November 4, 2021 • 39 mins
Have you ever wondered just how much your pricing actually matters? How about using price as an indicator of quality? SAME. So thanks to our pals at MYOB they've hooked us up with Jon Manning, who's their head of Pricing AND Chief Economist. Throughout his career, Jon has been on a quest to understand the psychology of pricing (and shared his top tips with us today!) and is the author of "Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services" - a book that is as impactful as it is complicated to say.
Quick shout out to our friends at MYOB who have our backs and keep this Business Bible show on the road for you all!
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:12):
This week on the Business Bible, we're going to be
talking about the psychology of pricing, monetization and business models.
We're going to be speaking with John Manning, the chief
economist at MWYOB. John has a unique experience in microeconomics,
which is the pricing, monetization and business models of small business,
as well as behavioral economics, which has been acquired across
(00:34):
a huge variety of industries here in Australia as well
as across Asia and the United Kingdom. John's one of
those people that you, as a small business owner, are
going to want to have in your back pocket. He's
going to teach us a lot about pricing psychology and
how it involves a whole lot more than just assigning
a dollar amount to a product. This is episode thirty
(00:55):
three Pricing Psychology Tips that Work. And as always, thank
you to our friend and MOYOB for keeping this show
on the road each and every single week so it's
free and in your ears to learn from. This is
the Business Bible, so let's.
Speaker 2 (01:18):
Jump straight into it.
Speaker 1 (01:20):
John. I am so excited to have you here and
talk about pricing psychology and value based pricing, and that
is exactly what you're an expert in and recently you
wrote a really interesting article that is available on moyob
and I think we're going to go through the seven
practical tips that you suggest for small businesses.
Speaker 2 (01:40):
When it comes to pricing psychology.
Speaker 1 (01:42):
And the first one was actually really interesting and I
felt like that was going hard straight off the bat,
but that.
Speaker 2 (01:49):
Was the ninety nine cent mark.
Speaker 1 (01:51):
So like the left digit effect, and it essentially says
that some price points are better than others. Can you
tell me a little bit about why that.
Speaker 2 (01:59):
Might be true?
Speaker 3 (02:00):
Hi, Victoria, Thanks for having me. So. The god left
digit effect has been around for a very very long
period of time and basically it works on customers perceptions
that nine dollars ninety nine is perceived to be cheaper
than ten dollars, which it is, but only by a sense.
(02:22):
But it is quite a successful strategy because of the
perception that it creates. But there is a couple of
caveats around it, and the big one is that a
price point ending in ninety nine cents is associated with
something that is discounted or on sale. It's not necessarily
(02:44):
associated with a quality product, which typically have price points
ending in zeros or without decimal places full stop. The
history of this is really interesting though, because as best
as I can trace, the practice may actually go back
to the Bon Marche department store in the eighteen sixties
(03:07):
in Paris, where by having to open the till and
give the customer change it reduced or minimized the likelihood
that the person behind the till may just put the
ten franc note in their pocket. They had to.
Speaker 1 (03:23):
Ah, so it wasn't even about pricing. Psychology was all
about naughty stuff.
Speaker 3 (03:29):
Yeah, hijacked my behavioral economics and pricing psychologists, maybe, But
nevertheless it does. It has been around for a while,
and it actually serves a useful purpose from from various aspects,
not just psychological pricing perspective.
Speaker 2 (03:44):
So does this mean.
Speaker 1 (03:45):
That if I'm a small business and I'm thinking of
putting a product on the market, I should be considering
left digit pricing or is that something I should be
taking into consideration, or I guess how big is the
impact here?
Speaker 3 (03:59):
There's different types of impacts, So obviously you would use
it more in the reject shop than you would in
a Louis Vuton shop at the top end of Colin Street,
for example.
Speaker 1 (04:09):
I cannot imagine walking in and they're like, oh, this
is one thousand and ninety nine.
Speaker 3 (04:14):
But that's not going to happen. So there are places
to use it and there are places not to use it.
But the other thing I was going to say was
that the other important consideration is when you go to
change the prices, because when you go and increase prices,
which most people want to do it sometime, particularly in
the current climate, there was a lot of price increases.
