
What We Can Learn About Pricing From Menu Engineers - terpua
http://gigaom.com/2009/09/13/what-we-can-learn-about-pricing-from-menu-engineers/
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easyfrag
Organizations will always come up with ways to encourage buying more (or
paying a higher price), but the strategies are a moving target because a given
market will learn and adjust (albeit slowly). I would argue that the MRSP
"trick" no longer works because almost no one expects to pay it anymore.

Using some of these tactics could backfire depending on how educated or savvy
your target market is. Think of spam messages, those over the top tactics used
to work on more people, now for most educated people that type of hard sell
doesn't work.

Of course it all depends on the target market, if you're selling blankets with
arms the bar is a little lower.

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gaius
"Menu engineer" is a job title now?!

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smokinn
Which makes me happy that "Engineer" is a protected title in Canada.

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lamby
I've always been curious why people get so upset when people adopt this word
outside of its, uhhh, less than traditional context. When did titles suddenly
become important around here?

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minsight
Would you get mad if your "Medical Doctor" wasn't? Or your "Lawyer" wasn't
qualified? Or perhaps the "Engineer" who designed the trusses holding up the
stadium where you see a ball game was just an unqualified amateur?

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lamby
I was primarily talking about labels, not qualifications, but I do feel they
are connected.

There are plenty of people who call themselves "tree doctors" yet medical
doctors have no problem with that (and certainly don't go all tribal and True
Scotsman about it). Perhaps the difference is that in the public eye, the term
doctor is synonymous with the qualification, whilst "engineer" has yet to
reach that status?

~~~
smokinn
It's because in Canada the term Software Engineer has a very specific meaning.
It means you did a 4 year Software Engineering programming program at an
accredited university and then worked under a professional engineer for a
certain number of years (I think it's 4?) and then passed your accreditation
examination.

I'm Canadian and I have a bachelor's degree in Computer Science. I don't call
myself an Engineer because other than being against the law, I have a certain
respect for the amount of work the people who earned the title went through.

Also, if they majorly screw up, (though this isn't nearly as likely in
software, it's usually happens when bridges or buildings fall down) an
Engineer can have his accreditation revoked.

Which is why legally calling yourself an Engineer in Canada, software or
otherwise, has a certain status associated.

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edw519
My very first customer was the boss of a friend of mine. I asked my friend
what his boss was willing to pay. "It doesn't matter," my friend replied,
"Just charge him 50% more than what you really want and let him negotiate you
down. As long as he thinks he's getting something from you, he'll be happy,
and you'll get whatever you want." Great advice.

~~~
tomjen2
Way back, my grandfather used to haggle in the local shops (back when they
where still worked by their owners, haggling was possible). What he didn't
get, was that the shopkeepers knew he was going to haggle and so adjusted the
price upward.

So yeah, that trick definitely works.

