Price, choice and buyer psychology: how understanding these factors can increase your sales.

Posted on May 14, 2012 by andrew.gregson

In a Ted talk (http://www.ted.com/) a few years ago (http://www.ted.com/talks/lang/eng/malcolm_gladwell_on_spaghetti_sauce.html), Tipping Point author Malcolm Gladwell spoke about the role of choice in buying decisions. When discussing pasta sauce, the manufacturer wanted originally to know what the customer wanted. From that information they would craft a product to fit the customer taste. Was the customer demanding chunky, spicy or smooth pasta sauce? Market research came back with a carefully crafted statistical analysis showing that most people wanted smooth.

By offering only smooth pasta sauce, however, they would have missed market niches looking for chunky and spicy with a consequent loss of market share in pasta sauces. So the statistical answer was correct but insufficient for a business decision.

When you look at coffee sales, you get the same results. In focus groups some people will tell you that they like bold coffee with lots of body. Others like lighter roasts and yet others like it milky. But an homogenised market survey will show that statistically most people drink weak, milky coffee. Again, making a coffee for the mainstream market means foregoing some market share. Taking the statistically significant middle ground means that portions of the market on either side of the middle are not served by your product or service.

But too much choice is a sales killer. People like choice but not too much choice. They want an economical option, a middle of the road offering and a quality choice. They don’t want 57 choices because it is just too much information to have to absorb, digest and thereafter make a decision. Three or four and never more than 5 choices reflects the optimal options in a buying decision.

Too much choice, as a study of dating sites revealed (Economist: Modern Matchmakers; http://www.economist.com/node/21547217) leads to confusion with no transaction at all or where the potential “customers” boiled down everything to the lowest common denominator. On dating sites, and in speed-dating, the lowest denominator became physical attributes. In the business world that would be price.

Sometime in the late Jurassic, I worked for the largest appliance distributor in Western Canada. Although not directly involved in the sales operation, I went along to a sales meeting in preparation for a huge week long sale being mounted in Vancouver. The sales manager Derek, advised the sales staff that, of the 3 models, model A was the one with all the bells and whistles and sold for the most money. But there was limited inventory, so don’t focus on selling this one. The middle version was the one with the most inventory and best gross margin. This is where the effort should be focused. The 3^rd model was the cheap and cheerful model being heavily advertised. The sales manager advised them that if they sold a cheap and cheerful model, he would fire them. Although now discredited as bait and switch selling, the example is of

Can you use this strategy in your business? Are you offering an homogenised product at an homogenised price? Are you leaving money on the table from customers who would like the best option and are prepared to pay for it? Are you missing out on sales of an economical product or service that could increase your brand recognition, walk-in traffic and overall revenue?

Can you offer a good better best option?

Think of your struggles against the big box stores and their purchases of overseas products. The box stores sell on price alone and can beat you on price every day of the week. But they do not typically offer anything more than the cheapest available. But you can. On any given day, I might need a hammer. So, I go to your store and you have the cheap and cheerful hammer made in China hammer selling for $9.99. Right next to it you have a made in Canada model selling for $19.99. Today I have $15.00 in my pocket, so I buy the offshore product. I am not a contractor and use a hammer 4 times a year, so I don’t need the best, just something that will frighten the neighbours.

In the final analysis you cannot know your customer’s purchasing power without asking for their budget. You cannot know if the customer is a contractor or a weekend warrior, unless you ask lots of questions. In the absence of good information, offering a choice of products in a tier of prices is the best way to capture all the market niches and build your business.

DON’T MARRY THE UGLY SISTER

Posted on February 4, 2012 by andrew.gregson

just fizzy white wine at a price

A business owner must see his business as a daily battle to create differences between his bakery and Billy’s bakery across the street. A victory in this battle means that customers will pay your price for quality, convenience or selection. Defeat means that your customers will reduce everything to the simplest comparable state – apples to apples, loaves to loaves – and dollars per unit. This is how customers will make a buying decision, by boiling choices down to the simplest common denominator- a situation what will certainly occur if you do not strive to offer value and which will result in you dropping your prices to compete.