(04:36):
When you have those psychological price points or those vanity
price points of say nine dollars ninety nine or nineteen
ninety nine, you are more likely to see a response
from the customer when you break that psychological price point,
So when you try and go to twenty ninety nine
or twenty one ninety nine, or even ninety nine to
one hundreds. So there are pros and cons which you
(05:00):
should address with open eyes.
Speaker 1 (05:01):
So essentially, if we're a premium brand, maybe it's something
that we're not going to consider as being as impactful.
Speaker 2 (05:08):
But if we're trying to be quite.
Speaker 1 (05:09):
Competitive in the market, and maybe we have a product
that could be in an area that's quite saturated, it
could be something to differentiate ourselves.
Speaker 3 (05:19):
Yeah, it could be. And it also seeguys nicely into
one of the other points in the article around price
being indicator of quality. So if, like if you're a
startup business and you've got either an evolutionary or a
revolutionary product, there's a very real possibility that customers have
absolutely no reference price in mind. They've got no idea
(05:43):
what your price should be. Ask getting one what they
think that the price of an airfare from Melbourne to
Sydney or Cydney to Brisbane should be, and they will
have a reference price absolutely, it will come from a
previous journey or advertising or something like that. So when
you're in that realm where people are not familiar with
your product, price is an indicator of quality, and a
(06:04):
price point that ends in zeros will reflect quality and
there'll be questions asked about it if it doesn't in
a zero.
Speaker 1 (06:12):
That's actually really important to consider as well, because if
you're new in this space and trying to prove yourself
and you've spent a lot of time, energy and effort
crafting a premium looking brand to then chuck a ninety
five on the end of it or ninety nine on
the end of the price, you don't want to just
give your consumer reason to doubt you after you've put
in all that energy.
Speaker 3 (06:33):
Yeah, exactly.
Speaker 1 (06:34):
So I think the next thing I want to ask
you about is making product value super clear.
Speaker 2 (06:40):
And how do we do that?
Speaker 1 (06:42):
How do we start saying to our consumers the value
of this product is X, Y and z or it
is superior in comparison. And I mean, you can do
that obviously with the left digit effect, but how do
we make it clear to our consumers.
Speaker 3 (06:57):
I always give the example of Apple. You've done a
lot of workshops over the years with various people startups
and stuff like that, and one of the one of
the interesting questions to ask people is what do you
like about Apple? And you know what people never say.
They never say I love the prices. They say I
(07:17):
love the features, I love the brand, I love how
it all works together. You know, the warm and fuzzy
feeling I get from using app that the packaging people
keep the packaging. But nobody ever says I love the pricing.
What Apple has really successfully done is desensitized customers to
(07:39):
price and sensitize them to value. You know, there's there's
a whole combination of things. A lot of this pricing
psychology stuff can assist with that. Another related example is
the context or the environment that a product is purchased in.
So Richard Taylor from the University of Chicago, who won
(07:59):
the No Economics Prize a couple of years ago for
behavioral economics in the eighties, did the think of the
beer on the beach experiment, And.
Speaker 1 (08:07):
That sounds like a whole bunch of fun kind of experiment.
Speaker 2 (08:09):
I'm not going to lie.
Speaker 1 (08:10):
I'll be involved.
Speaker 3 (08:12):
So he has a whole bunch of students. You know,
you're sitting on the beach on a hot day, and
I'm going to go to the Rundown grocery store at
the end of the beach and grab us a couple
of ice cold beers. How much are you prepared to pay?
And you know, nineteen eighty dollars? They said something like
a dollar fifty or something like that. He said, Okay,
(08:32):
now I changed my mind. Instead of going to the
Rundown grocery store at that end of the beach, I'm
going to the five star hotel at the other end
of the beach, where they have exactly the same beer,
eat exactly the same temperature. What are you prepared to
pay now, and the average response is about two dollars
sixty five or there about. Gosh. Now, traditional economic theory
(08:53):
says that is the same product. There's absolutely no difference
between the two product. The willingness to pay should be idea.
Behavior economics says no, the price is different because the
context in which the second purchase is being made is
completely different from the first context, and a premium can
be obtained for that.
Speaker 2 (09:13):
I love that.
Speaker 1 (09:14):
I feel like it's so important to understand that as well.
