The Psychology of Pricing – How Your Customers Think

In this episode of Live With the Pricing Lady, we're looking at part one, pricing psychology, how the psychology impacts customers. Sit back and relax and enjoy the episode. Hello, and welcome to this episode of Live With the Pricing Lady. I'm Janene, your hostess. The show is all about helping you build a more profitable business by understanding the tactics and strategies of pricing. If you feel uncomfortable with pricing, you are in the right place because we are gonna help you take concrete steps towards building your pricing confidence. Today we're going to be talking about pricings psychology in the context of your customer. Now, this is part one of a two-part series. When it comes to pricing psychology, there are two aspects of psychology we need to pay attention to. One is the external aspect, which has to do with your customers and with the competencies and the market, and the other is internal to your business. What's going on that's keeping you from doing the right things? We'll cover that in episode two. In this first part, we're going to be focusing on the importance of what your prices are telling people beyond just the number. That's right. The price is never just a number, it's actually a message. Your prices are constantly communicating to customers and they're telling them what to think about your offer. What to think about your business, how you can serve them. They're even communicating about the values of your business. So aside from the number itself, your prices break volumes, and it's important for you to understand what it's saying so you can make sure that it's conveying the right messages. As I said, this is part one of the two part series, so let's go ahead and get started. So first of all, why is it important that you understand this? Math is part of pricing, but there is a bigger impact, and that is perception, and that has to do with the psychology. I always joke with people and say, pricing is all about the psychology baby, and since you can't see me, I'm wiggling my eyebrows when I say that. And it's true. Pricing is a lot about psychology. And when we don't understand that psychology, then we can end up inadvertently doing the wrong things. You want to understand how people interpret the signals or the messages that your prices are putting out there so that you can ensure you're doing the right things. I alluded to already. If you don't understand some of these intricacies of the psychology, then you may end doing things that make it harder for you to close the deal or for clients to understand why that price is a fair price for what you are delivering. Now we're gonna do this in two parts. We're going to first take a look at the challenges that people have when it comes to the external psychology, and then I'm gonna give you some tips on how you can be doing it better. So first of all, one of the challenges when it comes to the psychology is that if you're just using random prices because somebody out there told you you had to use 97 or 2 97 or 2 9 9 9 or whatever it is, and you don't really understand, you're using random prices. Quite often those prices don't actually align with the value that you are delivering. So if you use those prices and there is a misalignment, then customers are going to have a hard time believing that that is a fair and reasonable price. And that can be in either direction. If it's too low, it can indicate that maybe your offer isn't going to deliver people, deliver people the value that they're looking for. And if it's too high, people may think, oh gosh, it could never deliver that. That's crazy. We're looking for a point or a price range that toes the line in terms of the price value trade off. If you're just using a price that someone says, okay, every offer like this has to be this price, then of course you may not be aligned with the value. Now another challenge that people can find in this aspect is assuming that lower prices always equal higher sales. If you use 99 instead of a hundred, you're going to get a more volume out of that. And that's not always necessarily the case. Those sorts of tactics can be effective, but in very specific. Industries in very specific situations they are effective, but you can't apply that across the board to any kind of business. You need to understand which psychology tactics and strategies are going to be the ones that suit and fit your needs and the needs of your customers. Now the third challenge that people have is they don't often take the time to understand how their customers make buying decisions, which means that they don't understand the triggers behind their buying decisions. So I had said this before, but It's worth repeating again here. Now, typically what I see when people set their prices is service-based businesses use a thought process that goes, I do this really cool thing, or We do this really cool thing. Everybody else is charging this much, so I'll charge 10% less. And that's how they come up with their price. And product-based businesses tend to go. We make this really cool thing, or I make this really cool thing, it costs me this much. Let me add 10% margin and that'll be my price. Both of these thought processes leave the customer out of. The equation. So when they're setting their prices, they haven't even thought about the customer and what the customer could really use. They haven't thought about the value, they haven't thought about willingness to pay. They're just kind of, you know, they're using some aspects of price setting. They're important, but the ones that are most important. Important they're ignoring. And that tells me that they also probably do not understand how their customers are making buying decisions because if they haven't included the customer in the thought process, how could they possibly? So that's another challenge because if you don't understand their customer and how they make buying decisions, you don't know what might actually trigger them to buy something. Now the fourth challenge that people have is they underestimate or they completely ignore the impact of how you present prices and how you present a price can make all the difference actually in price acceptance. It's very important and there are some nuances there, and the more that you understand them are aware. And are aware of them, the more that you can use them effectively in your business. The last challenge that people people have here is overcomplicating and confusing buyers. I see this quite often. Sometimes we think, okay, the more we throw at them the more likelihood there is that one thing will stick. And this is really a, a bad way to go about presenting prices to customers. Customers are easily