The psychology of prices
For a company, prices act as a major lever on earnings. For the customer, the price list is decisive in how he makes his purchase decision — or not. The price list thus becomes one of the most important elements in the purchase decision process. Many companies limit their pricing far too much to price points. A lot of effort is put into trying to answer questions like “Can I sell my product for 130.- or for 140.- Euro?”. Yet pricing is about much more than setting price points.
In my understanding, a price list, which includes an individual offer, is a communication medium and an important link between customers and suppliers. A good price list leads to a dialogue based on partnership. It gives the customer an orientation and explains the products and services offered in an easily understandable way. A good price list offers the customer choices and supports him in selecting an offer that suits him by bundling the products and services. The provider understands the needs and preferences of its customers even better through a well-constructed price list. He can talk about his services and the created benefits by means of the price list. He attracts new customers with an entry-level offer, and then sells them higher-value offers in a later phase. By precisely offering options and add-ons, it generates attractive additional earnings. All this shows that a price list or quotation is an effective tool for an intensive exchange with customers about the services and their benefits.
The most important thing in pricing is a good understanding of the customer’s needs and the benefits and value created for them. This understanding is the basis of price differentiation. Price differentiation involves using product variants to address different customer needs. In this way, you not only reach a broad spectrum of customer segments, but also increase their willingness to pay at the same time. Consider, for example, the Starbucks offering. Product variants such as espresso, cappuccino or caramel frappuccino address different customer segments and increase their willingness to pay. An espresso is sold for 2.49 euros and a caramel Frappucuccino for 6.49 euros.
Price differentiation has another major advantage: it enables the use of psychological price levers. These are based on irrational psychological processes that additionally stimulate customers’ willingness to pay. These processes include, for example, “anchor prices”: at the moment when the customer perceives a high price for a high-value product variant, the prices of the product variants below appear lower in his perception. Another example is the “compromise effect.” Many customers perceive the product variant in the middle as the best compromise between price and performance and therefore choose it.
We recommend an agile and value-based process of pricing to our clients. In the first iteration, you structure your customer segments, describe your products and services, analyze your costs, the market and competitors, and define your pricing strategy. This involves considering how to meaningfully bundle or unbundle your products and services and how to design possible product variants.
Then you choose the best price metrics, e.g. per piece or per user. At the end of the iteration, one sets the price points. Here we usually recommend a heuristic approach to our customers. This is derived from the selected pricing strategy, is based on a structured value analysis and draws on historical experience. The goal of the first iteration of pricing is to design a price list — a “Minimal Viable Pricing Model”, so to speak. This design is then continuously extended, refined and validated in further iterations. At the end of the process is a go-live pricing model. But even after this pricing model has been introduced to the market, it is worth monitoring and developing it further. Research shows that companies that continuously optimize their pricing models are more successful than those that do not do so at all or do so only irregularly.
About Christian Wirth
As managing director and founder of Optimal Price GmbH, Christian has been supporting companies of all sizes and from all industries in value-based pricing since 2014.
He specializes in pricing SaaS solutions and innovative, technically advanced products and services. The MUTUVAL solution he developed features a comprehensive approach, a value-based methodology and an agile pricing journey. He has more than 20 years of experience with subscription and usage-based business and pricing models. Its customers include the telecom, automotive and financial industries, Swisscom AG, Mercedes-Benz AG, MCC smart GmbH and Swiss Bankers Prepaid Services AG.