And it's not necessarily about the product, which a lot
of people think, I've got to pack my product full
of so much more value or offer so much more.
It can often be about the experience and about that
sales process exactly so.
Speaker 3 (09:33):
And like you think to yourself, Okay, well I don't
sell beers at one end of the beach or the other.
How do I apply that in my business? Well, take
the example of say Gap and Old Navy and Banana
Republic in the US. One is the bottom end of
the market, one's the mid end of the market. One's
the top end of the market. You go into Gap
and you've got the polished pine floorboards and stuff like that.
(09:56):
You go into old Navy and it's got brushed concrete.
That's how the context is different, and that helps to
reinforce the different prices in the two stores. The same
can apply to a website. I used to work for
a company where we sold motorbikes online and we change
the background image from a dirt bike to a Harley Davidson.
It's stuff like that which changes the context in which
(10:18):
your prices appear that help make a bit more difference
to the bottom line.
Speaker 1 (10:22):
And I think that that's really important to understand deeply
as well, because what you're talking about with the change
of a dirt bike to a Harley Davidson, you weren't
doing that. So they click on the website and they
go cool, a Harley Davidson. It's actually that subliminal feeling
of this is more premium or this is more luxury,
and they, underlyingly are going to think that your value
(10:44):
is higher than somebody else or one of your competitors,
purely because of the signs you're giving off. Yeah, but
we're talking before about price being an indicator of the
quality and that left digit effect. But how do we
actually use price to tell our consumer that they are
purchasing a valuable item and really teach them that this
(11:08):
is worth more. And I mean we're talking about okay,
Louis Vuitton wouldn't have one thousand and ninety nine dollars
and ninety nine cent bag, but they have one thousand
dollars shoes, and if we compare that to a Kmart
pair of shoes, we intrinsically assume that that quality is supreme,
when in reality we know some luxury retailers are still
(11:28):
sourcing their content from the same place as Camart.
Speaker 2 (11:32):
So what do we do.
Speaker 3 (11:34):
We should put a link in the show notes to
the pay LESSI experience in the US a couple of
years back. So I don't know whether you saw this
or you remember it, but there was a shop in
a mall in Los Angeles that change their name from
pay less to pay Lessie.
Speaker 2 (11:55):
Oh my gosh, I have seen this.
Speaker 1 (11:58):
For a second, I was like, oh, I don't think
I have no, I have seen this and it is hilarious.
We definitely will put this in the show notes.
Speaker 3 (12:05):
It is absolutely hilarious. I mean that again is an
example of the context in a store changing and for
the benefit of the listeners who haven't watched the video.
Yet they were payless shoes with pay less ee price
tags put on them. So there were forty dollars shoes
that in some cases were marked up into the hundreds
(12:26):
of dollars, and people the stuff walked off the shelves.
Speaker 1 (12:31):
Because people were buying it and they were so proud
of their purchasers to find out it was a forty
dollars pair of shoe. But essentially they just assumed that
the value was there because the prices were there and
they hadn't heard of this and this.
Speaker 2 (12:44):
Is so nice.
Speaker 3 (12:46):
Yeah, and it's really worth watching the video to the end,
but it was a great experiment to see, you know,
the difference between you know, what customers think and what
they actually do, which is at the heart of a
lot of behavior economics and pricing psychology.
Speaker 1 (13:01):
And if we apply that to the small businesses in
our BBC community, I guess that's something that we really
need to be aware of as well, because so many
of us don't have the confidence or the tools or
the skills at the time of launching, so we often
undervalue ourselves and then when you go, oh, well, now
I've got it. I've been in business for a year,
(13:22):
I want to increase my prices, and it's very hard
to make that jump. So sometimes you have to take
that jump at the start and use price as an
indicator of quality, regardless of how you're feeling about it.
But it is hard to do that. So John, what
would your advice be there?
Speaker 3 (13:40):
One of the most powerful things that any business can do,
and to be honest, should do, is always offer customers
three choices. The technical term for this is goldilocks pricing.
The non technical term is extreme dissubversion. But it's good
(14:00):
the best, small, medium, and large. And here's why it's
important and why it works. If you have one offer,
you've got a fifty to fifty chance of closing the
deal and that's it, end of story. If you have
two offers, you are going to force the customer to
make a price based decision, and roughly in about sixty
percent of occasions, they will probably opt for the cheapest
(14:22):
of the two. When you give customers three options, there's
two things that happen. The first thing that happens is
the customer thinks to themselves, which one do I buy?
