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Raise prices increase profits

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Three proven ways to make more by charging more. Based on the research of William Poundstone and Dan Ariely Graphics and key insights adapted--with deepest appreciation-- from a presentation by fellow SlideSharer, Shamvir Singh

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Page 1: Raise prices increase profits

April 8, 2023

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RAISE PRICES.

INCREASE YOUR

PROFITS.

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THREE WAYS TO GET

CUSTOMERS TO PAY THE PRICE YOU

WANT

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PAYING ATTENTION TO YOUR PRICING

STRATEGY PAY$

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WHY DOES IT PAY ?

Price is the one marketing mix variable that can be most

easily changed

Even a small increase can have a huge impact on your

bottom line

rthstahub.co

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April 8, 20235W

hat ca

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William Poundstone, the author Priceless: The Myth of Fair Value states: “People tend to base price on a vague recollection of what they have seen or heard and are mainly sensitive to relative difference, not absolute price”.

As a result, consumers are always assessing the relative price value trade-off against other comparable options. In other words, they seek context.

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Most small business people fear raising prices will cost

them customers

That’s true—if you’re competing on price alone.

Don’t do that—that makes you a commodity.

Communicate the VALUE you offer and price is only part of

the story

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A

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As John Jantsch puts it, people will pay LESS for

things they need and don’t really want—so they can pay

MORE for things they want and may or may not need.

Thank of the people who paid extra just to be among the first to have the new gold

iPhone

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What you need to do is demonstrate to

customers that the value your product or service offers is more

than worth the price you’re asking.

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Most customers don’t know what the “right”

price is without context.

So give them that context with a decoy price.

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The Decoy Price—also known as

asymmetric dominance

In this pricing strategy, a price that few, if any

would pay, is used to make the offering you do

want to sell look more attractive.

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HOW DO CONSUMERS BEHAVE TOWARDS VARIOUS PRICING OPTIONS?

Dan Ariely, the author of Predictably Irrational, supports Poundstone’s idea. Ariely describes how various pricing options can affect consumer’s uptake of particular service/product packages.

Ariely conducted an experiment where he offered two pricing scenarios. The first scenario offered three pricing options for The Economist:

Option A – Web only at $59Option B - Print only at $125 Option C - Web and print both at $125.

The experiment was conducted on 100 MIT students. Initially, 16% chose option A (priced at $59) and 84% choose option C (priced at $125). No students chose option B.

So why did the ECONOMIST include an option that nobody could possibly want?

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THAT MIDDLE PRICE WAS THE DECOY.

NOW SEE WHAT HAPPENED WHEN IT WASN’T AN OPTION.

The second pricing scenario removed option B and was re-administrated to another 100 MIT students.

The uptake for option A increased from 16% to 68% (the cheaper print only option).

It may seem illogical that removing option B (a price option that no one chose) would change consumer preference. However, option B served a purpose in scenario one by acting as a price decoy.

Ariely deducted that consumers have difficulty in comparing the relative price value trade-off of two very different options. However, if two options provided are similar (e.g. pricing such as options B and C), it becomes easier for the consumer to understand the relative price value trade-off.

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Decoys can increase your profitability, too.

Having the decoy price increased the number of people who chose the most expensive option.Without the decoy, a majority chose the least expensive subscription. (After Dr. Ariely contacted THE ECONOMIST about the subscription options, the offer suddenly

disappeared from the publication’s Web site)

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How you can use decoy prices

1. Have at least three options—people want choice and choice

provides context. 2. Make at least one less desirable by removing features or benefits—

that’s your decoy

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What can a $1000 ice cream sundae and a $69 hot dog teach us about

pricing?.

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New York restaurant and bakery, Serendipity III

knows the value of ANCHOR PRICING.

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The outrageously high-priced items make the

other menu items—such as the “Cheesecake

Vesuvius” at $22.50—seem reasonable.

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Ralph Lauren uses the $22,000 “Ricky”

handbag---named after his wife—to make the other

handbags and wallets seem like bargains.

Whether he ever sells one or not doesn’t matter—the

anchor raises the price people are willing to pay.

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How can you use price anchoring?

1) Have a high-priced option—even an outrageously high price. About 15% of buyers

will choose it because to them high price=greater

value.

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How can you use price anchoring

P

How can you use anchor pricing?

2) In negotiations or pricing, be the first to state a

number—a ballpark, or an upper range. Studies show

that once a number—even an arbitrary number--is

established, it anchors all future price discussions.

That initial high number can make you final price seem

reasonable. Aim high!

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How can you uscing

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CHARM PRICING—also known as PSYCHOLOGICAL

PRICING.

CHARM PRICING- also known as psychological

pricing

These are prices ending in .99 or .98. They have been

in use for over 150 years because they work. Studies have shown that people will more readily pay for a $3.99

item than the same item at $3.49 or even $3.29.

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How can you use price anchoring

P

CHARM PRICING—also known as PSYCHOLOGICAL

PRICING.

In Asia, prices tend to end in “8” because “8” is

considered lucky. But the same strategy works.

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WARNING!

MARKETERS NEED TO PAY MORE ATTENTION

TO THEIR PRICING STRATEGY

The right price can make all the difference: price too low and you miss out on profit, price too high and you miss out on sales.

Understanding what you can charge isn’t as straight forward as asking consumers what they are willing to pay:

• Consumers want something for nothing

• Consumers don't really know how much a product or service is worth

• Consumers can’t gauge what a fair price to pay is without some sort of context—so give them one of your choosing.

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WHAT DOES THIS MEAN FOR MARKETERS? $

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Marketers need to:

Monitor competitors prices to avoid become a ‘price decoy’.

Understand that consumers are not price makers.

Understand that consumers compare and contextualise the price value trade-off of your product/service offerings against that of competitors.

When researching price, simply asking “how much would you pay?” will not garner the most appropriate data.

Instead, consider researching price through trade-off exercises such as conjoint.

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line.” William Poundstone: PRICELESS

“ A small change in price can make a huge difference in profitability—because profit margins are small to begin with, adding a percent or two can boost profits immensely. Very few interventions can have such an effect on the bottom line.”

William Poundstone: PRICELESS: The Myth of Fair Value and What You Can do About It.

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line.” William Poundstone: PRICELESS

Acknowledgements

Shamvir Singh, Northstar, for the presentation format and the opening and concluding points (available on SlideShare)

John Jantsch, DUCT TAPE MARKETING

Professor Dan Ariely, PREDICTABLY IRRATIONAL

William Poundstone, PRICELESS

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