Don’t be cagey about your pricing

Being cagey about your pricing doesn’t work. That was the key message I took from a recent survey by SAP on how Australians shop online.

As many as 6 out of 10 Australians reported abandoning an online shopping cart when shipping costs were higher than expected.  46% left the cart after using the site for a price comparison and 32% terminated the transaction because stock was unavailable.

How to address each of these issues? Here are my tips.

1. Shipping cost

People hate paying for shipping, and hate being surprised by it even more. If you charge shipping, that’s OK, but you have to be smart about how you represent it. List it on your home page, ideally as a low rate “flat” cost, and consider creating a threshold at which customers qualify for free shipping.  Why? It will increase propensity to buy more to avoid paying for something they don’t value. Failing that, provide a “shipping cost” estimator before people get to the cart to ensure they know what they are signing up for.

Shipping also gives you another promotional lever. Like the mattress shop that delights a customer who is buying a $2000 bed by waiving a $50 delivery fee, consider running special “free delivery” events to drive sales.

2. Price comparison

Price comparisons are a fact of life, so it’s up to you to present your product in such a way that value seems undeniable. How? One way is to use numbers psychology to diminish the perception of cost. Consider:

  • Whether to use rounded or specific numbers (e.g. $20 or $19.95)
  • The sequence of mark-downs (e.g. was $45 now $25 or Now $25 was $45)
  • The size of the typeface you use (e.g. whether the RRP of discounted price should be larger)
  • Whether and how you should use dollar signs and decimals

You can also use choice architecture to make some products look better than others, moving the customer’s focus from a comparison between competitors to a comparison within your range.

Further, consider how you describe the products. Focus on the benefits for them (the why) before the features (the how), and what they get (the value) before the give (their money).

3. Stock availability

Out of stocks happen, but that doesn’t mean you have to irritate your customer. Include stock availability on the product page BEFORE they add to cart. Leaving it until the cart page means they have psychologically committed themselves to the purchase and will feel very let down by you. It also doesn’t hurt to have messages like “only 5 left” to increase urgency to act through scarcity.

This article also appeared in Smartcompany.

Five oranges

Let’s say I give you five oranges. Is that good?

It depends.

Did you want four oranges?

Did you want six oranges?

Did you want five apples, not oranges?

Did you not want anything at all?

Whether the act of giving you five oranges was a good or bad thing depends very much on context.

And yet, in business, we often seem to forget to consider the context of the exchange we have with our customers. We overlook the role we play in shaping the context to ensure our offer is always a good thing.

So is giving you five oranges a good thing?

It depends.

Or-an-ge glad I gave you oranges?

To understand context, we start by asking some basic questions about what is happening.

Who are you to me? If you are a stranger or friend will impact how the act is perceived. Have we been discussing oranges at length, or has this come out of the blue?

Where are you? If you are in a fruit shop and I am the retailer, there’s a chance it’s a commercial transaction. If you are at a sporting event and the oranges are segmented, it’s likely you will be distributing them to those on the field. If you are about to board an airplane, it will seem inconvenient and odd.

Who is around you? Are others there to help you carry them? Do you want others to see you receive the oranges, or will this be embarrassing? If you are at a Mango Growers convention, it may seem inflammatory.

What time of day is it? Presenting you five oranges at 10pm may not be as helpful as 7am.

What are your needs? Your wants? Do you hate oranges? Do you have more oranges than you know what to do with? Are you suffering scurvy and desperate for vitamin C?

Contextualising value for your customers

Now that we have considered the context in which the transaction will take place, we can move towards shaping perception of value.

Remember, value is relative, not absolute. That means your customer will be comparing what they get and have to give with a frame of reference.

You therefore have two choices as a business.

You can let them use their existing frame of reference. This is dangerous.

Or, you can create a new frame of reference. This is smart.

I once had an accounting practice send me a proposal for services, for example. This is how they communicated price to me.

Pretty standard phrasing, right? The problem was they left me to define the frame of reference. Was $2,000 good value or not? If I had $900 in mind, then $2,000 seemed expensive. If I had $5,000 in mind, it seemed cheap. I didn’t end up accepting their terms.