And that's different to thinking to themselves do I buy.
The second thing that happens is you force them to
make a value based decision because they need to go, Okay,
(14:43):
I've got three options here, what explains the difference between
the three prices. So Goldilocks extremeless aversion, and that can
actually be a vehicle for small businesses to test the
appetite for price increases. And you may actually head into
another realm of pricing psychology and behavioral economics, which is
(15:06):
the decoy effect. So you could make one so expensive
that it actually makes the other two options look really good.
The decoy may be the most expensive one or it
may be the cheapest one. So to give you examples
of those years ago, Telstra used to have I think
a two or a five gigabyte ISP plan. Now I
(15:29):
don't know anybody who would last probably would get would
get through a day on two gigabytes, but it got
people onto the product ladder, and then you could you know,
you would move through the product ladder as your usage
and needs change. So there's an example of a decoy
at the bottom of a product ladder. You can also
have them at the top of a product ladder. So
(15:51):
there's a cafe called Normals at the Meridian Hotel in
New York City and they have a one thousand dollar omelet,
but they also have a one hundred dollars one, which
one sells. What about a bottle of wine? Do you
ever buy the most expensive bottle of wine at a
restaurant by the subsiluately?
Speaker 1 (16:09):
Not, John, I'm young. I can't afford the most expensive
bottle of wine, but thank you for assuming I could
have that opportunity in life.
Speaker 3 (16:16):
But most the most popular selling wine in most restaurants
will be the second most expensive one.
Speaker 1 (16:23):
And is that something that we could adopt? And you know,
I know you said menu design, but this center stage effect,
can we maybe implement that on our websites or change
the way that we sell things online to actually adopt
this center stage effect and make use of it.
Speaker 3 (16:41):
Yeah? Absolutely, Yeah, So you know what I just talked
about regarding the three options that can equally apply to
a proposal for a listener who's perhaps in professional services.
That could apply to someone running a cafe with their menu.
It could equally apply to a digital business that might
be listening and how they have their pricing page set up,
(17:03):
which I think.
Speaker 2 (17:04):
Is so interesting.
Speaker 1 (17:06):
And I'm someone who does have a background in psychology,
but when I studied it, I had absolutely no idea
how that would end up applying to small business and
ultimately my own small business. And I think that is
just so empowering once you start learning about that, because
these are tips and tricks that you can start implementing
(17:27):
on your website or in your pricing models to feel
a little bit more empowered but also get the results
that you're looking for. You just don't go, Okay, cool,
this is the pricing model, this is how I'm going
to look at things, because you just think I'm so
excited about this product that I'm going to bring to life.
But then you're bombarded as a small business owner with
(17:48):
decisions like this to be making John, where should we
be focusing? I know this episode for a fair few
people is going to be a bit overwhelming because they're
going to go, what do you mean the pricing's wrong
or the values out or you know, maybe I'm not
doing it right. Where as a small business owner, can
we start focusing to have I would say the best
type of impact from the very beginning.
Speaker 3 (18:10):
The best answer to that question is is to rewind
back to the introduction where you say we're going to
actually have a talk about pricing psychology and value based pricing.
And it depends on whose paper you read, but typically
about seventy to eighty percent of companies price on a
cost plus pricing basis. So what that means is you go, Okay,
(18:32):
I've got costs X, Y and Z and so forth.
I'm going to throw a little bit of markup on
top of that and hope cross my fingers that that's
what the customer is going to pay. Most people do
not buy anything because of a customer's because of a
vendor's cost base. They buy because they get value from
(18:54):
the product or service. From my perspective, the starting point
for a you know, for businesses starting out is to
think about the value that you're providing and link your
pricing to value, either through discussions with customers or with
(19:14):
comparisons to alternatives.
Speaker 4 (19:16):
For example.
