Pricing…. a Sausage Party
The human brain is a wonder of nature. It is complicated, elegant, useful and seriously flawed. Evaluating pricing choices highlights one of the brain’s biggest weaknesses.
Let me give you an example….
- Imagine you had the money and wanted to purchase a $70 thousand car. The dealer, who is an hour from your home offers to drive it to your house and hand you the keys resulting in a two hour drive.
- Alternatively you can drive an hour to the dealership and pick up the keys and the car for a discounted price of $69,500.
Most people surveyed would have the car delivered.
Yet when those same people are asked if they would drive 2 hours for $500… earning $250 per hour… they’d take it.
That’s the human brain….. elegantly flawed.
Today in my ThinkTank group (see ThinkTank) we were discussing pricing strategy. One of the member’s prospect’s was pushing back on paying an annual retainer. The customer didn’t want to commit to some volume… they just wanted to pay as they go. The group of CEOs sitting around the table designed a three choice system that gave the client what they wanted and the business what they wanted. We outlined a 3 tier offer.
- Pre-pay for a large number of units for one fee. For illustration sake we’ll say 1,000 units at $1 each for a total of $1,000. This was the original offer that first had the client pushing back. The client didn’t want to wind up with unused units.
- Client pays $2.24 per unit for the first 250, $1.25 for the next 250, $0.75 for the next, and $0.50 for the last 250 units in a 12 month period.
- Or the client could just buy it ala carte at list price for $1.5 per unit.
Here’s what that would look like assuming the client purchased 250 units per quarter:
Looking at all three plans they all offer good trade-offs for the buyer and the seller. If the buyer doesn’t opt in to pay on a retainer prepaid basis, they can preserve cash, pay as they go while the seller has no guarantee of gross revenue. The non-guaranteed deals provide better margins for the seller.
Now comes the selling. If the seller wants the guaranteed deal it’s time to make the old Costco Analogy Gambit. What is the Old Costco Analogy Gambit you say? First of all the Old Costco Analogy Gambit stratagem (because I love the pomposity of the word stratagem) was established way back 15 minutes ago, when I made it up in this paragraph.
Here’s the logic. You can go to your local grocery store and buy 5 sausages for 15 dollars. At Costco those sausages are only available in 3 packs of 5 for $20. The conundrum (another pompous word I love) is do you spend $5 extra dollars to get 10 sausages that may go to waste?
If you decide to get your sausage at the grocery you would get your 5 sausages for 3 dollars each. At Costco you’d get 10 more sausages (15) for $5 dollars more only paying 75 cents per sausage. But I don’t want 15 sausages? So if you served 7 sausages your total cost per sausage is $2.86 translating to a 14 cent savings per sausage.
You could eat the 5 sausages and freeze the other 10 damn sausages for later.
Alternatively you could eat your 5 damn sausages and have your kids sell the other 10 sausages for 1 dollar each next time they do the lemonade stand thing. If they sold the 10 sausages for 1 dollar each, your original 5 sausages wound up only costing you 5 dollars. You just saved $10 dollars over the Grocery price.
Heck you could donate the 8 leftover sausages to charity. Who cares that you don’t need 15 sausages…. you saved money. Freeze them. Give them to Santa when he shows up for Christmas…. or pay 3 dollars per sausage. Your choice.
The key is make sure you can help the customer make a good decision by:
- offering several pricing options that serve your needs and theirs
- make sure that the deals that have less guarantee of volume deliver more margin
- be creative
- give them analogies better than those sausage analogies to make sure their making a logical decision and not a gut decision like the $500 two hour discount car decision up above
- work with a ThinkTank group to help make sure your brain isn’t playing tricks on you
Here’s the thing folks. If you’re making pricing, payroll, selling your company decisions in a vacuum… I guarantee you are making emotional silly mistakes. The same kind of mistakes people make when they don’t care about $500 when it’s a savings off of a $70,000 car but they’d push their grandma down a flight of stairs for $500 when it’s compared to $0. Want to know what if feels like to have someone on the other side of the table, asking you questions to insure you are not making those silly reptilian brain erros? Sign up for a complimentary 1 hour online coaching session by pressing that little red button on the bottom there.