overwhelmed when they're making decisions and. If they feel overwhelmed, then chances are they will go look somewhere else where the decision can be made more easily. We as consumers, as people making purchases, we're easily fatigued, let's say, when it comes to decision making, and so you actually want to present the right amount of information. In a simple way in order to help customers easily come to a decision for themselves. So those are five challenges that people have when it comes to the psychology of pricing. Let me say one more thing about overcomplicating and confusing. So I think, last time I looked, there's, I don't know, like 76 different pricing psychology tactics. I'm sure it's more by now, but there's lots and lots of them, and you're not gonna go and use them all. If you try to use too many of them, you actually will end up. Creating more confusion and hesitation in your customers, you'll make it more complicated for them to make the right decisions. So when we look at using pricing psychology tactics in our pricing, we want to be selective so that we use the right things in the right way at the right time in order to make that buying decision process easier for the clients, but also easy for us to manage. So let's look at five tips or tactics, if you will, that you can start using to help yourself in terms of the pricing Psychology I. And the one of the first tactics that is almost universal is what we call anchoring and anchors. Using anchors is a great way to sort of prime people's minds or prime the client's brains for seeing your price and anchoring. Basically, what the studies have shown is that if you introduce a number higher than your price. Prior to delivering the price and that number is higher, it can make your price seem lower, right? An example of this that I, you know, quite often when I am coaching with clients, I'll say, you know, what is the easiest way to sell a 5,000 frank offer? And they look at me a little cross-eyed and I say, put it next to a 15,000 frank offer, right? Or dollar a year. It doesn't matter the currency. But if you, you know, simply by adding that extra higher priced offer, you make the perception of the original offer. Seem less expensive to the customer. Now, it doesn't have to be a price that you used to anchor it. You know, if you have some copy or a big heading on the top of your landing page, you can use some numbers in the copy there to also help anchor. So there's different ways to use anchoring, but it's important. It's equally important for you to be aware that if you have a really small number. In front of your price, then it can have the opposite impact. Then it makes your price look very expensive. So even if you aren't going to use it proactively, you want to make sure that you aren't doing using the converse by accident and inflating or making your prices seem inflated compared to what they really are. So anchoring can be a very effective tool. This is also why quite often you'll see people have, you know, a really large offer with a very high price. Now, they may, they may never sell that big offer. They might if somebody really wanted it, but sometimes they have it there also simply for the purposes of anchoring. And that's not always the case, but sometimes that can be effective. The sec. Second tip I'd like to use here is, you know, I talked about this a little bit earlier, but it's to use these wisely, right? So charm pricing, that was when I was talking earlier about I. You know, using 99 at the end of your prices. Now that can be very effective in certain retail industries. So where you see that most effective is in re the retail business where people are trying to move a lot of inventory fast and their consumers are generally looking for the lowest price, right? So 9 99 a. You know, in our brains, the way our brains process information is cheaper than a thousand. And so people would be more likely to, to buy that, buy something at 9 99 than they would at a hundred. For example. I. But if you are a consulting business and you're selling your consulting services and you're adding nines onto the ends, it really doesn't quite fit right. And so you have to be careful of this. In fact, the other day, a colleague of mine was. Commenting on the price for a coworking space. And she goes, you know, their price is like 23 Franks and 85 robin which that's in, in Switzerland here. And they're like, why? You know, why would a coworking office have a price that precise? It seemed. Odd, it seemed out of order. That's something you would see in a different industry or in a different context. And we both know this coworking place and we know, you know, they're not trying to, you know, attract. Super cost sensitive people. They actually have a service. Is it a value? And it just didn't align with that business and what we know about them. And you know, she kind of had this like stinky cheese face when she said it because it just didn't fit. So you want to use these toxics wisely in your business, and that's. Probably one of the most important things. It should align with what your customers expect and what fits with your brand and the values of your business. Now for most service-based businesses, not all, but for many, you're not trying to be a bro a low price leader. So it's important that you frame your prices for value and not for cost. So you want to focus on the outcomes that your services bring, not. On the number of hours they have with you or on the different mo modalities. If you're a coach, let's say you have different modalities of working, the value isn't that you can bring these modalities to people. The value is in what they get out of using them, and you are experience with them. And so you need to be able to take that beyond these benefits to concrete, quantifiable value. How do you help them save time? How do you help them save money? How do you help them reduce risk, but quantify those things? It's beyond deliverables, even deliverables the number of sessions, those types of things, and the way that I, you know. Bundle that you know, in terms of what they are, I call those logistics and people don't come to you for logistics. They come for you. What they can get out of, you know, that program that you have or that consulting process that you use. And so you really want to. Focus on what those things bring in a quantifiable sense, and that's what we mean by framing something for value as opposed to cost. When you're talking and focused on the number of sessions, you're focusing yourself and your customer. On costs. They're thinking this number of hours at this rate, that's a cost to me. So that's why you want to shift it to what they're going to gain. I'm going to gain back five hours a week of