One of the key messages I’m trying to inform General Managers about is that when it comes to consumers, we have to be expert psychologists. Nothing is ever as simple as it seems. And when it comes to consumers price is as much a perception as in any other area of consumer engagement.
And that’s good news. There are no universal standards that dictate whether a price is high or low — it all depends on the consumers perception of that price and how consumers learn about how pricing works.
Your job doesn’t end when a customer purchases from you. Whether you want repeat purchases or a continuation of your subscription service, healthy businesses generate multiple streams of revenue from existing customers.
This section will teach you a few pricing strategies that play a role in your long-term revenue. You’ll learn (1) how to make price increases more undetectable and (2) which pricing strategies can damage your reputation.
Make Price Increases Undetectable
In a world with inflation, it’s inevitable. Your prices will increase at some point.
Since most people are familiar with inflation, they’ll be forgiving, right? Surely, they’ll understand.
Unfortunately, it’s not that easy. Despite inflation and other valid reasons, most consumers don’t see the justification for price increases.
Bolton et al. (2003) analyzed that perception. They found that consumers “underestimate the effects of inflation, overattribute price differences to profit, and fail to take into account the full range of vendor costs.” Welp, that’s unfortunate.
Although you won’t be able to eliminate all negative effects from price increases, you can make those price increases more undetectable (without being manipulative).
TACTIC 28: Use More Frequent (Yet Smaller) Price Increases
The easiest way to control price perception is through the just noticeable difference (JND).
Just Noticeable Difference – The minimum amount of change that triggers detection (i.e., the difference that’s just noticeable)
If your price is $11.79, an increase to $14.99 will be more noticeable than a smaller increase to $12.99. In theory, that concept is really intuitive. Obviously people will notice larger price increases.
In practice, however, that principle is very counter-intuitive. Since businesses are afraid of increasing their prices, they often save that tactic as a last resort. They wait until it’s absolutely necessary to do it.
However, if you reach that point, then you’ll usually be desperate for revenue. You won’t be able to increase your price by a tiny amount. You’ll need to increase it by a noticeable amount.
What should you do?
If you know that you’ll need to increase your price eventually, you should use more frequent (yet smaller) changes. Avoid waiting until the moment of desperation.
With more frequent price increases, you also avoid reinforcing a concrete reference price. If your price stays the same for years, then people will become accustomed to your price at that specific level. Once you change your price, people will be more likely to notice.
TACTIC 29: Downsize a Feature Besides Price
You can also use the just noticeable difference for other aspects of your product.
Food marketers know that consumers are pretty familiar with prices, so they often avoid price increases by reducing the physical size of their products (e.g., potato chip bags, candy bars, etc.).
By reducing physical size by a small amount, food marketers lower their costs and increase their margin. More importantly, they increase their revenue without increasing their price (or alerting people to any negative changes).
If you decide to downsize your product, you should reduce the size of all three dimensions — height, width, and length — by an equal amount. Consumers are less likely to notice a change in all three dimensions (Chandon & Ordabayeva, 2009).
Downsizing a feature in your product can be risky. If consumers detect a mischievous intent, you can lose trust and lower sales.
To maximize your revenue, you need to maintain and cultivate customer loyalty. The next strategy will describe certain pricing strategies that could damage your reputation.
Related Resources:
- 4 Ways to Get Customers to Add More to Their Cart — Tim Ash
- How to Earn Repeat eCommerce Customers — Armando Roggio
- Getting Started With Customer Churn Analysis — Dan Andrews
- Maximizing Your Profits With Pricing — Andrew Youderian
- 3 Ways To Charge More for Your Products and Services — Joseph Putnam