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nazgulnarsil
the impression of utility is more important than actual utility. what does the
extremely high priced option (50k in the example) signal to the customer? that
someone out there is deriving 50,000 + x value from that service.

~~~
lsc
depends on what you are selling, as a previous poster said, and who you are
selling it to. My experience selling to computer nerds has been that we are a
very rational and price-sensitive bunch. we shop around, and we want objective
measures.

Actual utility, much like truth during a court battle, is a big advantage.
Sure, it's not overwhelming, but it helps a lot. If you are providing actual
utility, your customers will do your marketing for you.

Personally, I think the choice depends a lot on what you are good at. If you
are good at marketing and have little technical and/or engineering skill,
sure, you will get more out of marketing. But the opposite can work too.

Personally, I'm always very amused by people telling me I should raise my
prices. I started out selling FreeBSD jails (with an actual utility close to
my current $8 product) for $40 each. I rented two. Switching to xen, then
dramatically dropping my prices (well, and a few years of actually, you know,
learning what I was doing) helped me a lot.

Marketing is easy when you have obvious and objective advantages over
competing products. You can yammer all day about this or that or the other,
but if you can point at your price sheet and say 'hey, look- I'm kinda like
that other guy, only 1/4th the price' well, for price sensitive customers,
that's a difficult to refute reason to give you a shot, especially if the
advantages your competitors cite for the price premium are not immediately
testable.

Differentiation is only in your interest if you are better at marketing
(and/or have higher costs) than the competition. In my case, the competition
is much better at marketing, and my costs are such that I can dramatically
undercut them while making a profit, so it makes sense for me to just focus on
providing a decent product while occasionally saying "Hey, look at me. I'm
kindof like the competition, only 1/4th the price!"

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nazgulnarsil
the point of the higher priced option is that it doesn't cost you any current
customers while potentially bringing in customers who wouldn't have otherwise
used you though. like the article said, even if the premium option just adds a
bunch of management-appeal language with no objective value, you still might
be able to get it into the hands of the engineers who work under them (at
companies where idiots make the purchasing decisions) that might otherwise not
had the option.

secondly, the view that undercutting (for the same objective value) will
always be interpreted correctly by the customer is a little naive. In reality
you often don't want to undercut your competition by too much for exactly the
same reason my initial post was about: perceived value.

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lsc
/secondly, the view that undercutting (for the same objective value) will
always be interpreted correctly by the customer is a little naive. In reality
you often don't want to undercut your competition by too much for exactly the
same reason my initial post was about: perceived value./

The thing is, I've tried setting prices at par with the competition. Sure, it
was high margin in terms of computer hardware, but computer hardware is the
cheapest part of the equation. Cutting prices dramatically is why this project
went from being a net loss to paying for my rent and a new server or two every
month. It became much 'higher margin' because it's cheaper to just give
everyone 4x as much ram than it is for me to compete on marketing with the
other players in this field.

Sure, there are people I'll never appeal to, and that's fine. There are some
real reasons why you might want to pay extra to have a 'real company' handle
your VPS rather than three guys.

I think that if you want to retain credibility, you can't pretend that you can
serve everyone.

Besides, I'd go nuts if I had to teach unix to every middle manager who
decided to sign up. Slicehost is great. if you need a bunch of hand holding,
use them. Sure, you've gotta pay for it, but you know what? tech support is a
soul-sucking job. It's incredibly difficult to maintain a good support
organization, and I think it is quite reasonable to charge extra if you are
able to do so. (I mean, assuming slicehost's support is as good as people seem
to say; I haven't personally used them. But I hear nothing but good things.)

if you know what you are doing, and if you have a system, like mine,[1] that
allows you out of band console, rebooter, and rescue media, you don't need
very much support. This is good for you and good for me, and my prices just
don't work, otherwise. Hardware is cheap, good people willing to do tech
support are not.

Objective, testable arguments appeal to my market, and 'Hey, I'm kindof like
slicehost, only 25% the cost' is a very strong, testable argument.

But my central point is that you should focus your marketing effort. saying "I
am all things to all people" is an obvious lie, which will cause most
technical people to write you off as worthless marketing garbage before you
get a chance to explain what you are actually good at. Figure out what you are
good at, and focus on and talk about that. Be consistent.

Sure, Perceived value is what you get paid for, but unless you are a whole lot
better at marketing than I am, increasing objective value is by far the
easiest way to manipulate perceived value. Besides, increasing objective value
makes me feel good about myself, and increasing perceived value without
increasing objective value makes me feel kinda slimy.

[1] in the interests of full disclosure, and, uh, in not getting people
signing up then exercising my 30 day money back thing, I will point out that
my system sucks badly if you want to provision a new server, or if you want to
resize your server. I'm working on it. But I do think my system does a very
good job of emulating a remote server in a co-lo with a serial console, a
rebooter, and a rescue CD in the drive.

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nazgulnarsil
_increasing perceived value without increasing objective value makes me feel
kinda slimy._

I feel like this is representative of why technical people leave money on the
table in general. every product has a laffer maximum, objective value doesn't
really exist.

also you are getting that you can maintain your current pricing structure
completely unchanged except for adding some premium option that you don't
intend to actually sell (you can price any added features that you don't
really want to support so high that on the off chance someone does buy it you
won't mind working for that money), right?

~~~
lsc
"I feel like this is representative of why technical people leave money on the
table in general. every product has a laffer maximum, objective value doesn't
really exist."

Maybe. what about comparative advantage? I can probably compete with the best
SysAdmins my competitors hire. Yeah, some of them are better than I am, but
it's at least a contest, you know? I'm not completely outclassed. I have a
fighting chance.

Put me up against the best marketing guys my competition can hire, though, and
I'll be humiliated. I'm just not very good at manipulating emotions, so I'm
better off if it appears that I'm not trying.

That, and I still don't believe I'm leaving money on the table. my growth rate
right now, (a bit over a server a month) is probably about optimal. It's fast
enough to be exciting, but it's slow enough to be not overwhelming. The
hardware margins are fine; a full server more than pays for itself in two
months. Really, any more than that is just silly.