Remember, our job is to frame the value of our goods and services to encourage our customer to proceed. Here are many techniques you can use, but let’s tackle two now: numbers and names.

Number framing

Contextualising the numbers you share with customers can make or break your interaction. Your success depends on the first number they see as it ‘anchors’ their perception of what follows.

Use a low anchor to be seen as generous

Use a low anchor if you want to be seen as generous e.g. “I know you only asked for four oranges, but I wanted to give you five as a thank you for choosing us”, or “last year’s bonus was $1200, but this year I’m pleased to say you will receive $1700”.

Use a high-anchor to diminish perceived cost

Steve Jobs used a high anchor when introducing the iPad so we would think it was great value. He started by citing ‘pundits’ who said it would be priced at $999 before thrilling the audience by revealing it would only be $499!

For the accounting practice, that could mean contextualising value as follows: “For larger clients we typically charge $5,000, but for your portfolio it would only be $2000”.

Or, if they didn’t have tiered pricing, they could use another larger number to anchor perceptions. For example: “Your current portfolio is $1,245,678. For us to manage everything we’ve discussed for you the fee will be $2000 plus GST.”

Re-set the anchor

What to do if they have a fixed expectation and you can’t deliver? For example, they wanted six oranges but you only have five to give?

Provide a reason for the shortfall, ideally citing an external event that is out of your control and likely to be affecting alternative providers as well, before framing about what you can do for them, right now. For example: “Unfortunately there is a shortage of oranges at the moment. What I can do for you is give your five right now, and arrange for an additional orange to be delivered to you tomorrow.”

What if the product or industry category has a fixed anchor, but you want to charge more? Starbucks faced this issue when launching in the US. The existing anchor for diner coffee was around $1, but they wanted to charge 4-6 times that. How? They re-framed what ‘coffee’ meant. From their store fit-outs with couches, cool music and the smell of roasting beans, to the fancy names they gave their drink sizes (Grande, Venti), they created so much distance between ‘coffee’ and “Starbucks” that they could re-anchor price expectations.

Back to the accounting practice. If the customer is used to paying $900 and they charge $2000, they need to re-frame expectations of what services from this accountant means. One approach is to offer the $2000 as the most basic option, introducing two more expensive options to drag the customer up to a higher anchor point.  Now the customer is comparing $2000 to $6000, and thinking they need to at least move to the $4500 option to get value.

Name framing

People are persuaded by descriptions. Rather than just give you “oranges”, I am giving you “sweet, juicy, sun-ripened organic oranges from Australia’s most awarded orchard”. A restaurant was able to increase sales of one item on its menu by 27% by changing the description from “broccoli” to “seasoned Asian-broccoli” (Just & Wansink 2009).

The language we use conjures up images in the minds of our customer. Not only does that mean paying attention to how we describe our offer, but what we call the product itself.

Imagine you were selling sweets, for example. Calling them “fruit chews” rather than “candy chews” would likely double consumption (Irmak, Vallen & Rosen Robinson 2011).  

Staging cocktail hour? Listing a drink as “Red Bull and Vodka” rather than “fruit cocktail” would prime your guests to act 51% more intoxicated.

If your product or brand carries a taint due to the connotations of what the name represents, consider changing it. Kentucky Fried Chicken moving to KFC and British Petroleum becoming BP are just two examples of companies distancing themselves from the original meaning.

Common product names you may have seen (or used) have their own framing connotations

  • Standard: Use to normalise it as a default. Avoid if you don’t want them to choose it.
  • Basic: Use to signal no-frills, low-cost and build tension about selection. Avoid if you don’t want to disparage your product.
  • Essentials: Use to signal they can’t live without. Avoid s lowest cost option because it will reduce impetus to upgrade.
  • Achiever: Use to signal aspiration. Avoid for lowest cost option.
  • Pro: Use to signal status difference between pro and amateur. Avoid if all options are for pros because it loses its meaning.

So you are about to give your customer five oranges. Is that good? It depends…on you.

This article also appeared in Smartcompany.

