Your customers want to pay more, you just don’t make it easy enough
If you sell boxes, there is a danger that customers can simply Google the item and instantly find other suppliers where they can get the identical item for less. If you sell knowledge, expertise or creativity, then that direct comparison becomes much harder. Buyers have to make their judgements of value for money based on many subjective elements.
One recent survey asked consumers to suggest a price that they thought would be fair for three specific purchases. Firstly a steak and chips meal, secondly the completion of a tax return, and thirdly the valet of a car. Half the respondents were given simple basic descriptions, and the other half a much more expressive explanation of the purchase. i.e. “Steak, chips and veg” Versus “A beautiful 12 ounce steak cooked fresh to your order, accompanied by hand cut skin on fries crispy on the outside and fluffy on the inside, with delicious fresh seasonal vegetables”. In all three comparisons the prices suggested by the respondents was significantly less where the descriptions were simple and bland.
The temptation for anyone in business is to cut to the chase and present a clear and crisp proposal with the price. This often leads to a simplification of the work being done and as a result a lower appreciation of value from customers. Sometimes the desire for speed and simplicity has a high cost on the perception of value.
A similar survey asked consumers to choose between 4 levels of domestic plumber to fix a washing machine. The very best arrived within 30 minutes, debated the merits of repairing or replacing the machine, had the parts on his van, fixed it, tested it and cleaned up the mess. The worst only arrived after persistent chasing, didn’t consider the replacement option, disappeared for hours to get parts and left a mess and his lunch leftovers behind. Two other options were part way between these two extremes, and prices were £40, £55, £75 and £100. The choices were overwhelmingly biased towards the top two options. Many surveys conclude that bottom prices with lowest service levels may be attractive to as little as 10% of the market and usually based on affordability rather than a value for money decision. The top end options can attract as much as 20% of the market, again not always based on value for money as much as a desire to have the best or not wanting to waste time shopping around.
This analysis works well for many service based businesses where it isn’t possible to buy an identical alternative.
Having worked with many service businesses, including those in creative industries, there is another aspect to be considered. Some customers may well want a lower cost option whilst others are prepared to pay a lot more. You could therefore set prices towards the lower end and miss out on profit from those willing to pay a bit more, or perhaps potentially lose them altogether based on their perception that you may not be of the right calibre. Alternatively you could aim high and lose some of the more price sensitive customers. A good way to tackle this is to develop multiple options for clients to choose. Let’s say you develop three levels of Bronze, Silver and Gold. There needs to be a clear differential of service as well as price, which could be the calibre of team member that handles them, or the speed of service. But each customer can, like in the plumber example, choose the level of service and price that suits them. By offering these choices you can hit three segments of the market with solutions tailored to them. Having done this with many businesses, they have often been amazed by who opts for Gold and who opts for Bronze. What is most evident is that many of their customers have valued the extra features of the Silver and Gold options and chosen to pay more for them
The objective for any service business should therefore be to offer 2, 3 or 4 service levels (5 only adds confusion), and to ensure that each one is described in expressive detail and focussed on the value you deliver to the customer, not on how you do it.
Peter Hill
Author Pricing for Profit.