Commodities like flour, pork bellies and water are traded on the world market on price alone. A successful business should be striving on the other hand to steer away from stark YES or NO decision and present itself as that highly desirable, nutritious, refreshing, sexy and distinctive water that will have the neighbours “oohing” and “aahing”. That is how you get your price.

In some instances, price is an indication of quality. Selling cheap means a substandard product in some customer’s eyes. Don’t sell me clothes. Make me attractive, stylish and self-confident!

Consider champagne, which is only fizzy white wine after all, but with typically higher prices. But the makers have kept improving sales in a market for alcohol that is uniformly declining across the developed world by positioning champagne as the special occasion drink. Could you imagine celebrating your 10th wedding anniversary with a bottle of Pepsi? I can imagine the divorce lawyers having a giggle over that one.

In the 1970’s when Ford was having huge quality problems in its Lincoln models, the company brass instructed the sales people to phone and ask customers about the performance of their new cars. This created a torrent of warranty claims from all dealerships across the country – except for one. At that dealership the sales staff did not ask if there was anything wrong with their purchase – implying something negative. Rather, they tapped into the reason that people bought a flashy expensive car in the first place. They phoned to ask how the neighbours liked the new car. This time the response was totally upbeat.

If your business wants to be successful, then don’t marry the ugly sister by putting price on the table before you have offered value. In your store or sales presentation, value should be offered first and price last. You alone can prevent the customer from taking the easy route and making a comparison on price alone. If you introduce price in the first breath, you have just told the customer that their choice must be on price alone and your efforts to add value after that are wasted

So where is the value? What makes your product especially good and a benefit to all who buy it? Is it healthful? Will it save time and money? Is it the best fit and best looking blouse on the racks today?

If you are selling something wherein everyone knows the price, like crude copper, say; what is the value proposition in dealing with your company? Is it the payment terms? Free delivery? Just in Time delivery? The sexiest sales staff? Do you have acres of parking? What value is buried in the price that you can bring into the sunshine for your customers to say “ooh” and “aah”?

Nevertheless, if you truly believe that your business can only compete on price, consider this. There is a product made from two commodities – water and flour – which are sold worldwide on price alone. In turn, this mixture should be the perfect commodity product. Right?

But, this dried paste of flour and water has over one thousand different market niches. And it has created all these niches and price points not by changing the use of this food product or even its flavour. The Italians have altered only one variable for this product – the shape of the food!!?? It’s brilliant! It’s pasta.