How to ditch discounts and win customers

Aussie retailers are doing it tough. The Christmas period failed to meet expectation, large internationals like Amazon are knocking on the door and consumers are demanding bargain prices. It’s no surprise then that many retailers have fallen into the trap of relying on discounts to win business. But anyone can discount – it’s a lazy form of marketing which squeezes your margins without providing any sustainable differentiation.

So what else can you do? Here are three strategies to give your customers the same buzz from a discount without penalising your pocket.

1. Sequencing your prices

When Steve Jobs launched the iPad, he was very particular about how he introduced price.  Teasing the audience that it would cost $999 before revealing it would “only” cost $499, Jobs delivered not only a revolutionary technology, but a master class in the behavioural principle of anchoring.

Anchoring tells us that people latch on to the first number they see and use it as a reference point against which subsequent numbers are judged. Higher prices hurt, lower prices feel like a bargain. Indeed that’s why discounts are so compelling – your customers can see what they are getting relative to the anchor.

But anchors can be a curse if you can’t control them. Ultimately, in order to convince your customer of value you will need to understand what they are using as their reference point. Have they walked into your store with a number in mind? Have competitors been advertising a similar offer? Have you displayed cheaper products closer to the entrance or first on your webpage?

When customers are low-anchored

If your customer’s anchor is lower than you are charging then you have some work to do. Your two options are:

1. Convince them why you are worth more – higher quality, longer life etc. Your challenge with this strategy is making your promises feel as tangible as price.

2. Shift the anchor – reframe your product or service so it no longer makes sense for that anchor to apply. Starbucks did this when they reframed how much Americans should pay for coffee. Instead of being anchored against $1 drip coffee served in diners, Starbucks completely reengineered the experience of coffee, from the smell of roasting beans to cool music, free Wi-Fi and plush chairs, which allowed them to create their own new anchors (Venti, Grande, Tal and Short) for what coffee should cost (i.e. $3-$6).

When your customers are anchor-less

If yours is a unique product or service it means your customer will use some form of proxy to guess how much you are worth. Until Jobs confirmed the iPad’s pricing, for example, a laptop or mobile may have served as a proxy.

Thankfully, pointing out why you are different can displace proxies. In a sense, you want to be an orange to the proxy’s apple, making it difficult for the customer to compare one with the other.  Your challenge in this scenario is to be similar enough so the customer “gets” you while different enough to warrant unique pricing.  This is what Jobs did – explaining the iPad was kind of like a mobile and laptop but actually very different.

When your customer is anchor-less, it’s your role to fill the vacuum. That means being very careful about what price you mention first. If you know your customer will likely choose the mid-range option, first talk about the top of the line. Why? To anchor them to the higher price so that the mid-range option feels like a bargain, just like Jobs did with $999 before $499.

2. Ranging your options

As already mentioned, discounts work because they compare a regular price with a reduced price. It is the relative difference that is appealing. But discounts are not the only way to give your customers this feeling; you can do it through your product structure.

When the first bread maker came on to the market, customers didn’t know whether it represented good value. The answer? Introducing a slightly more expensive version that served as a point of comparison. Suddenly the first (and now seemingly less expensive) model started to sell.

The lesson here is that you can introduce other options into your product range to help influence customer choices. A more expensive option (a.k.a. the anchor) can help make a middle option look less expensive, and a cheaper option with fewer bells and whistles can make more expensive options look better value for money.

3. Communicating the price

How you communicate the price is another opportunity you have to convince your customer. The size of typeface, whether you use decimals, rounded numbers or commas and even dollar signs can all impact the message you are sending.

In short:

  • People mentally rehearse numbers as they are reading them, so $14.90 will be perceived differently than $15
  • However, decimals elongate the number and can make it seem larger than it is 
  • Rounded numbers can signal your preparedness to sell more quickly
  • Dollar signs have been shown to trigger negative associations and result in less being order from a menu
  • People think prices written in smaller typeface are smaller

I know retail is tough, and price plays a significant role in convincing customers to buy. But before rushing to discount, focus on how you contextualise and communicate your price. You may be surprised how small tweaks can result in significant gains.

This article also appeared in Smartcompany.