This is week four of my psychology of pricing series. Where I share research-proven strategies to influence people to part with their hard-earned money, some of these pricing tactics work great with your design business, and many of them are perfect for helping your clients get more sales.
As previously mentioned, I took the tactics I’m sharing here from an article by Nick Kolenda on his website nickkolenda.com on the psychology of pricing. Nick has links to many of the studies I mention in these episodes.
Let’s get on with the list.
Tactic 29: Create a Payment Medium.
If you’ll recall the last episode, I talked about the Pain of Paying. That feeling we get when we have to part with our hard-earned money. Tactic 29 offers a great way to reduce that pain by creating a payment medium between the money spent and the purchased product.
What is a payment medium? Casino chips are a great example. When gambling at a casino, it's much easier to place a $10 or $20 chip on the table than it would be if you had to put a ten or twenty dollar bill down. Casino chips act as a buffer between your wallet and the act of betting, which reduces the Pain of Paying.
Another way this works, and possibly a way for you to incorporate this into your design business, is with advanced payments.
If you charge clients by the hour, Instead of offering a monthly retainer agreement, you may instead offer a discount if a client pays for a pool of hours upfront, to be used at a later date.
For example, if your regular rate is $100 per hour, twenty work hours should cost $2000. However, you could offer clients twenty hours of work to be used later for $1900. Your client would get 20 hours of your time banked for future use at a discounted price. The next time they have a design project, it won’t cost them anything because your time is already paid for. This creates a payment medium reducing the pain of paying.
Should the client have a design idea they want to explore, it will be much easier for them to justify spending hours they’ve already paid for than it would be for them to justify spending the money on their idea even though it works out to the same thing in the end.
Another thing to consider is a refundable deposit. Someone starting a venture that requires people to open an account to make purchases may require them to make a $50 refundable deposit when opening their account. This $50 can be used for future purchases or returned should the purchaser decide to close their account.
Since the money required to open the account is refundable, there will be less resistance to depositing it. More importantly, the deposit now acts as a payment medium. People will be more willing to spend it on a purchase since it doesn’t feel like money coming out of their pocket.
Tactic 30: Avoid Language Related to Money.
This tactic works great when combined with tactic 29 above. Instead of referring to deposited money as money, you may want to refer to it as something else, such as credits.
For example: Instead of clients buying 20 hours of your services. You have them buy 20 design credits, where each credit is worth up to 1 hour of design time. Then, when a client asks for a quote on a new design project, you can say it will cost them X credits.
A 2004 study showed that using credits creates an off-balance conversion between the money and the value. This conversion creates a payment medium that is more effective as it’s more difficult for the customer to convert the values.
A client with 20 design credits is likely to be more willing to spend 3 credits on a new project than spend $300 on it. Even though the two are essentially the value.
Tactic 31: Emphasize the Inherent Costs of Your Product.
People don't just care about the perceived magnitude of a price, for example, whether it’s high or low. They also care about the perceived fairness of a price.
Even if you price something low, people could still perceive it to be unfair. The opposite is also true. People could perceive a high price to be fair. It all depends on your pricing method. Cost-Based Pricing or Market-Based Pricing.
Cost-Based Pricing: Prices based on cost factors such as the cost of the materials.
Market-Based Pricing: Prices based on supply and demand or the competition.
Most people view cost-based pricing to be fairer than market-based pricing. And you can increase the perceived fairness of a price by emphasizing the inherent cost of the product.
Since consumers don’t know the actual cost and markup of an item, making the relevant cost and quality information transparent helps them make their purchase decision.
How does this work?
It’s quite easy. Emphasize the product's “top-of-the-line” materials or any other cost-based input.
Instead of advertising a new beverage as Delicious, say something like this new beverage uses naturally sourced organic ingredients. Including this information triggers a more empathetic perception of the price, causing people to imagine it's worth more. This will translate into more people willing to buy it.
Tactic 32: Add Slight Price Differences to Similar Products.
Whenever you have multiple options for a single product, you create a Paradox of Choice.
When presented with multiple options, people feel less likely to choose an option. That’s because once they choose an option, they lose the benefits offered by the other options. This loss aversion causes them to hesitate or postpone their decision. This feeling increases as more options become available.
In a 2012 study, two groups of participants were asked if they wanted to purchase a pack of gum. Each group had two options.
Group 1: Two different packs of gum priced at $0.63 each.
Group 2: One pack of gum priced at $0.62, and a different pack of gum priced at $0.64.
Surprisingly only 46% of people in group 1 chose to purchase a pack of gum. Compared to 77% from group 2. Why did this happen?
It’s kind of weird. When the two packs of gum shared the same price, people perceived them to be less similar. However, adding the small price difference increased the perceived similarity of the two packs.
This happens because when the two packs of gum are priced the same, people can’t distinguish between the two based on price. As a result, they look for other differentiating characteristics making the two products less similar. But when the prices were slightly different, people felt less need to compare the characteristics between the two packs of gum because they could differentiate them based on price.
Since the people in group two focused less on the differences between the two packs of gum, both packs maintained a higher degree of similarity, making it easier for them to choose a pack to purchase.
This tactic is used a lot on Amazon. Items that are available in different colours are priced differently depending on the colour option chosen.
Tactic 33: Use More Frequent (Yet Smaller) Price Increases.
Out of all the tactics I’ve shared with you, this is the one that I find mostly relates to designers.
The idea behind this tactic is to control price perception when it comes to price increases through what is called JND (Just Noticeable Differences).
Just Noticeable Differences: The minimum amount of change that triggers a detection. In other words, a difference that is just noticeable.
Increasing your hourly rate from $50/hr to $55/hr will be less noticeable than if you increased it from $50/hr to $80/hr.
Obviously, people take more notice of price increases when they are larger.
Unfortunately, most businesses, including designers, are guilty of avoiding price increases until it’s necessary. The problem with this is once you reach the point when it's necessary to increase your prices, chances are a tiny amount won’t help much, and you’ll need to increase it noticeably.
Many designers I know still charge the same rate as they did five or more years ago. As the price of everything increases with inflation, they are still making the same amount of money. When they finally decide to raise their rates, they’ll need to increase them significantly to catch up with inflation.
This tactic states that you should increase your rates or prices more frequently but in smaller amounts.
My suggestion is to increase your rates every January. Your clients might not even notice a small increase. And those who do won’t be too concerned with a small increase as they would if you increased your rates significantly.
Tactic 34: Downsize a Feature Besides Price.
The concept of Just Noticeable Difference can be used in other ways as well. It's used all the time in the food industry. Instead of raising the price of something, they reduce the size instead.
For example: Instead of raising the price on a 500g bag of chips, the chip company will instead use the same size bag at the same price but reduce the contents to 450g. This saves them money, and most customers won’t notice they’re getting fewer chips in the bag.
A variation of this tactic can be used when negotiating prices with clients. If a client thinks your price is too high. Offer to reduce it by removing a feature from the project. And make sure the feature you remove is worth more than the amount you reduce the price by.
More to come.
Next week I’ll conclude this series with the final tactics in the psychology of pricing.