The early chapters covered the crucial aspect of making sure the salesperson emphasizes all of the features and benefits of any buying decision somewhere in the selling process. Quite simply, if a customer cannot appreciate all these issues, they will not add them to their side of the Value Scales in determining what they may be prepared to pay.
However, Chapter 8 did made the point that some customers are indeed motivated to buy by the perception of a great bargain. There is a familiarity with the comment by a person returning from a shopping spree saying, ‘It was 50 per cent off so I bought two and saved twice as much!’ Whether the purchase was necessary in the first place, or whether the discounted price was genuine or represented good value, is lost against the powerful feelings of getting a bargain.
This chapter explores the point that the presentation of the price itself is an equally important element in achieving the highest overall sale value and hence generating maximum profit for any business.
This chapter includes:
The impact of the price ticket
In some retail environments the way in which a price is physically displayed can have an impact on how that price is perceived. A printed price ticket is read by customers as a real, accurate price that has been determined by someone who has worked it out properly, or even by a computer that has done some complex calculations to determine what the right price should be. If these price tickets look as though they have been properly printed – ie as you may find in a major electronics store on a new TV – then there is an underlying assumption that effort has been put into determining the price and producing the labels, so the price is probably right and unlikely to change. Rarely will customers question (in their heads or with a salesperson) a properly printed price ticket.
By contrast, a handwritten price ticket is taken as being someone’s judgement of what the price should be, and hence may be seen by customers simply as a starting point. So in many small retailers a price ticket written out by the shop assistant or owner is sending the subconscious signal that it is negotiable.
Going further, a printed ticket that suggests a calculated price, but which has then been crossed through with a marker pen showing a new, lower, handwritten price, confers the message of a bargain deal. The customer accepts the validity of the original price but the handwritten correction suggests that the person who changed the price may be doing them a favour by overruling the calculated price on the printed ticket.
This engages the customer with the people in the business. Larger retailers use descriptions such as Manager’s Special Offer, and you may have even seen some firms that put narrative such as Head office won’t like it, but the deal of the day is…. Now, don’t think for a minute that head office are ignorant of the deal being done, but the presentation of the price in this way builds a rapport between the salesperson or branch, based on the perception that the customer is getting one over on the faceless managers in head office.
This is drifting into an area of selling techniques rather than the pure topic of pricing, but what is clear is that the way in which prices are expressed, and even the way in which they are displayed, can have a profound impact on customers’ perceptions and hence the possibility that they will buy or not at various price levels.
Think back to the last time you went to buy something where the prices were not on display. That could have been perhaps a clothing store, jewellers or antiques shop, or an occasion where you were seeking advice from an accountant or lawyer.
How did you feel? What did you assume? What did you do?
Although your reaction may have been influenced by how keen you were to buy the product or service, on the whole people react in broadly similar ways:
Most people feel embarrassed to ask what the prices are! They feel that by doing so it might imply that they couldn’t afford the item at certain price levels. We have all heard of those really top-end retail stores in London or Paris or, say, Rodeo Drive, where the suggestion is that if you have to ask the price, then you can’t afford it!
The underlying assumption from most customers is that the products or services will be expensive. They believe that if the prices were normal – ie market rate, fair, reasonable, etc – then the business would be happy to display them or be open about what they are. By apparently hiding the price the assumption is that it must be unreasonably high.
What do most people do? They browse the shop for a short period, discreetly looking for prices on the bottom of items or hidden from view, and trying to make it look as though price doesn’t matter to them, and that if they like it they would buy it regardless of the price. They then leave without asking a price, without knowing what any items cost and without buying anything.
Customers don’t like uncertainty. However you opt to present your prices, you need to consider what image you are seeking to portray, what emotions you are trying to create within your customers (trust, perception of a bargain, a sense of urgency, etc), and then present your prices in the best way to achieve it.
One of the key factors in setting price is to use a number that demonstrates a degree of accuracy or certainty over the price itself.
Consider a homeowner who has asked a number of businesses to give a price for the installation of solar panels. Assume that there is no discernible difference between the products or services provided by all possible suppliers, and that they have not seen any significant differences in the sales material or the skills or perceived honesty of each salesperson. The decision to buy one of these has been made, and they can afford all options.
Focus now on the single issue remaining – price. The prices are so close that the amount is not an issue, and that there are no other discrepancies such as one business not charging VAT, for example. The decision as to which one to pick will be based solely on the perception of the business based on the way they have presented their price.
