The pyschology of pricing
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Transcript of The pyschology of pricing
| 1 of X | www.productfocus.com © Product Focus
Cambridge Product Management Network
The Psychology of PricingIan Lunn
Thanks to our sponsors
© Product Focus www.productfocus.com
Ian Lunn
Following Computing degree started life working in IT consultancy – Logica and Hoskyns
Senior marketing, product management and consultancy roles at Cable & Wireless, Lucent, Vodafone and Orange
Head of marketing in ‘dot-com’ company
Wide experience across business and consumer markets in both small companies and large multi-nationals
Co-founded Product Focus 6 years ago
Over 20 years product management and marketing experience in Telecoms, IT and software
© Product Focus www.productfocus.com
Product Focus
Europe’s leading product management training and
consultancy business with a focus on Telecoms, IT and
Software
© Product Focus www.productfocus.com
The importance of pricing
It’s important beyond the obvious that it determines what
you get paid for your product or service
It also Determines the volume of sales
Is a tool to maximise profit
Can create up-sell and cross-sell opportunities
Creates a perception in the mind of your staff, potential
buyers and your competitors
© Product Focus www.productfocus.com
Mini-exercise
Imagine you’ve just been made redundant and
you’ve decided to go into business with your
friend who’s in the same situation (and who
happens to be sitting next to you)
You’ll be landscape gardeners
What’s the name of your business and how
much will you charge for a day of your time?
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Reference prices
Pricing a product launched into an existing category
(product area) is subject to ‘reference’ pricing limits
$50 $349
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Key constraints on pricing
Com
petitorsCus
tom
ers
Cost
Price
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Pricing strategies: value-based
Maximises the revenue from differentiated products
Price the product or product features relative to each
other based on the value the customer derives from their
use
Requires an excellent understanding of the target
customer and what they value
“ There are two fools in any market, one that does not charge enough and the other that
charges too much”
Russian proverb
© Product Focus www.productfocus.com
Influencing value-based price
Objective Value e.g. Time saved x hourly cost (10 hours at £100 = £1000)
£1000
Opportunity value
Cachet / desirability
Reduce ‘disliked’ activity
Uncertainty
Switching costs
Resistance to change
Perc
eiv
ed
Valu
e
+
-
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Example : energy saving light bulbs
£5.40Lifetime cost
Price to customer £0.60
Lifetime electricity cost £4.80
Standard light bulb
Reference points + uncertainty + resistance to change depress this resulting in a realistic market price
£3 - £5
Energy saving light bulbs
Lifetime cost - Objective value
Value (£5.40 x 8) £43.20
Lasts 8 times longer uses 1/6 electricity
£36.80
Less cost of electricity (£4.80 x 8/6) £6.40
© Product Focus www.productfocus.com
Psychology of pricing If there are no easy reference points …
Customers will look at proxies i.e. things that are similar
They will look at other products in your range – if they are
judged to be reasonably priced or expensive then they will
assume it will be true for a new product
They will subconsciously be influenced by anchor points
So try and set an expectation with your customers about
why your product is worth X
© Product Focus www.productfocus.com
Magic numbers
$199.99 seems a lot less than $219.99 ($20 difference)
$119.99 and $199.99 don’t seem that far apart ($80 difference).
‘Charmed’ prices end in 99, 98 or 95
Source : an extract from a Microsoft web page selling Windows 7 – April 2010
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How to present an offer
What do psychologists claim will be the most
successful promotions in these scenarios ?
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How to present offers
Potential purchasers are twice as likely to defer a decision to buy on which of these offers?
Mobile phone
Latest model,
touch screen,
music & video play,
5mpx camera
500 mins, 500 texts
£50 + £25/month
Mobile phone
Latest model, touch screen, music & video
play, 5mpx camera500 mins, 500
texts£50 +
£25/month
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Decoys to boost sales
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People love a bargain!
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Product Management Journal
A bi-annual publication that provides best practice,
insights and explanations to over 2,000 product
managers across Europe
Online at www.productfocus.com
© Product Focus www.productfocus.com
Thank you
If you haven’t already, please
sign up to our Journal (back
issues online) and check out
our blog – Product Focus
Soapbox
Please check out our training
– our next course runs 22nd to
24th Feb in London
If you’d like to link on LinkedIn,
please let me have you email
address
Thank you for listening
Online at www.productfocus.com