HOOKER-NOMICS

Posted on January 9, 2012 by andrew.gregson

A DELIGHTFUL IF SOMEWHAT BLUSH MAKING ARTICLE. ASYMMETRICAL INFORMATION AND HOOKER-NOMICS

Assigning a price to a product is always tricky. But what if the product is illegal and the value subjective? Setting Allison Schrager discusses the matter with a happily self-employed prostitute. “I’ve always wanted my own business,” says Andrea …
Special to MORE INTELLIGENT LIFE
Andrea, an attractive, petite red-head, with a warm smile and a degree from a top Canadian university, sits across from me, sipping an herbal tea. She has been working as an independent, high-end prostitute for the last four months. I ask her how she decided to set her fee, now at $500 per hour.
How does a supplier determine a price?
Like most independent escorts in the New York metropolitan area, Andrea advertises on the Eros guide, an online listing service. She is in the VIP section, which Eros describes as, “A very special limited list of entertainers”. To be listed as an Eros VIP, Andrea shells out about $200 more per month, on top of the regular monthly fee of $175. (The cost of being listed varies in each city, and VIP add-ons can cost more.) This is her way of signalling that she is a high-end product, offering better quality service.
The going rate for VIP escorts on Eros ranges from $400 to $2,000 per hour, be they women, men or “she-males”. A search through the female listings yields an array of escorts who all claim to be well educated and worldly, and appear exceptionally attractive. An escort’s fee is determined by the provider or agency; Eros is merely a clearinghouse.
“I only charged $300 when I lived in San Francisco,” Andrea says. Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) There are only about 30 VIPs in San Francisco, but nearly 100 in New York, so Andrea can charge more here. The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.
In any non-competitive industry, setting a price is a supplier’s way of communicating value to a customer. When information is imperfect or asymmetrical (ie, when customers don’t know enough about a product, or when suppliers are ignorant of their value relative to their competition), prices deviate from their market value and the market becomes riddled with inefficiency. This is why tourists in midtown Manhattan spend too much money on fake antiques, and why my local laundromat will wash and dry my clothing for half the price of rival cleaners across the street.
For a prostitute, the asymmetry is more profound. On the supply side, it is challenging for Andrea to price herself relative to her competition. Despite the publicly available listings of prices, photos and expertise of fellow escorts on Eros, it is impossible to know if these other women provide comparable services. On the demand side customers cannot be certain that the product resembles the advertising. And much of the value is merely hinted at, owing to the illegality of prostitution.
The credit crunch means customers have become more price-sensitive. Andrea now receives more requests for an hour of her time instead of two. One woman on Eros is currently offering “Wall Street adjusted courtesy rates”. But given the role price plays in indicating quality, rates will probably remain sticky.

“I could do lots of other jobs, but this what I want to be doing”
Andrea first considered the industry after watching the 1967 film “Belle de jour” with her then husband some years ago. (She is now divorced.) She found herself inspired by Catherine Deneuve’s character–a married woman who worked as a prostitute by day–and saw this as a life she might like to lead. Upon exploring her own sexuality, she discovered she had a special gift: “I can be turned on internally,” she explains. “I don’t need that hot guy in front of me, it comes from within.”
Employed as a personal assistant, Andrea began looking for more interesting work. She was intrigued by an advertisement on craigslist for “Very personal assistants.” The job, she discovered, entailed a mix of secretarial work and the odd sexual act. For her first time, she let the man set the price: $200. They proceeded to have what Andrea describes as an “amazing” sexual encounter. Afterward she realised that she could ditch the secretarial work and make more money “just doing the fun stuff.”
She tentatively began advertising herself on Eros, and set her fee at $300 an hour. (Friends in the industry recommended the site.) This price was higher than what women charged in the craigslist classifieds (considered the dregs of the industry), yet lower than the going rate on Eros. New to the industry, she felt she was not yet worth a higher rate. She raised her price upon moving to New York last autumn.
In outlining her value, Andrea boasts that she does not merely provide sex, but also a vital service. She prides herself on being in tune with the desires of her clients, and maintains that she enjoys the experience. For her single male customers, she provides needed intimacy. For married ones, she says filling an “emptiness” in their lives can enhance their relationships with their partners.
“I love what I do,” Andrea tells me. “Many of the girls hate it, but I love it. I could do lots of other jobs, but this what I want to be doing.” Andrea concedes that she’s still new to the field, but her pleasure seems genuine.

Learning the tricks of the trade
Selecting an escort is tricky, given the limited information, daunting range of prices and questionable legality of the enterprise. There are services to aid consumers, such as the Erotic Review, a popular website that offers thorough reviews of the physical and sexual characteristics of escorts (on a scale of one to ten). The VIP section reads like the Penthouse forum (VIP distinction is quite pervasive in the industry).
Yet this information can also be unreliable. David Elms, the original owner of the Erotic Review, was accused of accepting bribes in exchange for posting positive reviews. Yet even when reviews are posted in good faith, experiences with a single escort may vary according to the circumstances. The variability in dollar value for a single escort’s service is a phenomenon known as YMMV (Your Mileage May Vary).

