Find out why customers were happy to pay 35% more for 10% less product?
With the multitude of how-to material on pricing available – 11,000 titles alone on amazon.com – the question of pricing strategy still remains a vexing one for many businesses.
It’s actually quite a complex area as getting it right involves a number of variables – the product (what’s on offer), the price, what the customer perceives as value and what the customer expects.
Matching the expectation with what is delivered is often half the battle.
The less-is-better effect
An experiment conducted by Professor Christopher Hsee, a behavioural science and marketing expert at the University of Chicago Graduate School of Business, explored just this.
Imagine that it is a hot day. You are at the beach and see an ice cream vendor who sells ice creams by the cup. Great. Just what you felt like.
Now, of the two options in the diagram below what would you be most happy with? The big 10 oz cup filled with 8 oz of ice cream or the small 5 oz cup filled with 7 oz of ice cream?
source:John Wiley & Sons, Ltd. Source Journal of Behavioral Decision Making, Vol. 11, 107±121
In this experiment the small 5oz cup serving was preferred. So much so that customers were prepare to pay 35% more for 10% less.
Why is this? Perception of value. The smaller cup overflowing with ice cream was perceived to be more generous than the larger one even though they were actually getting less ice cream. It was ‘the promise’ of what they were going to receive rather than the actual amount they did receive.
Yes. Less can be more.
Why is this important?
There is clearly a financial benefit to a customer paying more for less product. Executed successfully, it could significantly lift your profitability.
However, before you go increasing your prices and / or reducing the size of the product there are two key factors you need to consider which will determine whether or not that is a winning strategy.
- Are you selling a product or a service?
- What is your ‘promise’ and how to you deliver against this?
Are you selling a product or a service?
If I asked what are we selling in this is example you might think this is a bit obvious – it’s a product, right?
But is that all we are buying when we walk into an ice cream store? If that were the case then the price should reflect a reasonable mark up on the raw ingredients plus the cost of production (frozen milk, sugar flavourings etc).
A more extreme example is perfume. Clearly we’re paying for more than just scented water!
The reality is that most people are buying neither.
What customers are actually paying for is:
- An experience
- The fulfilment of an emotional need
- A solution or problem solved, or
- A combination of the above.
In the case of ice cream it could be “I deserve a treat”, “some piece and quiet from the kids”, “or a precursor to a romantic walk with your future partner”.
Almost all product businesses have a service component either in pre-sales, the buying experience itself, or in after-sales support in the form of guarantees or warranties.
The same is true for service businesses. The common perception is that the ‘product’ in intangible however there will generally always be tangible or physical elements to the service as well. These could be in the physical environment in which the service is delivered, the format and look and feel of a report, or even something as simple as the format and layout of your final invoice.
Ask yourself the question, are there any of the parts of my product of service experience that don’t support the impression or experience that you are trying to create? If the answer is yes, there’s a good chance that this will be reflected in the prices you are able to charge, or in your lower than average customer loyalty and referral rates.
What is your ‘promise’ and how to you deliver against this? Do you over-deliver?
“It’s when companies under-promise and over-deliver that people experience memorable moments that will affect their habits for a lifetime.” Martin Lindstrom- Fast Company.com
If your customers are like the young boy in the picture above then they very happy indeed. If however you are making a promise (small or large) and coming up short then you can expect higher than average complaints and below average loyalty and referrals.
By not setting clear expectations for a customer up front, you leave them to make up their own (usually higher ones), and this generally results in disappointment and an increase in complaints. Research shows that 40% of all customer complaints are caused by a failure to set clear expectations.
The solution to this is an obvious, and usually low cost one:
Communicate, communicate, and communicate. If customers understand what to expect in advance i.e. what your response times are, your service levels, or realistic product performance claims, they are less likely to be disappointed.
Apple claim up to 10 hours battery life on the new iPad, and I’m always pleasantly surprised how much life I can squeeze out of my battery.
Think about the car you drive. Do you get close to the performance and economy figures claimed by the manufacturer? If you don’t, how likely are you to buy from them again or recommend that model to a friend?
If things do go wrong, be clear on how you are going to rectify the situation, and when. We’ve all been in those situations when we have been kept in the dark when something hasn’t gone to plan. Whether its being delayed at an airport or waiting for parts for an important repair. Not knowing what’s going on just makes a bad situation worse.
Less can be more in making customers happy but only if you deliver or over-deliver against their expectations.