Pricing Products and Services: 10 Top Tips

Pricing products and services can be a tricky task, and as a small to mid-size business, you might have struggled with the question of how much to charge for your products or services. Charge too low and you miss out on profit, but charging too high you might miss out on sales. Here are 10 tips to help you in pricing your products and services.

Strategies for Pricing Products or Services

(1) Decoy Pricing 

I lifted this experiment from Dan Ariely’s book Predictably Irrational, which describes a subscription offer from The Economist.

(A) Web subscription – $59 for a one-year membership to its online content
(B) Print subscription – $125 for a one-year membership to its print edition
(C) Print and web subscription – $125 for a one-year membership to its online content and print edition

Ariely conducted a study with his 100 students, and 16 chose option A, and 84 chose option C. No one chose option B.

So if nobody chose B, Ariely removed it such that it looked like this:

(A) Web subscription – $59 for a one-year membership to its online content
(B) Print and web subscription – $125 for a one-year membership to its online content and print edition

And now 68 students chose option A, while just 32 students chose option B now. Notice the drop in those choosing the more expensive option now, from 84 to 32. Why is this so? This is because the students suddenly wondered if it is worth the additional $66 to get the print edition too? Probably not.

This is decoy pricing in use, where the most expensive option which appears to give you something for free actually aids in increasing its sales.

Likewise, you could price your services like that too. If it works for you, let me know!

(2) Price Formatting 

In a research by Sybil Yang, Sheryl Kimes and Mauro Sessarego, they tested the effect of menu-price formats on sales.

Price formats tested in the study were:

(A) A dollars and cents numerical format with a dollar sign ($00.00)
(B) A numerical format without a dollar sign (00.)
(C) Scripted or written-out prices (zero dollar signs)

It was found that price formats did show noticeable differences. Contrary to expectations, guests given option B spent significantly more than those who received options A or C.

Although these findings may only apply to this particular experiment, and such as situation, it it worthwhile to note the effect and how to present your prices to your customers. So businesses, start leaving out the dollar signs and putting just 299.00!

(3) The Number 9

Prices ending with 9 are everywhere but is this really effective? It seems so, according to 8 studies done from 1987 to 2004 using $49, $79, $1.49 etc. These prices boosted sales by an average of 24% as compared to other prices.

In another two experiments carried out by the University of Chicago and MIT, a mail order catalog selling women’s clothing was printed in 3 versions:

(A) A catalog with price of $39
(B) A catalog with price of $34
(C) A catalog with price of $44

Each catalog was sent to an identically sized sample. Subsequently, results showed that there were more sales at the price of $39 than the other 2 options, including the cheaper option of $34, in terms of sales volume and profit margin.

This could be because we tend to read numbers from left to right, and so a price such as $5.99 will be read as $5. This is the “left-digit effect”. Having said that, the hypnotic effect of the number 9 cannot be dismissed, so try to use this in your product’s pricing.

(4) Sales Price Markers 

Research has also shown that sale price markers, which listed down the old price as compared to the new sale price, were more powerful than just stating prices ending with the number 9. A combination of the number 9 and the old price is perhaps the most effective.

You can hence start running your own promotions, such as Usual Price: $380, now just $299 sale!

(5) Small Fonts 

According to marketing professors at Clark University and The University of Connecticut, customers perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface.

Why is this so? According to Vicki Morwitz, research professor of marketing at the Stern School of Business at New York University, this is because we tend to read sale prices with large fonts relative to their original prices on a price tag. In our minds, physical magnitude is related to numerical magnitude.

(6) Easy Math

In pricing products, a sign that shows “was $12, now $10” is more effective than printing “was $12, now $8.72” because if the difference is easy to calculate, our minds tend to perceive the former as a better and bigger deal, even though the $8.72 is the better offer. The same theory can be applied to your pricing.

(7) Anchoring 

Meanwhile, a study by psychology experts Tversky and Kahneman suggested that giving your customers an initial figure or amount will lead him to use that particular number to estimate other quantities that are not known to him.

In the study, test subjects were told the number 65 and then asked to estimate what percentage of African nations were members of the UN. The average response was 45%. A second group was tested but given the number 10, and the average response was 25%. You can see that the group who was given the number 65 gave an answer that was close to twice of the actual answer, while the group who was told the lower number estimated a lower and more accurate percentage.

Having said that, you can start adding in some more premium products or services to your portfolio even if you do not intend to sell them. And you will probably do much better if  you state how much your competitors are charging before you tell your customers your prices.

(8) Straightforward Pricing

In pricing products, a single price scheme normally sells better than a variety of price plans. According to Ash Maurya, in his article on Venture Hacks, he tested:

(A) A single price of $49 per year
(B) 2 plans of $49 per year and $24 per year
(C) 3 plans of $49 per year, $24 per year, and a free plan

The single price won. Perhaps in this complex and messy world that we live in, customers want simplicity. Check on your brand positioning, and adjust your pricing accordingly.

(9) Price Perceptions

According to Neil Davidson in his book ‘Don’t Just Roll the Dice‘, customers based their perceived value on reference points. So if your service is more expensive than the common reference points, what you can do is to change the perception of the category you are in, or create a totally new category for yourself, and your customers will be able to accept any price you name. If not, just try pricing products lower than the other reference points, and likely you will win.

(10) Context Sets Perception

In an experiment carried out by Richard Thaler, it was found out that subjects will pay more if they are told that the product is being purchased from a more expensive and luxurious place rather than a rundown store.

How then do you take this point into consideration when pricing products and services? Of course, you can make your services look more premium. For instance, in your service packages, use designs and colours that denote premium services so that customers are willing to pay a higher price for them.

Contact us for a chat using the form below – we’ll be able to offer some tips on how to use pricing to increase your revenue.


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