Favourable reviews let escorts charge higher fees, but also increase the risk of alerting law enforcement officials. This is because the site makes plain what Eros leaves to euphemism (“escort services” can mean many things.) Andrea has taken several measures to evade legal action. Customers must contact her through her website and provide a real name and phone number. The number must be a main line at a verifiable company, not a personal extension. Self-employed clients need a reference from another escort. Neophytes must seek services elsewhere first.
As many as 100 visitors come to her website each day, Andrea proudly discloses. (Activity on the site certainly peaks on Fridays at 1pm.) Her site features many alluring photographs, and she wears some clothing in all of them. Nudity signals low quality.
Andrea learned some tricks of the trade from other women in the industry. Independent providers have a loose sorority, even though they compete with one another. Escorts maintain a website called the National Deadbeat Registry, which features advice such as: “Stay emotionally healthy by being emotionally detached.” Also: “Many clients have issues with women, and therefore do not, or can not, have normal healthy relationships with women. That is why they pay for your time and services. Keep this in mind and remember to not ever get involved, date, or marry your customers.” (So much for nursing “Pretty Woman” fantasies.)
The Deadbeat Registry also names and shames errant hobbyists (men who patronise prostitutes), be they undercover police, insolvent or violent, and highlights those who fail to show up for appointments (a common problem). Andrea tells me about a hobbyist who always paid with a credit card and later disputed the purchase. He did this to several women; once they learned of their shared foe, they banded together and informed their client’s boss of what was being done on company time with a corporate card.
“I consider myself an entrepreneur”
Without the support of an agency, Andrea must manage some tedious aspects of the business, such as operating her own website and covering the costs of advertising, health care, photos for her website and personal grooming.
Working independently is less stable, as agencies tend to provide a more steady stream of clients. But Andrea considers working for an employer degrading, and is uncomfortable with someone else setting a price for her services and profiting off of her body (agencies often take a 50% cut). She prefers choosing her own clients and deciding on what she is willing to do with them. “I am solely responsible for my own mistakes and successes,” she says. Having and respecting boundaries is important.
“I’ve always wanted my own business,” she explains. “I consider myself an entrepreneur.”
Agencies often charge higher fees because they claim to offer customers greater accountability. They are seen as more customer friendly and enjoy the advantages of economies of scale, making the costs of screening clients and marketing escorts lower than those for independent providers. Yet Andrea reckons working for an agency has become more dangerous, as law-enforcement officials are more inclined to crack down on larger networks to expose more customers. At any rate, internet listings have enabled more independent providers in recent years
Slouching towards economic equillibrium
In cases of extreme uncertainty on the part of consumers, such as when shopping for a used car, the convention is to expect a “market for lemons”. Used-car salesmen are widely seen as a sleazy bunch owing to incentives they have to lie about a car’s quality. Because buyers presume a good chance of fibbing, most will only pay a low price for a used car. This could deter honest brokers, and ensure that only lemons are indeed on the market. Honest salesmen of quality cars can break this cycle and charge more, but only after building a reputation for good value.
Similarly, some assume that the only kind of women who would sell themselves at any price are of poor quality–ie, lemons. Especially valuable escorts who are exceptionally attractive, appealing and skilled, say (ie, in short supply), can break this perception of low value by charging exorbitant prices. (The high prices are also a factor of the illicit nature of the product.) Fees can reach astronomical heights as a supplier builds a reputation. In this way high-end prostitutes can escape the “market for lemons” perception.
Self-employed service providers always struggle to determine what the market will pay for their work. The aspiration is always to find the price that enables economic equillibrium, where supply equals demand. But when the product is sex (human capital in the purest sense) the problem becomes more personal and the information more scarce. The escort industry has developed unique ways to signal value and to overcome information asymmetries. Time and experience should help Andrea to approach her own personal equilibrium price.
(Allison Schrager is an economist based in New York. She keeps a website with links to past articles.)

7 PRICING MYTHS

Posted on November 30, 2010 by andrew.gregson

Businesses owners recycle old myths about their businesses and their industry in an attempt to simplify and understand their own circumstances. But the myths will not bear much close scrutiny. Here are 7 de-constructed myths.