Speaker 1 (19:29):
Now, John, it would be a miss of me to
not mention the fact on this podcast that not only
do you work for MYO B and you're a very
valued member of their team, so valuable that they've actually
put you forward to hang out with me for the
hour on this podcast, but you're also an author and
you've written a book that essentially exists to help small
(19:51):
business owners understand value based pricing and monetizing their products
and services. Now I've introduced that in a way that
hasn't actually mentioned the title of your book, and usually
I would do that as an articulate young woman. But John,
could you maybe tell us what the title of the
book is and why it's really hard to google?
Speaker 3 (20:16):
It is not actually, because if you just type in
Flo double C into Google, you should get the word
Flox Knox in a hilification.
Speaker 1 (20:26):
Oh yeah, this is exactly what I would have been
looking for.
Speaker 3 (20:29):
It is the longest F word in the English language.
It is one let alonger than anti disestablishmentarianism.
Speaker 2 (20:37):
Oh that's exactly what I thought. When I saw it.
Speaker 1 (20:40):
I was like, Wow, he's really going for it.
Speaker 3 (20:43):
So it's not it's not in everybody's vocabulary. But it
is a beautiful word for pricing because it means the
habit of estimating something as valueless.
Speaker 1 (20:56):
So can you maybe step us through. I know in
your book you have a few deen step value price
canvas is what you referred to it as. How do
we apply that to our business? Obviously I'll be linking
this book in the show notes to throw that out
to our community because I do think it will be
a really valuable read. But can you give us the
(21:16):
TLDR Because if the title is anything to go by,
I feel like it's not the shortest book in the world.
Speaker 3 (21:24):
I'm hoping that it's a very easy and effective book
to digest. And the reason for the canvas. So the
book is in two halves. The canvas is described in
the first half of the book, and the canvas helps
you understand that your value that your product or service
provides to customers. And the canvas evolved because when I
was talking to you know, startups, entrepreneurs and side hustlers,
(21:47):
they were all using the business model canvas, but they
actually had nothing in the revenue model box. So the
canvas is designed as an exercise to work through. You
don't necessarily need to fill out all of the quadrants,
but the price of going through each of the fifteen
steps will help someone identify the value they provide. The
second half of the book then helps you price on
(22:10):
the basis of value now that you've understood it from
the first half of the book. So it goes into
four different methodologies. There's a methodology called customer value analysis.
There's a methodology called economic value analysis. There's a short
sharp methodology called the Van westerndor price sensitivity meter, and
(22:32):
then it wraps up with a five step approach to
developing a SAS or a subscription model.
Speaker 1 (22:38):
And when you talk about subscription models, are you talking
about ongoing service or are you talking about the offering
payments in installments as a subscription model.
Speaker 3 (22:49):
So the definition of subscription I use is sell once,
renew many. So there is a generally a monthly recurring
fee that is charged for a particularly service. Now that
service can be a tech service like we offer at
n YOB, or it could be you know, there's so
(23:11):
many different dog food. Dog food is available on subscription.
Headphones are available on subscription. There's a whole proliferation of
goods as well as services that are increasingly becoming available
on a subscription model. Not every product is perfect for subscription.
And dog food is one like dogs eat every day
(23:34):
and they're not fussy on varieties, so it works. Really
good coffee, you know, is not as good, but it's
still something that a lot of people drink, you know,
two cups five days a week sort of thing. So
it's got pretty predictable demand to it. And there are
some products that just absolutely you know, have very low
(23:57):
likelihood of being successful as a subscription product. So the
first point of call has got to be is there
that recurring and predictable usage of the product or service
that I'm providing which I can convert to a subscription?
Speaker 1 (24:15):
All right, John, to pivot from talking about subscription models
to talking about paying in installments. We know, because you
said just before, people love options like the Goldilocks effect.
But should we be offering multiple different types of payment
opportunities to our clients or does that potentially shoot us
(24:35):
in the foot?
Speaker 3 (24:37):
No, it doesn't necessarily shoot you in the form. I
always like to make the distinction between setting prices and
getting prices. And setting prices is putting the dollars and
cents onto a price tag, if you like. But then
how you get the customer to give you those dollars
(24:58):
and cents is all about how you get your price,
and that's things like terms and conditions and installments can
be you know, should be part of the terms and
additions and they can work for you. So you know,
smaller price points, reduced price sensitivity, So you know, there
(25:19):
we less price sensitivity around a fifty dollars a month
subscription than are six hundred dollars per year. Even pricing
per day that makes the price even smaller. There are
plenty of examples around that express the price in a
smaller unit, but that's still charged the same way. But
just the fact of expressing it as per day, per month,
(25:42):
per year actually affected the attractiveness of the.
