) if there is less ability to price compare.

You can unintentionally sink your own ship with the pricing around you.

You can't trust others to place product in a way that favors your brand. (my mom & pop retailers are out-selling one of the largest grocery chains in the world (Kroger) because I am aware of how pricing effects sales and have adjusted my strategy to compensate)

Understanding how your customers shop is essential. Don't be afraid to stand around looking like a weirdo in a grocery store for 4 hours if that gives you the info you need!
 

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