
A Common Pricing Mistake - nathanbarry
http://thinktraffic.net/most-common-pricing-mistake
======
tfinniga
There is also a danger to trying to extract an amount of money as close as
possible to the value from each customer. The difference between the value the
customer receives and the amount they pay usually turns into good will towards
the product, and in turn how likely they will be to recommend it.

If you're going to have different pricing tiers, the higher tiers need to
ostensibly have more work put into them. You can't just say that if you fit
into one bucket of people we know you have more money, so we're going to
charge you more (e.g. DVD regions). You need to give them something more for
it, so that your customers don't hate you (e.g. HD movie downloads).

Nobody likes to feel like every possible penny is being wrung out of them, or
that they're being unfairly targeted to pay more. Measuring happiness of
customers or how likely they will refer others is more difficult than
measuring which product each customer bought, but just because it's harder to
measure doesn't mean it's less important.

~~~
pekk
What's unfair about price discrimination? It is endemic to real capitalism in
markets all over the world, where sellers are simply exercising their right to
name their price. If you don't accept the price of the service, then walk
away. If you accept it, don't complain that other people got it cheaper.

~~~
czr80
Pricing is as much about emotion as it is about logical evaluations of value.
You need to be sensitive about pricing situations where the customer will pay,
but only begrudgingly, and so leaves the transaction feeling that they never
want to come back and certainly would never recommend you to anyone else.

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dkokelley
I hate this title. I understand that it is designed to draw attention and
curiosity (coming from a site called THINKTRAFFIC, it's probably expected),
but the title and other titles from the "popular articles" section just scream
"headline tricks to draw clicks".

An informed title would probably be "Useful pricing techniques" or "Have
multiple price points", although it really is a balance between headline
accuracy and user interest. I suppose what I hate the most is that this less
accurate title works better, and that's our fault.

~~~
rhizome
"Please phrase your blogpost title in the form of a search query string"

~~~
jrajav
"How to price a product" would have been just as fitting, but less patronizing
and baity.

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jacques_chester
This is pretty good advice.

Pricing is a big topic in itself and I think it's worth taking the time to
look at it more closely. As I always say when pricing is raised on HN, no
decision you make will have more impact on your profitability.

(I also usually link to my review of an _entire book devoted to pricing_ ,
here it is: [http://chester.id.au/2012/09/12/review-the-strategy-and-
tact...](http://chester.id.au/2012/09/12/review-the-strategy-and-tactics-of-
pricing/))

Just think about it. Pricing is a decision that gets made infrequently. It
sets the upper bound on potential profitability; whereas costs have in theory
no upper bound.

People think about costs more because those are hidden from the customer and
can be constantly twiddled. But it's meaningless without a smart price
structure.

Right now I'm working on a little niche web application. What will I be doing
in the new year? Well, coding on it, sure.

But I will also be getting a new, well-fitted business suit, going out to my
customers, and finding how much Problem X is costing them. I'll adjust my
pricing scheme to match, because my intention is to capture a fraction of
value, not to pluck a number out of the thin air.

Seriously. Buy that book if you have a business, _any_ business. Use my Amazon
referral link or the non-referral link, I don't care. Just get the book.

------
politician
About 3 years ago, Dan Ariely presented "Are we in control of our actions" [1]
which demonstrated, among other things, that when offering 3 graduated choices
the middle choice has a strong orienting effect on the decider. That is, the
middle choice points the way towards which pair should be considered - the
bottom two or the top two.

The prices of the author's packages are $39, $79, and $169. The differences
are $40 and $90, respectively. According to Ariely, in this situation more
people will consider the $39/$79 pair (because they are more similar, in this
case based on price) rather than the $79/$169 pair, and, in fact, this is what
the author reports.

[1] <http://www.youtube.com/watch?v=9X68dm92HVI>

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jere
>So far we’ve been adding price points with more and more success, so where
does it stop? It stops at three. Adding too many is just going to cause
confusion.

That's funny. As soon as I saw this, I knew I was going to ask about the Jam
study... which after reading further was already mentioned.

Three seems to the magic number. For a project where users are presented with
several options (unrelated to price) I had already made the decision to use
three. But is there any objective reason three works better than say four? All
I have is a gut feeling right now.

~~~
czr80
I think it's a result of how quickly the number of comparisons increase. If I
have 3 options, A, B and C I need to make 3 comparisons. A vs B, A vs C, B vs
C. If I have 4 options I need to make 6, for 5 options, 10 comparisons and so
on.

If we assume that people can hold about 7 +/- 2 items in short term memory,
you can see why the decision process becomes mentally tiring after 3 or at
most 4 items.

~~~
nathanbarry
I'm going to start using this to explain multiple packages from now on. Thank
you very much.

------
d0m
* But if I tell you the book is $39, but for $79 you can buy the book plus all these great videos and code samples, then you are comparing the two packages to each other. All of a sudden $39 sounds reasonable, and you are trying to decide if the extra value in the $79 package justifies the price increase.*

This is a sophism called "False dilemma". Survey callers use it all the time..
it's so annoying. For instance:

    
    
      <caller> Hi Mr X, I'm working for blabla. This survey will take 1 minute, shall we start?
      (Note: They make it explicitly rude for me to say "No"; I.e. they don't open any door such as "Are you interested in  continuing, etc.").
    
     <me> No thanks, I'm busy! Have a nice day.
     <caller> Sure! Should we call you Tuesday or Wednesday?
     (Note: Bang, the false dilemma sophism. The caller tries to limit the option to *only those two!*. But obviously, there are hundreds of other choices.. such as:)
     <me> No thanks, don't call me back I'm not interested.
     <caller> (Try another annoying tactic)
     <me> (Being really tired of being manipulated decide to let the phone open but not listen to it anymore. After 15 minutes, I check back to see if the caller is still here (he's not)).
    

