Your Pricing is a Signal to Customers
August 14, 2018
Recently I gave a presentation to a group of business owners on pricing, specifically how pricing is the most important driver of revenue and profit growth in a business. To understand pricing, it’s important to understand the value equation customers sort through as they evaluate a purchase. Regardless of whether they consciously realize it or not, customers weigh a comparison in their head: does the value received from this product or service exceed the cost of purchase?
After my presentation, I received a comment from Hans Meier, a friend of mine who was in the office products business at the time. Additionally, Hans is a phenomenally talented wood craftsman. He makes a variety of wood decorative items, toys, and puzzles, teaches other craftsmen, and exhibits at weekend trade shows. (You can find some of his excellent work here.)
Hans shared that he started making wooden fret crosses. Wooden fret crosses can be extremely ornate and intricate—beautiful works of art. Hans had made several large ones, which he had priced at $40 to $50 each. Despite their beauty, the crosses were just not selling, and in, turn this led to another problem: these crosses had been to 8 to 10 different craft shows and had not sold.
Finally, out of frustrations at one show where again the crosses were not selling, and not wanting to have to lug them back home again, Hans decided to mark them down and get rid of them. When pen in hand, he started changing prices.
“WHAT are you doing?” a voice called urgently from the next booth. A lady who was exhibiting her crafts next to Hans’s booth was curious.
Hans told her the saga of his crosses, and how he wanted to mark them down to get rid of them.
“NO,” she replied emphatically, “don’t do that!”
Exasperated, Hans handed her the pen. “OK then, you price them,” he sighed.
She took the pen and made new tags for the crosses, pricing them from $125 to $150 each. During that same show, Hans sold three crosses at the new, higher prices, to three different customers.
Hans now routinely sells these ornate crosses for $175 to $225 each. That’s about four times more than before his fellow exhibitor took that pen and in just a few short moments, completely transformed the profitability of those products.
As business owners, we need to understand that our price is sometimes interpreted as a signal by customers: a signal of quality, or lack of it. Readiness to discount or markdown may be interpreted by the client as an admission that the product or service really doesn’t have that much value after all. In such cases, discounts may actually not actually drive a sale; on the contrary, the signal sent by a discounted or low price may drive the client away and into the arms of another provider whose higher price signals better quality.
In the case of Hans and his decorative fret crosses, a higher price reinforced in the minds of buying clients what they came to a craft show to purchase: an intricately carved, handmade item made by a master craftsman. Hans’s original, much lower price may have been interpreted by potential buyers as a signal these items were of much lower quality and craftsmanship.
If you enjoy craft beer or wine and you’re not really a connoisseur, think about how you order in a restaurant, confronted by a list of beers and wines, some of which you’ve had before, some of which you’ve never heard of. What’s your first impression of the $8 glass of craft beer you’ve never heard of compared to the Budweiser draft? The former has to be good if it’s $8, right?
You don’t have to imbibe to be subject to this phenomenon. What about that delivered pizza from the national chain which you purchased with a discount you accidentally found online, and which comes in a box with more coupons taped on top? How does your perception of the quality of that pizza compare in your mind to the more expensive version you get in a sit-down Italian restaurant which not only doesn’t deliver but doesn’t discount?
This dynamic is not just true in extremely subjective products like arts and crafts or food and drink. What’s your immediate perception of the experience, intellectual depth and advice, and service quality of the attorney advertising on a billboard for a $199 divorce, vs. an attorney who asks for a $10,000 retainer to begin the divorce process?
Understand that your price is a signal to your potential buyers. Price your product or service with care. Those prices may be interpreted in ways you never considered, and can reveal much more about your product or service than you can imagine.
(Pricetag Graphic by Sarah Williams)
(The original version of this post was published at Solopreneur School.)
©Ray Business Advisors, LLC and John Ray
About me: I’m enthusiastic about how changes in pricing strategy can significantly change profitability for a business and enhance life choices for business owners. I live this passion through Ray Business Advisors, my outside CFO and business advisory practice, in which my pricing is exclusively value-based, not hourly. I work with business owners on how they can change their pricing not just to increase their profits, but better serve the wants of their customers. Click here to learn more or call me at 404-287-2627.