Using Relativity to Price Products

Why does a customer buy a product? The logical reason is because it solves a problem for him. But in reality, the value of the product is actually created in the mind of the customer.

The Right Relative Price

As a business that manufactures goods, you are aware of the value of the things manufactured. The cost of raw material, labor, and packaging all add up to create the cost of the goods you produce. Now what is the right selling price? That is determined by the customer’s expectations.

Unfortunately, there are reasons and psychological factors that make the behavior of customers very difficult to predict. In other words, customers don’t always go for the best financial value offered for a product. They sometimes act in an illogical manner.

Irrationality of the Customer

Suppose you were a book publisher. Now suppose for a certain publication, these were the prices listed on your website:
a) eBook – $9
b) Hardcopy – $22
c) Hardcopy + eBook – $22

Given this choice, what option do you think a reader is most likely to go for? Studies reveal almost 80% would go for option c. With a hardcopy available at $22, and a hardcopy + eBook available at the same price, option c is clearly the better choice.

Now suppose these were your options:
a) eBook – $9
b) Hardcopy + eBook – $22

The hardcopy + eBook offer doesn’t look so good anymore, does it? With an offer price like this one, you can expect almost 70% to go for option a, the cheaper eBook.

So What Changed?

Customers very rarely select items based on absolute terms. Instead, they measure the relative advantage of one item against another and determine the value in their minds accordingly. So above, in the first instance, it may have been difficult to decide whether the eBook for $9 was a better deal than the hardcopy for $22. But it’s a no-brainer that the hardcopy + eBook for $22 was most definitely better than a hardcopy for $22. The eBook was FREE in this deal making it the clear winner! In the second instance, the hardcopy entails an additional cost of $13, making the cheaper option a more lucrative choice.

Dan Ariely has brilliantly described this concept in his book ‘Predictably Irrational.’

The Trick Item

In the first instance above, the option b for only a hardcopy at $22 was the trick, or decoy, item, placed there to push people towards the more expensive option c. Option b was clearly not worthy and no one was going to pick it anyway. But just offering the choice made more people select option c. In the second instance, when the trick item was removed, leaving only the eBook or hardcopy + eBook offer, more people went with the cheaper option a.

Now comes the kicker. How can you as an entrepreneur use this understanding to your advantage?

Keep this behavior in mind while pricing your products. Find your major profit centers, products or services that give you maximum ROI. Now say this product or service is option A. Offer another option B, almost comparable to option A. Until this point, the choice will be tough. Now add an option A-, something similar to A, but clearly inferior. Now the choice between A and B might be tough, but the choice between A and A- is very simple. This will drive more people to go with option A, since A will look better not only in comparison to A-, but overall.

If a business can tap into this customer way of thinking  from time to time, they will be able to boost their sales and profitability.

Sarika Periwal is associated with Mabbly.com, a firm specializing in digital marketing. Talk to us about effective and innovative marketing strategies for your business. Connect with Sarika on Twitter or Google+.