Speaker 1 (25:45):
Offer, which I think is quite interesting and definitely applicable
to a lot of businesses as well, especially if it's
a product that people might use every day. You can
really justify your value and be like, okay, cool, it's
less than a coffee per day. People go, oh, actually
that makes sense. That is worth more than a coffee
per day to me. But in the grand scheme of things,
(26:07):
they might be looking at the price trying to justify
it to themselves. You're providing them with the justifications.
Speaker 3 (26:14):
Yeah, And that's a really good point.
Speaker 1 (26:16):
It's because people find it very hard to contextualize a purchase,
especially when you look at the grand cost of it.
That can feel really overwhelming. It's like, you know, all
like in this because I'm a I would love to
think fashionable younger female in cost per wear. So I
have had this argument for a very long time with
(26:37):
my friends who are very into fast fashion. They'll be like, oh,
this you know top was sixty bucks, or this skirt
was one hundred dollars and Victoria cannot believe you'd spend
three hundred and fifty dollars on.
Speaker 2 (26:48):
X, YORZ.
Speaker 1 (26:49):
That's ridiculous. But I find myself wearing it for six
plus years and my friends are throwing those things away
at the end of a season. You kind of go, okay.
But if you looked at cost per ware and maybe
this is my way of justifying more expensive purchases, but
I would argue that I'm getting more value out of that. However,
(27:09):
if someone hadn't introduced me to the concept of cost
per ware, I would be feeling a little bit guilty
about the fact that I'm spending more than my friends
on a particular item. So I think it is definitely
about teaching people how to justify it to themselves in
a way.
Speaker 3 (27:26):
So there's a couple of things to unpack there.
Speaker 1 (27:29):
One, my shopping addiction is first and foremost.
Speaker 3 (27:33):
And I'm going to do this in a covert way.
So there's two things to unpack there. One is that
people are better at making relative decisions than they are
making absolute decisions. So you can compare a price increase
to a magnum price. That is easier to do than
(27:53):
saying the price is going up three dollars sixty. That's
the first thing. The second interesting thing to unpack there
is the price of a dress. If I show you
a dress identical dresses, one is sixty dollars, the other
one is one hundred dollars with forty percent off. So
it is sixty dollars. Which one sells the most.
Speaker 1 (28:14):
Oh, the one hundred dollars one with a forty percent off,
because I just think.
Speaker 2 (28:17):
It's more valuable.
Speaker 3 (28:18):
John, It's that, but it's also you know you're getting
a bargain. And the psychology of the consumer today is
they love the thrill of a hunt to find that
forty percent off, and they love the thrill of the
kill to get forty percent off because getting it gives
you bragging rights with all your friends. Look, I've got
forty percent off this dress, so you can again, you
(28:40):
can use that in your pricing strategy if you're in
a retail environment and stuff like that. It also means
that an integral part of any business's pricing strategy has
got to be discounts. Because discounting is not going away
in a hurry. It is proliferated over the last ten
or fifteen years. But the critical thing for small businesses
(29:03):
gives and gets. If you're going to give someone a discount,
get something in return, get a longer contract, get a
larger sale, something. It's a negotiation, not a surrender.
Speaker 1 (29:15):
I like that, and I think that that's something we
can all apply to what we do, because I think
that discounting for a while has been seen as something.
Speaker 2 (29:23):
Like should I do it? Shouldn't I do it?
Speaker 1 (29:25):
I know with my content, I have an online course,
and I deliberated four weeks over what the price would
be and how that would work and compare it to
every other course on the market, even though I couldn't
find one that was even comparable, which is why I
started it. But then I looked at it and I
was like, do I do discounts? Do I not do discounts?
(29:46):
Does that take the shine or the value away? And John,
You're absolutely correct. When I offer a discount, the sales
go through the roof. In comparison, to the month to
month sales. It's as though people are waiting for it.
Speaker 2 (30:00):
So are we.