1. ALL my competitors buy better so they can sell cheaper; and that explains my poor sales.

This is a trifle unlikely. Globalization of supply chains has made it simple for even small store owners to source the best. The suppliers play games, of course, with volume discounts, rebates and other sales devices to push up sales. But, to blame the supply chain for poor sales performance is a red herring that deflects attention from other business problems.

And a final comment – Why is cheap the only measure of value you offer your customer base?

2. Business owners deem that 45% of the time, price is the most important factor influencing a sale. Customers, by their own admission, go to a competitor because prices are too high, only 25% of the time. Quality and customer service rank higher in the customer mind when deciding whether to buy a second time from you.

3. Every customer who says we are too expensive, is RIGHT.

There are customers for whom free would be too expensive. Remember too, that sticker shock can be a buyer’s strategy to get you to lower your price. There are some customers who buy on price alone but they need to be gently pointed in the direction of a competitor.

4. If sales drop, then it is the fault of high prices.

Really? Wouldn’t industry figures indicate a general contraction of the entire industry, particularly during a recession? If market share remains the same, then price is not to blame.

5. Yes, but! If you look only at a few select items, to the exclusion of others, then my prices are bad across the board.

It is unlikely that all prices are poorly positioned. Most regular buyers of a particular product or service can recall 10 prices alone. That appears to be the maximum number of prices we can remember and only through constant reinforcement. So, in a store selling 1000 items, 990 things have no comparable in the mind of the buyer.

6. My costs are the only factor to determine prices.

Prices are determined by a whole host of factors NOT related to costs. Among them are: volume discounts; 30 days to pay; free delivery; free installation; free support; and free add-ons. These factors drive up costs but are not reflected in pricing.

7. Being the cheapest price is the only factor that influences a sale.

This cannot be true. With items of fashion or taste, higher prices are associated with better quality or social standing. There are cheaper sneakers than the ones demanded by teenagers so that they are “cool” in their social circle. And diamond rings would not be the symbol of undying love if they cost $4.95, right?

A Pricing Strategy for Small business – why dynamic pricing works

Posted on November 23, 2010 by andrew.gregson

We all know that business absolutely refuses to follow those beautifully consistent budget numbers; that revenues rise and revenues fall day by day and month by month. So, at certain times of the cycle, demand is low and at other times it’s high.

But we often set prices once and for all, ignoring these demand cycles. And what does that mean to profits and sales?

On this graph, demand, in blue, rises and falls. The price in dark red is a straight line across the time scale. Demand rises above the price line and then dips below the price line.

When demand is high, sales and profits roll in because the price is lower than would be predicted by a simple analysis of demand and supply. But, when demand dips below the price line, the company is priced out of the market. Below the line is lost sales (RED areas) and above the line is lost profit. Why?

If demand is high and you are the lowest price, you get the business but you have given up a profit opportunity to carry you through the business cycle.

If demand is low and your price is high relative to the demand, then no one buys from you and sales go down.

This can be changed. Dynamic pricing takes into account micro changes in demand and adjusts the price accordingly. We have all seen this. Hotels charge a premium in the high summer months but offer bargains in the winter. Want to rent a moving van at month end? Pay the price! And of course, gasoline prices shoot up just before the first long weekend of the summer. Airlines used to reward the late arrivals at the airport by offering best price seating in response to an analysis that it was better to fly with a passenger in the seat at any price than flying empty. Of course, they found that this rewarded bad behaviour and have reversed the offering, charging more to the last minute traveller.

On a more sophisticated level, the Economist reported the use of dynamic pricing software being used in pubs in London to reflect demand during “happy hour” right after work, versus the early evening drinking crowd. Prices moved by the quarter hour.

