

Don’t Ask Customers What They’ll Pay. Tell Them. - moritzplassnig
http://blog.spark59.com/2012/dont-ask-customers-what-theyll-pay-tell-them/

======
rogerbinns
Also related is that you should aim for 3 tiers of product at 3 tiers of
pricing. What will generally happen is people realise the bottom one tells the
world they are cheap and skimping on product, and the top one tells the world
they spend too much money and are getting too much product, so the middle one
seems the right fit.

An apocryphal story about this is Wendys having 3 burgers with 1, 2 and 3
patties respectively. Not many people were buying the 3 patty version so they
decided to get rid of it. The sales of the 2 patty version then declined
because consumers had been using the existence of the 3 patty burger to
justify purchasing the 2 patty one.

You'll notice that the iPad, iPod Touch and iPhone all come in 3 different
different memory capacities. I can't find any sales figures by model, but I'll
bet the middle ones are what sells the most.

This "3" approach also means you can still sell to the lower and higher end
customers so you don't have to get your pricing perfect.

Edit: two additional links about this

[http://www.asymco.com/2010/10/07/the-cognitive-illusion-
that...](http://www.asymco.com/2010/10/07/the-cognitive-illusion-that-is-
iphone-n-1/) (perception of alternatives)

[http://www.wiglafjournal.com/pricing/2004/07/framing-the-
pri...](http://www.wiglafjournal.com/pricing/2004/07/framing-the-price-
practice/) ("price framing")

~~~
citricsquid
Do you think this theory also applies to 1 month, 3 month or 12 month
subscription options to services?

~~~
rogerbinns
It applies whenever you are spending money - you consider the alternatives,
but humans do not do so rationally. By how you frame your 3 options, you can
push people to buy the one you want. Here is an other example from Dan Ariely,
a behavioral economist, showing three options:

[http://danariely.com/the-books/excerpted-from-
chapter-1-%E2%...](http://danariely.com/the-books/excerpted-from-
chapter-1-%E2%80%93-the-truth-about-relativity-2/)

~~~
jbrennan
Warning: On-Swipe link.

------
tchock23
I agree with this post - asking customers what they'll pay isn't always the
best way to price your product.

However, if you do ever find yourself asking a customer what they would
hypothetically pay for your product, never ask them "What would you pay for a
solution like this?"

Instead, ask them "What do you think a 'fair and reasonable' price would be
for this product?" It's a variation on the "what would you pay" question that
tends to get a much more thoughtful, honest response.

Just a tip for HN from someone who has been in consumer insights and research
for 10 years and has done hundreds of customer interviews around new products
and pricing...

------
Natsu
I would have used wine, rather than water, to illustrate Principle #1. At
least with water, people generally agree that it's all the same and the $2
bottle is a ripoff. But with wine, you often hear about things like blind
taste tests, where the cheap wines often come out ahead.

But it's more complex than that. People who buy wine may have other motives
and will want a more expensive wine for whatever reason (special occasions,
showing off, etc.). What's more is that one's experience of something like
food depends on how you feel about the food. And price contributes to how you
feel.

In other words, you might rerun the same taste test you did blindly before and
have people pick the expensive wine the next time. So quality is complex:
there may be both real and imaginary parts and which item people will pay more
for depends on how it gets compared to the alternatives. And that's not even
getting into things like branding, where people feel a certain way about a
brand and that contributes to their enjoyment (or lack of enjoyment) of a
product, etc.

~~~
ashmaurya
I'd disagree and say with wine you'd have to explain a lot more (as you did).
We know from the existing bottled water market (in the U.S.) that a viable
market exists at both $0.50 and $2.00. $2 might be a ripoff to you but it's
what some customers always purchase which leads to Principle 2.

~~~
Natsu
I live in Arizona. I don't know of anyone buying $2-$3 water because of the
quality, mostly we buy it due to convenience. In short, because it's 116 F and
they want water _right now_.

Sure, maybe there's Evian or whatever, but at least for me, it's well outside
of my normal experience. Most of the expensive water we buy is pure
convenience, because we'll buy from the guy with $2 water instead of $3
without thinking, given the chance and all the common brands are blurred
together (Evian is really the only one that sticks out).

So... yeah. I'll agree that it's a proper example, it's just not something
where quality is a major consideration, at least in these parts. YMMV.

~~~
gregpilling
I live in Arizona also, and I know people who would swear on a stack bibles
that <insert brand> tastes better. Despite repeatedly explaining to them that
it is filtered tap water, and showing it to them on the label where it says
"filtered tap water" , they insist. In any convenience store there are
multiple brands of water at multiple price points, each with their own fans.
weird.