Speaker 1 (30:01):
Putting ourselves on the back foot by discounting something and
giving the consumers the knowledge that we will do it
so they're holding out for that purchase. Or should we
be discounting more regularly than just at Christmas or at
milestone occasions.
Speaker 3 (30:16):
So again there's a few things to consider there. While
I'm not an advocate of cost plus pricing, it is
through analyzing your profitability that you will know whether or
not those incremental sales from discounting are profitable or not.
And perhaps I should flick you through a matrix which
(30:37):
really simply calculates the impact of discounting. So I've got
two matrices that actually show you what sort of volume
up if you've got to achieve two offset a discount,
and I can't know what the other one is, but
they're really useful matrices. You know, people think their revenue
goes through the roof, and it may well do, but
(30:58):
it does need to go through stronomically depending on your
margins for profitability to be achieved. But then the other
example is, you know, going back to the example I
gave before, do you you train the market to buy
when you're only on sale? You know, if you look
(31:19):
at some of our biggest retailers and so forth, if
they haven't got Manchester on sale or towels on sales
or kitchen We're on sale, their footfall is down. And
a lot of it for some of those retailers is
because they have trained the market just to come in
when they've got stuff on sale.
Speaker 5 (31:34):
And yeah, of course I'm worried about yeah, and you've
got so let it make the customer earn the discount
gives and gets like if you're doing online courses, you know,
sign up three of your friends or something and the
fourth person's free or something like that.
Speaker 3 (31:50):
There are ways already out there to adapt their models
to specific industries. There's not a lot that's new in pricing.
A lot of it's already been done. You just need
to look around and see what others have done.
Speaker 1 (32:03):
And I think that's an important point as well, to
do your research and look around at what everybody else
is up to and see if that might work for you,
because it doesn't always work. And I guess that leads
into my question about the sunk cost fallacy, which essentially
describes our tenacity or tendency sorry to follow through on
something that we've already invested time, energy, effort, and money into.
(32:25):
And I guess this applies to small businesses and relationships
and jobs and literally everything in life. But when it
comes to business, you recommend that we actually employ this
sunk cost fallacy?
Speaker 2 (32:39):
Why would we want to do that to ourselves?
Speaker 1 (32:41):
John?
Speaker 3 (32:43):
Well, again, there's you know, if you've got customers that
purchase things frequently, you can almost create a subscription out
of that. So Amazon, Amazon do this really well. Catch
do it really well as well. You know, you sign
up for a membership of I can't remember what Catch
(33:05):
is called, but you sign up for you pay the
ad your fee for it, and that gives you discounts
I think, on deliveries or so forth for free deliveries.
And there's certainly evidence out there that because people enroll
in those programs, when the opportunity arises, they try to
(33:29):
amortize their participation in those programs as much as possible
by buying lots of stuff.
Speaker 1 (33:35):
And is that something that small business owners should be
considering or talking about? And I mean it makes a
lot of sense. And as an Amazon Prime member myself.
I do see the email pop up into my inbox
to say, Victoria, it's Amazon Prime Day, don't miss out,
and you find yourself browsing through things you definitely don't
(33:57):
need and sometimes don't even want, but it seems like
a deal at the time. But it's one of those
things that you go, Okay, that works for Amazon, they're
so big, it works for eBay, so big catches the same.
Is there a way we could scale that back for
a small business.
Speaker 3 (34:13):
It would depend on the business. So it's a bit
like our discussion about what goods and services make good
subscription businesses. It depends, but there'll be things like you know,
like there's predictable demand and little little change in variety,
the stuff that makes dog food a good subscription product.
(34:34):
There'll be equivalents on you know, membership plans and stuff
like that, which can translate into into products that are
catch like or Amazon like.
Speaker 1 (34:45):
And I think that you could potentially even stretch that
into an email subscription, so it might not necessarily be
them quote getting their money's worth, but make the most
of the membership you've got, and you could start referring
to your DA or your email list as your community
or as a subscription so that when you are emailing people,
(35:07):
it's like, oh, you're in this exclusive community. Make the
most of it, or give them access to exclusive discounts
or potentially making them feel like they get access to
products before other people do without having to employ a
paid subscription model. So I think that there's potentially a
little bit to learn there, like for small businesses, because
(35:29):
I don't even do that, and I think it could
be something that might, you know, make it feel a
little bit more exclusive. And I feel like this has
been such an insightful episode to actually learn a bit
more about what that looks like and how that could
potentially work for us. And I mean not every single
tip that we've shared or piece of advice that you've
(35:50):
shared is going to be applicable. But that's what you
have to do as a job as a small business
owner is work out what's going to work for you
and what's not a maybe doing a little bit of
trial and error and seeing how these things could be employed.