Dynamic pricing also works for longer time scales. Every year in the Pacific Northwest of Canada , the lawn mowing season opens in April. Almost immediately, there is a rush to get the mower tuned up or repaired. One repair shop owner contacted his customer base in the dead of winter and offered special pricing and free storage for machines brought in immediately instead of waiting for the mowing season to begin.

Smart ideas for smart times! Dynamic pricing works.

HOW TO BUILD A CONTRACTING BUSINESS

Posted on August 30, 2010 by andrew.gregson

HOW TO BUILD A CONTRACTING BUSINESS.

“If I had cheaper prices, I would have more and happier customers.” Most contractors believe this statement. However, it is really an assumption not supported by research and facts.

Do customers really leave because of high prices? Independent research suggests NO. While business owners firmly believe that 45% of customers don’t purchase a second time because of high prices, customers blamed high prices only 25% of the time.

On the other hand, while business owners firmly believe that only 22% of customers did not return due to service problems, customers blamed poor service 75% of the time.

And, while business owners firmly believed that only 18% of customers did not buy a second time because of quality problems, customers blamed poor quality 32% of the time.

So what can a contractor do with this piece of evidence? Remember that low price is often equated with CHEAP. No one wants to buy cheap but they do want value for money. And value for money according to this study is equated with GOOD SERVICE first, and GOOD QUALITY second.

Andrew Gregson has 15 years of experience as a business consultant to small and mid size businesses in Canada, the United States and the Caribbean. To date, Andrew has analyzed and assisted over 130 businesses in the service, wholesale, distribution, manufacturing and logistics sectors.

Andrew owned 3 businesses in Vancouver and dominated his market segment for 13 years. In 1997, he sold the business and went to work for a Chicago based management consultancy.

Andrew Gregson’s book “Pricing Strategies for Small Businesses” is based on the experience accumulated over many years of working with his clients in North America. Andrew is a graduate of Simon Fraser University, the University of Western Ontario and the London School of Economics.

Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
http://www.pricingstrategies.ca
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
toll:1-888-959-0752
andrew@pricingstrategies.ca

Find the Value and find the Profit

Posted on July 26, 2010 by andrew.gregson

In this market place, customers are relentless at hunting down the lowest possible price. And to be completely fair, quality and value come in a poor second if you have limited funds to spend.

But bargain hunters come in 2 flavours. First, as above, there are the customers who will drive across town to save a dollar because they need that dollar. For the rest however, they are trading dollars for quality or perceived value.

Let’s assume that you have qualified the customer for their spending budget. No point in test driving BMW’s if the budget is $2,000, right? The challenge in your small business, whether it is a retailer, contractor, service provider or distributor is to find real value and shove it into the full glare of the sun.

So, having established that the budget is $2000, you proceed to offer the items at that price point. About now your sales training should be kicking in and you have, in your mind, carefully marshaled all the features and benefits that the customer will enjoy if they buy this product

First, a terrific item with 16 wonderful features at $1999.You list each feature, its advantage and the benefits to the buyer, if he buys it. Only at the end is price mentioned.

If the buyer does not reach for his wallet, then you move down one level to the next item with 4 benefits stripped away – yes, you must mention that these features are now gone – but now costing only $1600.

And if there is no response there, you present the 3rd choice, of an item with 10 benefits removed which undoubtedly means the customer has to do more of the work personally, but now costing only $999.

In my store I sold replacement barbecue parts. They were original parts from the manufacturer (OEM) but cost more than the universal parts my competitors sold. My sales pitch was that my competitors’ parts were cheaper and required only a SMALL amount of assembly before use. The customers bought the slightly higher priced part because the benefit received was less stress at having NOT to follow a printed instruction sheet.

The implication in this little homily is that a little bit of focused sales training combined with a harsh look at your product or service can attract bargain hunters you can sell to. If you identify the value in your product or service and communicate that with some honesty and sincerity, the cash will flow and the profit will appear.

Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
http://www.pricingstrategies.ca
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
toll:1-888-959-0752
andrew@pricingstrategies.ca