How much does it cost? That's the million dollar question, isn't it? How we answer has the potential to drive profit-or not. The fact is that price is a funny animal and one that doesn't behave in anything approaching predictability. Certainly fixed costs play their part in setting the bottom, or break even, price but what about the other end? How do we set prices in a way that doesn't leave money on the table?
Before answering that, we must first understand two important concepts. The first concept is the idea that consumers really don't know what anything should cost. This effect is called coherent arbitrariness. In his book Priceless: The Myth of Fair Value (and How to Take Advantage of It)¸ William Poundstone cites an example that we can all relate to-a trip to the supermarket. "They walk the supermarket aisles in a half-conscious daze, judging prices from cues, helpful or otherwise. Coherent arbitrariness is above all a theory of relativity. Buyers are mainly sensitive to relative differences, not absolute prices."
In previous articles, we've shared the concept of presenting products From Best-to-Basic and the importance this has on effectively conveying value. The second element is anchoring, or setting pricing on your higher and lower products in order to move more of your middle product. In the example below, the Preferred Membership is presented as the Most Popular Plan.
The Premium Plan establishes a high-end anchor at $259 per year (more than $200) while the Basic Plan sets the low-end anchor at $119. Like the middle-sized chair in Goldilocks and the Three Bears, the Preferred Plan appears as the 'just right' plan.
"Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow."
- William Pollard