These five businesses have put forward their price offers as follows:
Business 1 – £5k all in.
Business 2 – £4,999, including VAT.
Business 3 – About £5,000.
Business 4 – Between £4,900 and £5,100, but we won’t know exactly until we finish.
Business 5 – The all-inclusive, fixed price will be £4,173.68 + VAT so exactly £5,008.42.
How would most customers interpret these different choices? Just think for a moment before you read on as to which of the five options you would pick and why you would pick that one.
Business 4 is potentially the cheapest, but this is also possibly the most expensive. Let’s explore them and consider what goes through the customer’s mind when making the decision.
The use of the very round sum £5k all in description by Business 1 suggests that the price hasn’t been properly worked out. It isn’t even expressed as £5,000, but as an abbreviated £5k. This implies that it is an estimate based on a broad market price or ballpark figure. Most customers would assume one of two things: that it includes a high profit element, or there is a risk it may actually go up before the job is finished. This usually leads them to ask for further discounts, or to avoid the risk of an increase and shop elsewhere. It simply isn’t believed as being a properly worked out price, and hence it isn’t trusted as being fair or correct.
Business 2 has clearly been persuaded by the myth of the number 9 that was covered in Chapter 8, and thinks that the price of £4,999 will be seen by many customers as a correct price, being as it is just below the figure of £5,000. In fact, the larger the price, the less believable the issue of ending in a 9 becomes. It may work for items at £1.99 or £29.99, but it becomes counterproductive as the numbers get bigger and it seems completely contrived. At this level, customers will round up to the £5,000 anyway, and will probably feel that the business tried to trick them with a naive fudged price to make it look like a bargain. Consumers are not stupid and they know that the odds on a price being calculated fairly to cover the supplier’s costs and make a decent profit are never going to end up £1 below a simple round sum amount.
Business 3 has destroyed completely the customer’s confidence in the price it put forward, by the use of the word about. There are many businesses that use this or similar words such as approximately or use the word estimate rather than quote. This is a critical issue as consumers hate the uncertainty over price that these words bring. The natural assumption is that any actual price will always be higher than the estimate. So the supplier may be thinking that the price is about £5,000 because he doesn’t know exactly how much cable he will need, so his final price could be £50 more or £50 less than the estimate. The customer, however, is thinking it will only ever be higher and that it may end up several hundred pounds more.
Business 4 has at least limited the range of the price uncertainty, and indicated that it could be lower, but there are two problems here. The first is that most customers will assume that the price will always be closest to the higher figure and that the supplier is trying to mislead them by giving the range but intending to bill the top price anyway. This may push some customers to buy elsewhere, even though the price could be the lowest option. The second problem is with the customers who set their expectation at the lower end of the scale and become unhappy customers once a higher price is finally received, despite the openness of the supplier up front. In most businesses, leaving any uncertainty on price will either push the customer away, or lead to retrospective arguments. It is a recipe for problems.
So whether it is a single number that is then weakened by the word about or estimate, or a range that has inherent uncertainty built in, customers prefer to avoid uncertainty or they assume the worst anyway and make their judgement based on the top price indicated.
Business 5 has set a price that implies a number of things. First, that it is absolutely fixed in stone and that the customer can have confidence that this will indeed be the amount that they pay. Second, the accuracy of the amount, even down to the final 42 pence, suggests that this is a carefully worked out price that reflects all of the costs of the job. Most of us understand that when we buy something, the business must make a profit, but we want to feel that the profit level is fair. Using very specific numbers gives a clear suggestion that all the components of the deal have been properly considered, including a fair profit level.
Although it may vary from product to product, customers also want to feel that they are getting the same sort of deal other customers get. When we see round sum numbers or price ranges, there is sometimes a concern that the price may have been uniquely assessed just for us and perhaps increased based on a perception of our ability to pay; ie they may worry that the solar panel price is higher for a house with a brand new Porsche on the drive than it would be for an identical installation on a house with a single 10-year-old car on the drive. When we hear very specific numbers we simply assume that the price is the properly calculated price for that job, irrespective of our circumstances, and has not been plucked out of thin air!
Let’s look at this from a slightly different perspective. In Chapter 10 we discussed the problem of discounts. Let’s now look at why accuracy in discounting is essential.
Premier Wholesale Limited is a £1m turnover business selling tools and equipment to trade customers. Dave, the Sales Manager, was on the phone to a relatively new customer who was clearly asking the question about a discount.
From outside his office, only Dave’s side of the conversation was audible and went like this:
Dave: Yes we have that in stock, I can ship it today.
