In 2008, Pizza Hut saw its sales drop because of the Great Recession. Competitors were lowering their prices and offering discounts — and Pizza Hut figured they had better offer a discount if they wanted to compete with Dominoes Pizza and Papa John’s Pizza for a dwindling market.
So in 2009, Pizza Hut began to offer a large cheese pizza with three toppings for $10 (the normal price was $15). Then they sweetened the deal by offering unlimited toppings for the same $10 price.
And sales rose.
That’s a good thing, right?
Fast forward to 2011. The economy was easing and Pizza Hut (and the other pizza competitors) now wanted to reinstate their normal pizza price of $15.
And customers resisted.
Why? Because of two psychological triggers:
- People had gotten used to paying only $10 for a pizza with unlimited toppings. When you increase the price back to the “normal” $15, people see that as a raise in price of 50 percent, conveniently forgetting the pre-2009 pricing.
- When you lower your prices, you devalue your product or service. You’re basically telling people, “It’s not worth $15, it’s only worth $10. We’ve been overcharging you all along.”
What do you do when sales are sluggish and you want to offer a discount, but you don’t want to imply that your products and services are worth less by lowering the price?
Enter the Concept of Adaptive Pricing
Here’s the psychology behind the concept: Customers have different needs, and place different values on the various aspects of your products and services — price being just one aspect they consider.
- Many customers value access to a live instructor above learning on their own, so if they have questions they can get help immediately from the instructor. Therefore, they’re willing to pay more for a live class than a self-study program.
- Some customers place value on group brainstorming and sharing of best practices to shorten the learning curve, and are willing to pay to be a member of a mastermind group.
- Other customers value private one-on-one services and are willing to pay a premium price to get your total attention to find solutions to their problems and think strategically.
By knowing what your customers value — and creating pricing and discounts based on those values — you can increase customer satisfaction and sales at the same time.
But My Customers Want Low Prices!
Be careful of your own psychology: you might be a budget shopper yourself, but not all your customers are. If you constantly offer things for a discount (or for free!), it’s more about your own feelings about money and pricing than the needs of your customers.
For every customer who wants things as cheaply as possible, there are customers who demand extraordinary quality and are willing to pay for it. Just look at the different price/value levels of department stores (from Wal-Mart to Neiman Marcus) and you’ll see that there are huge ranges of quality, service, experience and price needs among customers.
Don’t assume your customers want cheap prices and are willing to take a lower quality service or product in order to get the lowest prices. Price based on the value of what you’re offering, and on your branding strategy. Are you the Wal-Mart of your industry or the Neiman Marcus? (Or somewhere in between?)
So, You Want to Offer a Discount
Great! Offering a discount has a lot of benefits for your business. Pay attention to your strategic purpose behind the discount — to increase sales, to increase demand, to test a pricing strategy, or to get the word out about a new product/service — and price accordingly.
When you offer your discount, test to see if your goals have been met. You may be assuming a discount will produce a certain results, and you could be wrong. Tracking your results is the only way to know for sure. (The numbers don’t lie!)
Three Adaptive Pricing Techniques to Use in Your Business
For customers who are concerned about price above all else, offering them your product or service in a different version at a lower price-point will serve them while still keeping your sales up. Here’s an example:
- I teach a 5-week class where students submit their homework assignments to me for review and analysis, and have access to me during class to ask questions. That class is priced at $499.
- For the budget-conscious student, I offer similar material in a self-study version $299, (and they don’t have access to me at all if they purchase the self-study version).
- For customers who want more private access to me to learn the topic and apply it specifically to their own business, they join an ongoing mastermind group that includes the class plus the group access. Each customer has a different need and by creating three versions of the service, I meet the needs of each type of customer.
Additions for Free
Another adaptive pricing technique is to offer an “extra” or “bonus” for free, but keep the base price of your product and service the same.
For example, you could offer your mastermind group to your customer at full price, but then offer them a free additional hour of your time. Walt Disney World theme park had a great success with offering their Buy Four Entry Tickets and Get Three Free package.
But don’t offer pseudo free bonuses unrelated to the product or service that customers are buying. Customers are now savvy to the free bonuses that many internet marketers offer (like: Buy Our Ebook and Get $40,000 Worth of Bonuses Free), and it just makes people think you’re trying to fool them, lowering trust and harming the relationship.
Everyone is telling you to combine a whole bunch of your offerings together, then give the customer a special price. But what if your customer doesn’t want everything in the bundle?
Consider offering your main product or service at full price, and then offering upgrades at a reduced price.
- You could offer your live event for $1,200, then offer an hour of private consulting time for an additional (discounted) fee to those who are attending the live event. Or you could offer them an ongoing mastermind group for an additional fee.
- Or you could offer them recordings of the live event for an additional fee. That way, customers can choose which upgrades are valuable to them and you can clearly see which upgrades are the winners in the eyes of your customer.
The key here is to know your customers, and know what they value when it comes to purchasing services and products. If you’re not sure, test out several pricing strategies and see which one pulls in the most revenue.
It’s also important to stop offering discounts when they are no longer needed to boost sales. Be strategic and think through your pricing ideas before implementing them so they don’t come back to bite you later!