Not selling products may sound foolish, if not counter intuitive, to running a business. However, it's one of the best ways to increase revenue.
Let me explain...
More times than not, customers will not choose the most expensive nor least expensive products available to them. This makes sense as they may feel they don't require the advanced features of a more expensive product, but feel the cheapest product will be of poor quality and not meet their needs.
Because of this, consumers will use the highest and lowest prices they see as a guide for what they will eventually spend.
In the 1970s by two psychologists named Tversky and Kahneman theorized that suggesting an initial figure to a test subject caused that subject to use that number as a starting point for estimating unknown quantities.
In their study test subjects were told the number 65 and then asked to estimate what percentage of African nations were members of the UN. The average response was 45%. They then tested a second group but salted them with the number 10 and their average response was 25%. Amazingly the group that was primed with the number 65 estimated nearly twice the true answer (23%) while the group primed with the lower number estimated a lower percentage (much more accurately).
This practice in the business world is known as Anchor Pricing, and it's a very effective tool for driving up the price tag of products.
Consider these pricing options for a brand new hammer:
- Hammer A: $9.99
- Hammer B: $14.99
- Hammer C: $39.99
Now, consider these pricing options:
- Hammer A: $4.99
- Hammer B: $9.99
- Hammer C: $15.99
What you'll probably notice is that Hammer C either helps to drive the cost of Hammer B up or down. Now people in the market for a good hammer (not the best or cheapest) will be more inclined to spend more or less based on what that anchor price is.
There was a funny story I once read where people that went into a store had to ask the front clerk what the price of a good was.
The one clerk would yell to the back, and ask the other clerk. The other clerk would yell something like "$42!", and the clerk in the front would strategically mishear this price, and say, "it will be $22." More times than not, the customer would immediately throw $22 down on the counter.
This is obviously unethical, but now you see how anchor pricing works. You place one price into your customer's head, and that guides how they think about the value of your products.
So much psychology goes into pricing. More times than not, the cost it to takes to build a product, or carry-out a service, is almost irrelevant to the eventual price. Instead, pricing is a function of what businesses promote, and what the market will bear.
Now, anyone who has gone to business school knows prices increase when there is too much demand of an item, and prices decrease when there is too much supply. However, within those boundaries lie plenty of wiggle room for smart companies to leverage anchor pricing to drive as much revenue as possible.
Experimenting with your anchor pricing is a great way to increase prices, and revenue, despite not selling more expensive lines of product.Don't compete — DOMINATE.
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