Pause
Dave: Normally that model sells for £1,000 + VAT.
Pause
Dave: Yes, OK we can do something on the price, how about 30 per cent off?
Pause
Dave: No. 30 per cent is what everybody gets.
Pause
Dave: Great I will get it sorted immediately.
What had actually happened was that the customer had asked, ‘Can you do a deal?’ Dave had gone straight to a 30 per cent discount rather than starting at a lower amount, because ‘almost everyone gets 30 per cent so it is easy to work out the adjusted prices’.
As soon as he said normally, he was sending a very loud signal that there was room for negotiation. Simply stating what the price is reduces that risk enormously. Once a negotiation is underway, there is a key need for good negotiating skills to keep the downward movement in price as low as possible.
This is typical of many salespeople. Whether they start at 30 per cent or less, almost all discounts will be a simple number of 10 per cent, or perhaps 20 per cent, and almost always a multiple of 5. This is not because it’s the right answer, it’s because it is easy for the salesperson to calculate!
The major problem with these round sum discounts is that no one believes them. If a customer asks for a good deal, and the salesperson says ‘I can do 20 per cent’ the chances are the customer still thinks there may be some further flexibility in the price. In fact, in the real example, even starting at 30 per cent, the customer still pushed further. This would be true if he had said 5 per cent, 10 per cent or 15 per cent, in fact any ‘round sum’ multiple. Just like the examples above of the round sum approach to the headline price, round sum discount figures are assumed to be made-up numbers.
Let’s see how the conversation could have gone:
Dave: Yes we have that in stock, I can ship it today.
Pause
Dave: Normally that sells for £1,000 + VAT.
Pause
Dave: (after loud random tapping on calculator) I could do a special price just for you based on the specific machine you are buying, and on the understanding that you will pay on time, with a discount from list price of 21.27 per cent. On this machine, that means you will pay £787.30.
Now how would you feel if you were the customer? Obviously, you would prefer 30 per cent, but if you didn’t know it was available and the proposal of 21.27 per cent was made, you are much more likely to believe that this is the right price based on the sheer accuracy of the numbers, and the apparent calculation of them. What is more, the business has clearly linked the discount to a specific machine, not necessarily for all products, and only if paid on time. This enables the company to quote different discounts for future products and even cancel the discount if the customer fails to pay on time.
This was tried on the next sale, and although not a truly scientific comparison, the second customer did accept the 21.27 per cent discount offered without challenge. The financial impact of this 8.73 per cent reduction (30 per cent down to 21.27 per cent) in the discount was massive. In this example reducing the price by £212.70 rather than £300.00, added an extra £87.30 of sales value, and meant that the gross profit they made on that machine went from £250.00 up to £337.50, a 35 per cent increase. Once again it was simply a matter of taking time to sell properly, and present the price in a more sophisticated way.
Another business actually prohibited the idea of round sum discounting. 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, etc, were simply no longer allowed. If a customer wanted 10 per cent, the salesperson now had to get them to agree to 9 per cent or 11 per cent. The salespeople were bemused and challenged the fact that if a customer expected 10 per cent, and would just not accept a 9 per cent discount, that they would actually prefer to give away 11 per cent. This was confirmed to be the case.
The point, of course, was to make the salespeople think. Over a period of time, forcing them to discuss the available discounts with customers, and as a result sell on features and benefits rather than a simple I’ll knock off another 5 per cent or 10 per cent, would bring the discounts down and as a result, the real prices up.
In this company they found that the salespeople got into the habit of talking more directly about the price, and where they once typically gave 20 per cent, they didn’t just drop to 19 per cent, but gradually they got down to 18 per cent, then 17 per cent, and then to 16.73 per cent, etc. Eventually the average discount reduced by almost a quarter. This was simply because it was made difficult for salespeople to revert to giving standard discounts. Also, they were trained to talk more to the customer, discuss more openly the issue of price and, of course, pick a number that had a more credible feel than the old round sum numbers previously used. When they used to say 20 per cent, many customers often asked for 25 per cent. When they said a very specific 17.4 per cent, no one pushed for more.
The importance of the actual numbers
You will recall the myth surrounding the significance of the number 9, which was that the power of this number was in its being psychologically below a key price threshold and hence giving a perception of being great value for money.
A major experiment in the USA tested the impact of certain prices on customer demand. They worked with a major mail order catalogue company to test the demand of particular products at differing prices. For example, a ladies fleece jacket was offered for sale with a great picture and positive narrative in around 60,000 catalogues across its customer base. In one third of the catalogues the price was shown as $44, in another third it was priced at $49 and in the last third it was priced at $54.
