Test your prices

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. Here is part 3 in a series on consumer pricing perception.

Could you be hacking and slashing away at your own profits just because you aren’t offering enough pricing options? Take a look at our title picture- everything priced the same, could there be opportunities to price differently to increase revenue and profits? According to William Poundstone, author of the book Priceless: The Myth of Fair Value, it’s very likely that this is the case.

In his book, Poundstone examines the purchasing patterns of consumers on a selection of beer just up my street. In the first test, there were only two options available: a regular option and a premium option.

Test #1

(Images courtesy of Nathan Barry)

Four out of five people chose the more popular premium option- wow that seems good. But could adding a third item and price point increase revenue by targeting those looking for a cheaper option? The researchers tested this by adding a $1.60 beer to the menu.

Test #2

The cheap beer was ignored and it upended the ratio of standard to premium purchases. This was clearly the wrong choice, since in this instance anchoring is actually playing a negative role. If customers don’t want a cheaper beer, perhaps a more expensive beer might work?

Test #3

Perfect!

These examples clearly show how important it is to test out different brackets of pricing.

This is especially true if you believe you may be undercharging. Some customers are always going to want the most expensive option, so adding a super-premium price will give them that option and will make your other prices look better by comparison.