my life, or I'm going to gain a job, you know, two months earlier than I would if I tried to do this all on my own. So frame for value, not for cost. People buy the results that they expect to get, not just the hours. So the fourth tip here is that simplicity cells the simpler you can make it for people to make a decision, the much. You increase the likelihood that they will choose to work with you. So you want to avoid a lot of options. Earlier last year I had a, a client and she said, oh, can I send you my new land, my pricing page, my new page, and can you gimme some feedback? And I said, sure, send it to me. So she did. And, and I opened it up and I scrolled and I scrolled some more, and I scrolled some more, and I scrolled. I scrolled some more and it was like she had put her entire price list on one landing page and it went on. I, I felt like I was scrolling forever. And as a customer, I mean, even if I go to a restaurant you know, my ability to choose something easily on a menu is directly proportional to how much there is on that menu. And when I visit the US, sometimes I get really just like. In decision overload because there's just too many options on the menu. And it's similar with your landing page or your offers. I saw this even this week that, you know, a customer, they had a really looked at first glance, like a relatively simple summary of their pricing on two slides, right? But when I started doing the math of how many different. Options there were for a customer. Between those two pages, it was well over 20. And presenting a client with, for consulting with 20 different options is gonna be really hard for them to understand where to put themselves. So simplicity sells and you want to avoid having lots of options and you know. Having to explain too much. Keep it simple first, you know, from your conversation, try to understand what it is that they need. Then present them with one or two offers and let them say, yes, that's what we need, or, no, we'd like this, or can we do that? Then you can always bring in. The next level of offer or go down a level and offer rather than just plopping everything in front of them. That's kind of like the lazy man's way of selling, but unfortunately it's also a very ineffective way of doing it as well. So now the fifth tip or tool I have here when it comes to pricing psychology is use social proof. Now, and you've know this, I know you already know this, but it bears repeating because, you know, we like to see the results that other people get. That gives us. Certain level of comfort that we're about to spend our money wisely. Right? And seeing that others have made that investment and that they've gotten the results that. You know, we as a customer are seeking, can make a significant impact on what people decide to do. So use social proof, use it in in different ways. There's, you know, lots of different contexts in which you can bring that into a discussion or bring that into your marketing strategy. Don't be shy about using it. If people have gotten the results, have them share those results with other people or get their permission for you to share them. That's also important when you're using testimonials, recommendations to make sure or to ensure that you. Get their permission for that. But it's very important to utilize that social proof in any pricing strategy because it will help you. You can also use business cases. There's another form of social proof if you have a business case from a client. And you know, if you didn't get. Permission to use their name with it. You may still be able to use it without sharing their name or revealing who they are. I have, you know, some clients who don't want their clients to know that they've been working on their pricing and the way they have. So there are, the important thing here is that you take the opportunity to use it and you use it purposefully. Now one caveat I'd like to add when I talk about these, you know, aspect of pricing psychology over the years, people have often said to me I don't want to use this. It feels manipulative in some way, and I don't feel. It is manipulative. It depends on your intention, right? If you're using social proof, but those aren't things that people have actually said about working with you or those results, or if you're utilizing something with the wrong intentions behind it, then I would agree with you. But what's more important is that if you don't understand these tactics and you. Inadvertently or accidentally do something, and it makes it harder for your customers or harder for you than you're doing them and yourself a disservice. So even if you choose not to use some of these actively, make sure that you understand them so that you don't inadvertently, inadvertently use them in the wrong way. I like to wrap this episode up. With a small challenge. So I suggest that you take 10 minutes this week or 15 minutes to look at one of your offers and answer three questions about it. So one is your pricing, sending the right signals. So take a step back and look at that offer. Look at the price in relation to that offer, and ask yourself, what is this really communicating to people? Is the offer structured in a way that makes it reflect the value that you really deliver? So those are my, that's my challenge. Those are three questions you can ask yourself. I'd like to wrap this up by saying. Now that you know about how your customers can perceive your price and what types of things your prices might actually be communicating to them, it's important that you use that information effectively in your business. The next episode. Part two of pricing, and psychology. We'll be diving into the other side of pricing psychology, what I call the internal side, and whether you're a one person business or a 500,000 person business, the internal aspect of pricing can be just as challenging as the external side, so we wouldn't want to miss that. I hope to see you in the next episode. That's all for today. I wish you a great day, and as always, enjoy pricing. Thank you for listening to this episode of Live with The Pricing Lady, the podcast. If you enjoyed the episode, rate, review, and subscribe to it, then share it with your friends and colleagues. I love hearing back from you listeners. If you've got comments, questions, or topic ideas, go on over to thepricinglady. com and contact me there. Not sure where to start when it comes to improving pricing and profits? At ThePricingLady. com you can download a copy of my Self Assessment Pricing Scorecard. Find out where it's going well and where you can begin improving. Or just simply book a discovery call with me. There we can discuss what's up with pricing in your business and how I might be able to help you.