The distribution of the catalogues was random, such that three neighbours might each have one with a different price. The jacket cost the company $20 to buy in, so they made either $24, $29 or $34 of profit per item.
Let’s look at the results:
|
Price of jacket |
Volume sold |
Profit generated |
|
$44 |
1,000 |
$24,000 |
|
$49 |
1,500 |
$43,500 |
|
$54 |
1,000 |
$34,000 |
There are two interesting conclusions here. First, that the $44 and $54 prices sold the same volumes, suggesting that high or low price did not have any impact on the sales volumes. It was perhaps the great picture, good narrative or position in the catalogue that was having the impact on the sales of that jacket compared to others, rather than being a price-based decision. This confirms a lot of what this whole book preaches; ie it isn’t all about being cheaper.
The second interesting point that the university conducting the study concluded, was that people prefer a price with a 9 at the end of it. As explained already, 9 is a familiar and trusted number and it might be easy to conclude that it is the number itself that is the key. But all the university study really showed was that 9 was a more popular or more significant number than the number 4. The question is whether it is more significant than, say, the number 3 or the number 8.
Ask people to score something on a scale of 1 to 10 (where 10 is excellent) and the vast majority will score 7. That is because it is the number least likely to provoke a follow up question such as ‘only a 6, what was wrong?’ or ‘an 8, what in particular did you like?’
We attended a seminar that looked at the power of numbers in selling to customers, and were really gripped by the point that 7 is a non-confrontational and hence powerful number.
As a result, we simply made sure that every single quote we sent out ended in a number 7. This could be a quote we might have sent out for exactly £10,000 being changed to show £10,007 instead.
We were amazed at the improvement in our conversion rate for the quotes we won. Although many customers asked to round the price down by the odd 7 pounds, very few argued about the overall price.
Sarah Hill Builders
The major point is this. The actual numbers that you use to express the price of the goods or services that you sell have a direct impact on whether the buyer believes the validity of the price and ultimately whether they are prepared to pay it. There is a very real danger that any round sum presentation, whether of headline price or discount percentages or £ price reductions, undermines the customer’s perception that the prices are real, fair, properly calculated or non-negotiable.
An item priced at £10.07 will be more attractive to customers than one priced at £10.00. Whether it is more attractive that £10.09 or £9.99 is not as clear-cut. This contrasts completely with many businesses that set their prices by trying to simplify the presentation to the customer using round sum prices or round sum percentage discounts.
Presentation of price on bundled items
Chapter 6 looked at the idea of bundling products in order to encourage customers to buy additional items within a bundle that they may not have bought if they were able to make a decision on an item-by-item basis. One of the key issues for businesses is the presentation of this bundled price.
Let’s make a very basic comparison between a menu of choices, and a bundled deal. On the whole a menu of prices gives the advantage to the customer as it allows them to individually assess the elements they want and the value for money to them of each separate component. In most cases this will mean that some customers will opt out of at least some of the options that the supplier wanted to sell. From the customer’s perspective, unbundled or menu pricing creates transparency and allows them to select exactly the options they want.
Conversely, bundling helps the seller. First, there is the simplicity of a single-priced bundle, so that if you can sell the same bundle to everyone, it makes life easier. The easier it is to package, sell and deliver the bundled items, the lower the marketing and selling costs. Bundling also means that customers assess the total value and end up buying elements they may have opted not to buy on a menu-priced basis.
When a seller unbundles options it opens up the whole transaction to line-by-line scrutiny. If, for example, a plumber had agreed a price with a client for fitting out a bathroom at £5,750, the customer will make a judgement about the overall value of the work versus the price being asked. Now say the plumber presents a bill listing the individual hours spent on each aspect of the work by each tradesperson, each individual item from bath to taps and tile adhesive, and also includes an amount for removing waste, ordering parts, etc. Even though the total price is exactly what was quoted, the reality is that many customers will review the detailed list of items and will almost certainly baulk at some elements, such as the fact that two workers took the scrap to the tip charging two lots of time. Even if they were happy with the overall price before, they may become dissatisfied now that they can see some individual items they think are overpriced.
By contrast, there is a desire for some businesses to list out every component of the bundle in order to demonstrate clearly the overall value of the package. Like the examples given in Chapter 6, Microsoft want to make it very clear what each individual piece of software costs so that they can tempt customers into buying the Home Office package for a much better overall price.
