Avoid Pricing and Discounting Mistakes

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 needed to offer a discount if they wanted to compete with Dominoes Pizza and Papa Johns 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 getting better, 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. A $10 pizza was their new “habit” of pizza purchasing. When they increased the price back to the normal $15, customers saw it as the pizza now cost 50% more, conveniently forgetting the pre-2009 pricing. Your customers only know the most recent price they paid for products and services.
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.” They’re okay with a short-term discount with a deadline, but when you lower your prices for a long period, they wonder about your integrity at having charged higher prices previously.

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 when deciding to buy from you.

For example:

• 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, even if it’s the exact same content.
• Some customers place value on group brainstorming, sharing of best practices to shorten the learning curve, and deep conversations that quickly solve a problem. They are willing to pay more to be a member of a mastermind group compared to what they’re willing to pay for group coaching.
• 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 prefer — 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. Is it true that they want and expect extremely low prices? If you constantly offer things for a discount price (or for free), it may be 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 Walmart 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 your products and services based on the value of what you’re offering, and on your branding strategy. Are you the Walmart 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 and price accordingly:

• to increase sales
• to increase demand
• to test a pricing strategy
• to beta test a product or service before officially launching it
• to get the word out about a new product/service

When you offer your discount, test to see if your pricing strategy goals have been met. You may be assuming a discount will produce a certain result — and you could be wrong. If you want to be certain whether your pricing strategy works, track the results and look at the statistics. (The numbers don’t lie!)

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 of how versioning might work: let’s say you teach a class. You could have 3 versions of that same class, depending on the needs of your customer segments:

• You teach a 5-week class where students submit their homework assignments to you for review and analysis, and have access to you during class to ask questions. That class is priced at $599.
• For the budget-conscious student, you offer similar material in a self-study version $399, (and they don’t have access to you at all if they purchase the self-study version).
• For customers who want more private access to you to learn the topic and apply it specifically to their unique needs, they join your mastermind group that includes both the class material and the mastermind group access for several months after the class.

Each customer segment has a different need — and by creating three versions of the service, you 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 private consulting time. Or you could offer a buy-one-get-one free (BOGO) program where one student registers at full price and then they can invite a friend for free. 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 a menu of upgrades at a reduced price. It looks something like this:

• You could offer your live workshop for $1,200.
• You then offer an hour of private consulting time for an additional (discounted) fee to those who are attending the live event.
• Or you offer them an ongoing mastermind group for an additional fee.
• Or you offer them recordings of the live event for an additional fee.

This 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.

Final thoughts…

The key 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!