Meh. It's a good marketing tactic, but it's very annoying.

~~~
heyitsnick
I disagree.

In your example, your false dilemma is trying to remove the possibility of
_dont answer survey_ (instead, you consider _which day do I answer survey_ ).
That's a false dilemma.

But that's not the case here. The article isn't about trying to remove the
option of _don't buy book_. This article is about using pricing to anchor a
customer's expectations of what the product should cost by offering multiple
price points.

------
JoshTriplett
This seems like the _second_ most common pricing mistake. The most common, at
least among developers: setting pricing based on cost-plus rather than value.

~~~
jacques_chester
Seconded. Every once in a while a new service's pricing page is posted on HN
and someone says "Why should I pay $X / month for that? I could Write It In A
Weekend (tm)"

That's _not the point_. What matters is the _value to the customer_ , not _the
cost of production_. Cost of Goods / Services is not the smart way to price.

In a few weeks I'll have a blog post on this, name checking my new best friend
Hayek.

~~~
ruswick
It does matter when a potential buyer will mentally juxtapose the cost of
production with the price being charged. If the individual can reproduce the
same value at a lower cost by producing it themselves, they will likely do so.
This is why business-to-developer commerce precludes price gouging: the
developers can replicate your product if need be.

It's possible to wring a lot of money out of people or corporations that don't
have the capacity to replicate your work by opining the virtues of yielded
"value." It isn't possible to do that when selling to technical people. At
that point, cost of production needs to be taken into account. This is also
why soft features like polish and convenience become significant in
differentiating products.

EDIT: Also, you never refute the argument in the original article decrying
your stance because value is idiosyncratic.

~~~
jacques_chester
> _It does matter when a potential buyer will mentally juxtapose the cost of
> production with the price being charged._

Such estimates are routinely utterly wrong. People underestimate the cost and
difficulty of pretty much _everything_.

The book I reference elsewhere includes an entire chapter on explaining value
to customers.

Not always useful or even possible (here we pass into the world of marketing,
advertising and salesmanship). And yes, there is a market-clearing price which
may be below what you want to make. Either you accept a lower profit or you do
something else. That doesn't change the concept of charging for value vs
charging for cost.

However you seem skeptical about the idea of charging for value -- to the
point of calling it "value", with what I presume are quote marks intended to
convey sarcasm.

------
brc
Shades of Joel Spolskys classic post 'camels and rubber duckies' which
explores pricing discrimination as well.

The joelonsoftware article and this one are both good reading. And both
underline the concept that pricing, like software, is never 'done'. You always
need to be working on it.

~~~
sokoloff
Convenience link:
[http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...](http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html)

------
guelo
I guess his "most common pricing mistake" is price discrimination. But price
discrimination is one of those things that sellers love and customers hate.
"Why was I charged more than someone else?" is a sure way to piss off a
customer. Tread carefully.

~~~
khet
I am not sure what you're talking about? Trying to make the most profit in a
capitalist society is what the OP is doing. Nothing wrong with that. If he can
make me pay more, ill respect him for making a living.

~~~
icebraining
Most people (read: buyers) don't view it in the same way as you, though, which
is why it's dangerous. People feel cheated if they pay more than someone else
for the same product.

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joey_muller
I liked this post and the title. As a PPC manager, I see all kinds of business
models and can attest to the 3 tier method working best. The most interesting
thing is how you arrive at these through bracketing. Nice work.

------
davemel37
very informative post, but I'm afraid it leaves us with incorrect conclusions.
In all examples, no one tested just one high price point for the item.

The story starts out talking about how value is relative to each purchaser, so
with different price points you can draw out the more valuable customers with
tiered pricing and get more than your original pricing from those who opt in
for the higher price point.

The glaring omission is not testing just the highest price point. The author
explains he didnt want to price out interested readers at lower price points.
I don't understand why though. The people who appreciate your value will pay a
premium, and others who are not willing to pay a premium, or not really worth
having as customers for many reasons, if not for the simple reason that if
your goal is to create value, why wouldnt you focus on the areas you can
create the most value? There are other reasons I would be glad to share...

The strategy of "comparing apples to oranges" so you can sell an ebook for $39
instead of $10 is a sound one, but the same strategy could work with only one
price point at $179 or even $1700 if the value is there for your audience. In
this case, the best comparison would be, "you can pay $10,000 or more to learn
how to develop apps at college, or you can pay a developer $100k a year to
develop for you, or you can buy a proven strategy on how to develop apps from
me for only $1799."

Would everyone pay? of course not. Would some people pay? All you need is less
than 20 for it to be a bigger blockbuster than his original sales.

I would personally be shocked if he only had the highest priced point bundle
as the only option if he didnt generate much more revenue. Arguably, atleast a
few of the people who bought at other price points would come around and spend
more.

So, this article is absolutely right, draw your customers away from being able
to compare your product to other products in the same category, and focus on
the value proposition to them... But, dont take his tiered pricing proof as
set in stone, odds are it cost him more revenue by doing it than if he didn;t.

~~~
ahoyhere
Many tests _have_ been made along these lines, and the sales are usually lower
for the single high price. The theory is because it makes the lower tier look
like a steal.

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Torn
I'm surprised noone's drawn a comparison between this and Kickstarter's reward
models.

Packages / price points are built into kickstarter, and seem to work pretty
we..

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olalonde
I'm going to guess that this post probably made the author more money than any
pricing tactic he discussed.

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zb
In what universe does doubling revenue qualify as a 200% increase?

~~~
GotAnyMegadeth
In Metroworld: <http://threesixty360.files.wordpress.com/2011/08/yckth.jpg>

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dljsjr
[this comment was posted in the wrong thread. carry on]