So what should you do? Hide the individual prices into a single bundled price without any explanation of the component elements? Show the bundled price and each of the components so customers can assess the savings the bundle represents, or offer the customer a menu to pick and choose what they want?
The simple answer is that it depends. Look at the Action Points and see what you could do to test this for your business.
What you need to do is look at the things you sell and identify how these could be bundled together. Initially you should look at what you do to see whether there may be some obvious bundling opportunities. However, in many businesses it is the act of seeking to develop compelling packages that leads them to try and find new features and benefits to add into a bundle in order to add the value to the customer. So although it may be obvious that where you sell products that link together – such as a PC, printer, anti-virus software, etc – great bundles can be developed, many other businesses can develop some excellent bundles with special service elements. In an earlier chapter we looked at the computer software company that bundled in training, post-sale support, and a later review of any changed requirements.
If your business is essentially retail, where customers are free to browse (in-store or online) then you must show the price clearly and if you want to offer discounts, be clear on the terms and conditions that apply.
As discussed above, keeping the price under wraps in these sorts of situation creates uncertainty and often steers the customer to look elsewhere.
If you are in a service business where price may vary uniquely for each customer (a legal firm or kitchen fitter, for example), or in a business-to-business operation where negotiation is expected, then you need to be a little careful about talking price too soon.
It is essential to consider all of the elements that go onto the customer’s side of the Value Scales, and all the features and benefits of doing business with you, before you look at the price on your side of the scales. The end objective remains the same; ie to get the scales to balance so that customer and supplier agree on the price and value, or to tip them slightly in favour of the customer so that they have a perception of getting a good deal. However, it is harder to move the scales from tipped entirely in your favour (price is on but nothing else has been said) towards the customer by gradually adding all of the value points for them.
Much better to tip the scales completely in the favour of the customer by loading all the value points on first and then seeing if your price tips it the other way.
Make sure the customer is clear on the value you offer before you tell them the price.
There is a word of warning though. If you take this to the extreme, as some businesses do, you create a lack of trust as the customer can feel you are trying to trick them by avoiding a direct dialogue about the price.
There is a true story about one situation where a couple had to demand a price from a kitchen company who just kept reworking designs and talking about all the clever features they could include, steadfastly avoiding the question of price until the couple simply refused to discuss anything further. Through that process they lost all confidence in the salesperson and, regardless of the value of the kitchen they offered, would never have bought from them.
So when you get the clear signal that the customer wants to talk price, get it on the table straight away. In many cases this is a buying signal that is ignored at great cost.
Once you have addressed all of the points above, there is a further subtlety to the issue of price presentation. There are many ways to say the word price, and each will have a slightly different impact in the mind of the customer.
Price, for example, is a clear statement of the amount that the customer is expected to pay. It does not make any comment on the value of that item, or the potential benefit to the customer of paying it.
If you use words such as current price, or this week’s price, or today’s special, you make it clear that the price may go up, and that creates a sense of urgency in the mind of the customer. The quicker you get a customer to buy, the better.
Using terms such as your investment when you talk about an accountancy service, for example, will get the customer to consider the amount in context with ongoing or long-term benefits of buying the advice.
The word fee is mostly used in professional firms and adds a layer of credibility based on the assumption that professionals can be trusted. If a lawyer talked about a legal case and referred to the price of the work, the customer’s perception of quality would be reduced.
The dictionary is full of words that can be added in to the mix and which present a particular message to customers. You may have seen many prices promoted with additions such as crazy, outrageous, incredible and many other adjectives that underline a purported value for money.
These terms will apply differently to each business depending on its products and services, its typical customers and the image it is seeking to promote about the business as a whole.
The way that you express the price can have a dramatic impact on the customer’s willingness to pay it.
Making a price clear and understandable, as well as accurate and believable, will remove a great deal of the downward pressure on prices caused by customers seeking to avoid uncertainty.
1 Change all of your prices and discounts anywhere that round sum figures are undermining the credibility of your overall message.
2 Look at all the ways your prices are described and develop and implement a range of descriptions that express your prices more positively; ie investment rather than cost.
3 Review the way all of your prices are displayed. Does it suggest to the customer that there is room for negotiation? Is it clear and unambiguous to them? Implement changes to add clarity and certainty to the presented price.
4 Undertake a review of how all of your major competitors describe their prices and adopt their good practices into your business. Ensure your sales team are trained to exploit any uncertainty they may create in the way they express prices.