Discount Tire also uses the good-better-best philosophy, with the middle
choice being most popular.

~~~
Natsu
I guess we just have very different experiences.

I'm used to all water being exactly the same price in a given location and to
only noticing when they jack up the price for captive audiences.

------
robert_mygengo
This theoretically true statement "There is no reasonable economic
justification for a customer to offer anything but a low-ball figure. " can,
in practice, be irrelevant.

So unless you are a savant, following the OP's advice in _enterprise_ sales
can result in you leaving hundreds of thousands of dollars on the table.
Because customers (especially at the early stage) often have a perceived value
for something that is far more than you realized, or they have a budget, and
their price is the budget. Steve Blank has great examples of these situations
throughout his career.

The OP's advice makes sense for consumer sales (and I think he should clarify
this).

This book gives a rounded and intelligent set of tools that work in almost all
situations — and will make you rethink the thoughts you thunk about pricing:
[http://www.amazon.com/Winning-Profit-Game-Smarter-
Branding/d...](http://www.amazon.com/Winning-Profit-Game-Smarter-
Branding/dp/0071434720)

------
fab1an
Way too few startups use price anchoring strategies when _presenting_ their
prices - the iPad intro is definitely not the first, but possibly the most
well-executed anchoring I've ever seen. If your product is disruptive in the
sense that it potentially can replace a more expensive existing solution, you
should simply point out the math - the higher the original number, the better,
as even the higher price points you've been thinking up for your product will
seem small. Interestingly, anchoring can also work outside of mere price
comparisons. That is, sometimes it's enough to just _present high numbers_ to
effectively prime customers towards higher price points. The most famous
example is Kahnemann's classical experiment on using subjects' (obviously
random) social security numbers for anchoring:

"...an audience is first asked to write the last two digits of their social
security number and consider whether they would pay this number of dollars for
items whose value they did not know, such as wine, chocolate and computer
equipment. They were then asked to bid for these items, with the result that
the audience members with higher two-digit numbers would submit bids that were
between 60 percent and 120 percent higher than those with the lower social
security numbers, which had become their anchor."
<http://en.wikipedia.org/wiki/Anchoring>

~~~
ashmaurya
Yes, but this kind of anchoring is "artificially" manipulative. It's possible
you convince a customer to accept a higher price at first, but pretty soon
buyer's remorse will set in and you're screwed.

I do believe you want to pick "valid" anchors and sometimes be more selective
(as-in the iPad case) but the comparison has to stick.

~~~
polshaw
>buyer's remorse will set in

Not necessarily. Take our case of the iPad. It came out at a time when
netbooks had created a new low for computer pricing. The iPad lacked a
keyboard, a proper/large HDD, had a processor that was even slower, ran a
smartphone OS that couldn't even multi-task properly, and had a screen
resolution right out of 1995. The 'logical' price for this would have been
$200-300; pretty much the only hardware that was not a cost reduction on a
netbook was the (low cost) touch layer. Yet it had excellent customer
satisfaction. They created perceived value- lacking USB, storage expansion and
replaceable battery were all practical disadvantages-- but these weren't
things that created desire like the buttery-smooth operation provided by the
GPU and capacitive touch, the large viewing angle from the IPS screen, the
sleekness from having just one button etc, and the light and slimness gained
by forgoing so many features available in even a netbook.

And it's not just something like apple does. Think of a tech 'consultant', or
a fashionable web-design company. Chances are you see their prices and think
'WTF are they smoking'..I could have better than that done for me for 10x
less. but their clients, i bet are pretty happy. Because of the value they
offer-- some perceived, some reality.

------
twiceaday
What about the humble indie bundle or kickstarter? Asking the customer what
they want to pay has never been more popular.

~~~
ashmaurya
The context here is for products where one would sell a product or service
directly to customers e.g. SaaS, enterprise. Crowd-sourcing is a different
model. So are multi-sided and marketplace models.

------
callmeed
I don't agree with this–or maybe I do. It's hard to tell without knowing what
he means by "testing your price with customers".

I think asking customers "what would you expect to pay for this?" should be
part of your initial usability or beta test with potential customers. 2
Reasons for this: (a) your target market has certain price expectations for
products and (b) you might "tell them" what to pay and still be too low.