I think what I need to be focusing on now is automating the bits of support we
are currently (badly) doing by hand, that is, provisioning and re-sizing
domains. Next, I think, backups, as that's the biggest threat right now. Data-
loss events are horrible.

~~~
nazgulnarsil
_I'm better off if it appears that I'm not trying._

well that's a different signal, depending on your market (technical people in
this case) it could be a superior signal.

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lsc
yes. I understand it is marketing, just as much as having a $25 burger on the
menu. The difference is that I don't understand what a $25 burger can honestly
signal. Maybe, for the target market, a $25 burger can honestly signal
something important, that I just don't understand? Perhaps "we take care to
make you feel like you are eating at an expensive restaurant." I can imagine
that being important to some people. I'm pretty certain, though, that a $25
burger on my menu would signal something that was very negative to my target
market. If nothing else, it would look like a dishonest signal. Because I
don't understand what a $25 burger is signaling, I would not follow through on
that signal.

I mean, I am trying to signal that I'm one of you. I'm not going to fuck
around in an attempt to extract pennies from you. I'd be doing this for free
if that didn't carry some serious negative consequences. If you are not a
nerd, you have no idea how much many of us hate talking to sales every time we
need to buy new equipment or space. Like most marketing signals, if I don't
follow through, if this isn't an honest signal, the market would believe me
for about five minutes.

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nazgulnarsil
the $25 burger signals that your restaurant is capable of making a burger
worth $25 to someone. this then reflects well on the care you take with your
cheaper offerings. of course in reality the relative qualities of product
offerings can be completely unrelated, but our monkey brains are not
objective. thinking that nerds are free of bias is a bias :)

~~~
lsc
I don't see how a $25 burger on the menu signifies that $25 burgers are
selling. Especially in the IT industry. It's normal for vendors to have 'list
prices' that are 50%-70% higher than what you can negotiate them down to.
(seriously. talk to a small business who has bought a new NetAPP or EMC
storage device.)

Also, yeah, we are all biased, even nerds. I'm sure you could, for a short
while, trick nerds into paying more because of those biases. But I'd bet money
that they'd figure it out, probably sooner rather than later, and they'd be
mad at you.

If you are selling to the middle managers who tell nerds what to do, it's
different. But I'm a long ways from being able to hire someone who can pull
off that sort of thing.

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bmelton
"My hunch is that most companies could increase revenue by simply adding a
very high-end offering, even if they never sell a single one of those
expensive units."

This strikes a parallel to something 37Signals once said, many moons ago,
though I believe I had misinterpreted their point. When they said it (or when
I read it,) I assumed it meant that you should definitely throw a premium
option out there because there are some people who always buy the premium
option... even those who wouldn't consider buying a less-than-premium option.

It honestly never occurred to me that its primary purpose is to make the other
prices look smaller by comparison.

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callmeed
I think there is an aspect beyond simply a perceived savings–especially if
your web app is B2B.

In our two main products we sell more of the mid and higher priced options. My
theory is that business owners (especially sole proprietors) like to think of
their company and needs as bigger than they actually are ... "I can't get just
the start/basic/hobbyist/limited plan. I need the
veteran/professional/unlimited/premium plan."

So, in our experience, customers may not always buy the highest offering, but
they will rarely buy the lowest offering.

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lamby
> business owners (especially sole proprietors) like to think of their company
> and needs as bigger than they actually are

Do you think that's an aspirational viewpoint, or that they are actually poor
at judging their needs?

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adamc
Isn't this kind of like being evil to make more money? Exploiting flaws in the
way people reason about price is not the same as delivering value.

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lsc
is it evil to try to charge as much as you can? I would argue no. Certainly,
in the case where my product is limited, such as when I'm selling my time, I
put effort into that. Is it evil to spend time trying to charge more for the
same product rather than spending that time making a product that is worth
more? maybe. It's certainly not admirable.

I explained in a previous comment that I think not differentiating, and
instead competing on price and value can be a good strategy, especially when
industry margins are high.

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nintendo1889
I work in computer repair as a sole proprietorship, and if I charge too much I
won't get repeat business. But you can't always judge if someone will refer
more customers to you or give you repeat business.

~~~
lsc
when I say 'charge as much as I can' I mean 'set my hourly rate as high as
possible' where the hourly rate is set before the work is done (and usually
before we meet)

