Avoid Pricing and Discounting Mistakes

Posted by on Feb 14 2013

In 2008, Pizza Hut saw its sales drop because of the economy. 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:

  1. 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.
  2. 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.”

As a business owner, 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 product and service (pricing being just one aspect of your offer).

For example, many customers value access to a live instructor above learning on their own, so if they have questions or are working on their homework assignments, they can get help 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 discussion and 24/7 access, and are willing to pay to be a member of a private membership website. Other customers value private one-on-one services and are willing to pay a premium price to get your total attention to help find solutions to their problems and challenges.

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.

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.

So, You Want to Offer a Discount

Great! Offering a discount has a lot of benefits for your business. Pay attention to WHY you are offering a 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. But don’t devalue your product or service and don’t train your customers on a discounted price that’s not going to be around for long.

Three Adaptive Pricing Techniques to Use in Your Business

  • Versioning. 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 teleseminar series called SEO For Everyone, 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 $219. But for the budget-conscious student, I offer similar material in a self-study audio with the PDF transcript for $99, (and they don’t have access to me at all if they purchase the lower priced product). For customers who want private access to me to learn how to do SEO, create an SEO strategy, and want me to analyze their website for them, the price is higher. 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 individual service 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.
  • Unbundle. 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 customer, and know what he or she values 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 pay attention to the economy and stop offering discounts when they are no longer needed to boost sales during tough times. Be strategic and think through your pricing ideas before implementing them so they don’t come back to bite you later!

   

21 comments for now

21 Responses to “Avoid Pricing and Discounting Mistakes”

  1. Gbonju AkintolaNo Gravatar

    Thank you Karyn,

    Very enlightening information. As a trainer, there’s always that temtation to give juicy offers just to get ‘bums on seats’.

    04 Jan 2011 at 5:56 am

  2. [...] This post was mentioned on Twitter by Amber Easton. Amber Easton said: RT @pawelgra77 RT @kgreenstreet Self Employed Success Avoid Pricing and Discounting Mistakes http://is.gd/k4C0k [...]

    04 Jan 2011 at 6:08 am

  3. Edward AbelNo Gravatar

    Excellent article… Great points and strategy!

    Ed

    04 Jan 2011 at 7:57 am

  4. Karyn GreenstreetNo Gravatar

    Glad you liked it, Ed!

    04 Jan 2011 at 9:16 am

  5. Karyn GreenstreetNo Gravatar

    You make a good point, Gbonju. Part of the reason I wrote this blog post was because I was in the middle of writing a class on “how to market your teleclasses and training workshops.” I have nothing against early-bird special prices to get students in your classes, as long as you don’t keep extending the deadline. I think that bonuses are a great way to get “butts in seats” but too often I see people giving away free bonuses that have zero to do with the topic of the class. When I ask my students, “What do you do with all the free bonuses you get when purchasing a class or product?” they nearly always reply, “I download it, then it sits on my hard drive for a few years, then I delete it.” Not very valuable.

    04 Jan 2011 at 9:18 am

  6. Karyn GreenstreetNo Gravatar

    P.S.

    Hey, folks, if you don’t see your photo next to your blog comment, it’s because you don’t have a “gravatar” set up. It’s easy (and free). You can set one up here: http://www.gravatar.com/

    It works not only on my blog, but on a lot of blogs, so you set up your photo once, and it will show up on many of your blog comments as long as the blog owner has gravatar set up as well.

    Then I can see your smiling faces! :)

    04 Jan 2011 at 9:22 am

  7. Maulitta BrownNo Gravatar

    Karyn,
    I always love and appreciate the blog posts you write. I don’t always have time to read them all but this one caught my attention so I read it. I shared it on FB and Twitter. It is a good one!
    Thank you,
    Maulitta

    04 Jan 2011 at 12:13 pm

  8. Karyn GreenstreetNo Gravatar

    I’m glad you found it helpful, Maulitta, and thanks for sharing it! If there are any topics you’d like me to cover in this blog about growing your business, just let me know, okay?

    04 Jan 2011 at 12:55 pm

  9. Helga MatzkoNo Gravatar

    What great ideas, Karyn, especially at these times.
    You are a fountain of information, regardless what the topic might be.

    Thanks, with much appreciation as always.

    15 Feb 2013 at 9:07 am

  10. Maria EvansNo Gravatar

    Excellent example, advice and presentation. I’m going to share with my MBA marketing students when we discuss pricing strategies. Thank you, Karyn!

    15 Feb 2013 at 9:17 am

  11. Linda ParriottNo Gravatar

    Thank you Karyn. This article came just in time while I’m thinking about pricing. The concept of adaptive pricing is new to me, but I like the 3 techniques you suggest. Offering 3 versions of the same product is appealing because it allows you to repurpose your content while adding value to your customers to have it their way. Unbundling goes against the grain of “wait, there’s more!” Very refreshing! I too have lots of unread bonus content taking up space on my hard drive that I doubt I’ll ever get around to reading. Yet at the time of purchasing, those bonuses sweetened the deal. Now I have to declutter. Much for me to learn from this post.

    15 Feb 2013 at 9:19 am

  12. Denys KelleyNo Gravatar

    Wonderful article. I was taught to always add value.
    Love your comment about “OWN psychology”~ I was raised by budget shoppers and it took a bit for me to grasp that it was okay to charge what I charge and that people would pay it!

    15 Feb 2013 at 10:18 am

  13. Jen McGahanNo Gravatar

    Yes, very insightful. Discounting is just a bad habit unless you have a strategy. I love the “access to teacher” idea! Thanks, Karyn.

    15 Feb 2013 at 10:37 am

  14. Stephanie MariscaNo Gravatar

    Thanks Karyn for sharing these considerations about pricing. What you suggest allows us to choose what is best for us and our audience instead of following a cookie cutter model that just doesn’t work for everyone. Another great post- thank you!

    15 Feb 2013 at 10:40 am

  15. Terry WildemannNo Gravatar

    As always, a brilliant article. Quite timely, Karyn. Thank you!

    15 Feb 2013 at 10:48 am

  16. Coach EstelleNo Gravatar

    Great article Karyn! I think the part about your Own Psychology is key – finding out what your clients respond to will make a huge difference.

    16 Feb 2013 at 2:18 pm

  17. PolinaNo Gravatar

    Thank you Karyn,
    As always great information offered on a clear, practical way. It is a pleasure to learn from you.
    Polina

    18 Feb 2013 at 10:50 am

  18. Karyn GreenstreetNo Gravatar

    I’m glad you all found it helpful! It’s something we all have to learn to manage. :)

    19 Feb 2013 at 11:49 am

  19. AlisaNo Gravatar

    Great article!!

    19 Mar 2013 at 9:54 am

  20. Karyn GreenstreetNo Gravatar

    Thanks, Alisa, I’m glad you like it! As small business owners, we have to be careful that we don’t underprice our products and services. Yes, it might be a short-term way of bringing in income, but the long-term ramifications can be extensive.

    19 Mar 2013 at 11:14 am

  21. Helga MatzkoNo Gravatar

    Every word echoed with me, Karyn. Thanks as always; you have ALWAYS the most common sense and understandable approaches to issues. I wish that executing would be as smooth.
    Thanks as always.

    25 Mar 2013 at 10:36 am



Category: Running a Strong & Efficient Business