I just did this with a new product we launched. My lowest plan was priced at
$9/month. We did a usability test with our target market and ask them (at the
end) what they expected to pay for a product like this. Only 1 person said a
number lower than $20/month–and they went as high as $100/month.

~~~
FireBeyond
"I just did this with a new product we launched. My lowest plan was priced at
$9/month. We did a usability test with our target market and ask them (at the
end) what they expected to pay for a product like this. Only 1 person said a
number lower than $20/month–and they went as high as $100/month."

However, that doesn't imply that they WOULD pay that for a product. The
conclusion they might draw (validly or otherwise) could be "I'd expect to pay
a lot more for this product, so I won't even consider it an option - it's out
of my range."

I might expect to pay $1,000 for a table for 4 at one of Gordon Ramsay's
restaurants. I might be pleasantly surprised to find the average bill around
$600. That doesn't mean I'll pay $600 for that, though.

------
nate
There's another way of looking at pricing that comes up more and more in my
thoughts on starting a new business/product. I've been calling it "pricing in
reverse". I'll blog about it soon in more detail, but the gist is...

As a new startup or business, it's likely you have no audience, no fans, and
no customers. You are going to have to go get them. One method, that can be
very effective to get them if you do it right is online advertising through
pay-per-click ads on places like Google/Facebook/LinkedIn.

Assuming you pick some niche with X searches, those ads are Y per click. And
the per unit revenue of my product is Z.

Making bold but average assumptions about your conversion rates you can say
something like let's assume 1% of searchers click on my ads. So my ad cost is
going to be searches * CPC * 0.01.

Assuming I can get a 1.5% conversion ratio the revenue I'll bring in is
searches * 0.01 * 0.015 * Z.

So:

Revenue(searches * 0.01 * 0.015 * Z) - Ad Cost(searches * 0.01 * CPC) =
profit.

Set profit to zero and solve for Z. Get searches and CPC from the Google
adwords tool.

You'll now know your product NEEDS to cost Z to break even doing pay per click
ad campaigns.

Sometimes this is going to be an eye opener for you. You'll realize that you
probably need to charge a ton more and so maybe your product needs to have a
much more powerful feature set to warrant that higher price.

This example and thinking was inspired from Tim Ferris' Muse Math:

<http://www.fourhourworkweek.com/bonus/pdf/musemath.pdf>

~~~
namityadav
Cost plus pricing. You should definitely know you numbers like the customer
acquisition cost etc. I agree with you there. But relying on the cost to come
up with the price point usually leaves money on the table. Price based on the
value for the customer, not your cost.

~~~
derefr
Just make sure to find out these numbers, so you font go into a market where
value is _below_ cost.

------
jcr
If you want far better information on pricing, the following old (2004)
article by Joel Spolsky is excellent.

[http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...](http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html)

------
JTon
The video embedded in the article is great. Steve jobs literally gets the
crowd to cheer for "unbelievably low price" point of the ipad at 499.
Brilliant

~~~
ashmaurya
The brilliance is picked an externally accredited source (pundits) for a
product twice in price. Another alternative was positioning the iPad as a
better (bigger iPhone) but that obviously would not have worked as well.

~~~
polshaw
Its fascinating. These 'pundits', lets remember (beside the question of
whether it was even accurate or significant-- enough pundits and someone will
have said anything), we didn't know what the iPad was going to be. The
possibility that it would be a powerful, fully-fledged OSX running computer
was considered very real (remember the slamming people gave it as just a big
iPhone).. if the question had been 'what do you think we will charge for our
iPod touch with a bigger screen', not even the most hardcore apple pundit
would have said '<$1k'.

Then he lingers on this issue-- talking about how much they have accomplished
for the price-- almost making a value proposition for it at $999. After about
a minute of $999 up on the screen he announces that '[apple] have met our cost
goals'. I think this phrasing is very interesting-- he doesn't say 'we have
beaten our goals', 'met our aggressive goals' or 'achieved a low cost'--
nothing to remove from the perception that it could be $999. At the point at
which your expectation is highest that he is going to announce that the goal
they met was a $999 ipad, and he has built tension, they dramatically drop in
the real price.

Even the fact that they managed to manipulate their audience is in turn a
suggestive indicator that this is great value, a shock, at this price. This
can have a big effect when you consider that the press are not immune from
this manipulation-- who then present this device as highly desirable and of
great value.

------
Porter_423
Nice, I totally agree with the fact that pricing of product is an art to
attract the customer before your product is being released.

~~~
derekp7
That reminds me of a story I read years ago (pre-consumer-internet days),
where a particular Office suite was priced at $99, but didn't sell well. They
then released a "professional" version, sold it for $399, and it flew off the
shelves. If I remember right, I think it was something by Borland. (Exact
details are a bit fuzzy).