Because at the end of the day, as much as
we spoke about the ninety nine cent mark or what
you're calling the left digit effect and creating value for
(36:13):
the consumer and making sure they see it, know how
to do it, and offering lots of value and offering
lots of different pricing options for them. At the end
of the day, pricing psychology is about so much more
than just putting a dollar amount on a product and
knowing that people will purchase it. John, is there anything
that you would like to leave the BBC community with,
(36:35):
Whether that is a tip or a trick or a
podcast you recommend. It could be the Beer on the
Beach experiment to look into, or I remember before we
started recording, you recommended a podcast that you've done historically.
How can we learn more about this?
Speaker 3 (36:51):
My other favorite video on YouTube is called The Wicked
Sick Project.
Speaker 1 (36:56):
What is that?
Speaker 3 (36:58):
The Wicked Sick Project? So this is two guys who
buy a BMX bike on eBay and then they put
it back on eBay, but they change the description of
the bike and they make stuff, They make shit up.
They say this bike has done fifty thousand skids and
(37:18):
twenty thousand bunny hopes and so many monos and all
that sort of stuff. It should have sold for roughly
the same prices they bought it for. They sold at
a five hundred percent premium because they changed the context
in which exactly the same bike, they changed the story
around it, the context they changed it to a five
(37:41):
star hotel from a Rundown grocery store. And I think
that's one powerful message that I always leave people with
when you think about your pricing, do you want to
be the Rundown grocery store at the end of the
beach or the five star hotel?
Speaker 1 (37:55):
I like that, and I feel like that is a
beautiful place to stop. Thank you so much for sharing
with us so much thought, so much energy, and so
much of your knowledge. I feel like I am ever
grateful for MOYOB being able to connect me with people
like you so that I can learn more about small business,
but also our community can for free, which is honestly
(38:18):
such a special thing to be able to share. Fantastic,
all right, Thank you so much once again to John
for joining us and sharing his plethora of experience.
Speaker 2 (38:40):
Who would have.
Speaker 1 (38:41):
Thought that we needed to take into consideration the left
digit effect, or how to make product value clear, or
even what anchoring is. And once again, thank you so
much to our friends at NYOB for sharing their experts
with us so that we can learn from them. Honestly,
each and every single week I learned something new and
I'm genuinely so great grateful to have such a team
(39:01):
to rely on. But as always, that is all we
have time for today. So just before we head off,
we'd like to acknowledge and pay a respect to Australia's
Aboriginal and torrest Right Islander people's, the traditional custodians at
the lands, the waterways and the skies all across Australia.
We thank you for sharing and for caring for the
land on which we are able to learn. We pay
(39:24):
our respects to elders past and present, and we share
our friendship and our kindness. See you guys next week
for another episode of the Business Bible.
This week on the Business Bible, we're going to be
talking about the psychology of pricing, monetization and business models.
We're going to be speaking with John Manning, the chief
economist at MWYOB. John has a unique experience in microeconomics,
which is the pricing, monetization and business models of small business,
as well as behavioral economics, which has been acquired across
(00:34):
a huge variety of industries here in Australia as well
as across Asia and the United Kingdom. John's one of
those people that you, as a small business owner, are
going to want to have in your back pocket. He's
going to teach us a lot about pricing psychology and
how it involves a whole lot more than just assigning
a dollar amount to a product. This is episode thirty
(00:55):
three Pricing Psychology Tips that Work. And as always, thank
you to our friend and MOYOB for keeping this show
on the road each and every single week so it's
free and in your ears to learn from. This is
the Business Bible, so let's.
Speaker 2 (01:18):
Jump straight into it.
Speaker 1 (01:20):
John. I am so excited to have you here and
talk about pricing psychology and value based pricing, and that
is exactly what you're an expert in and recently you
wrote a really interesting article that is available on moyob
and I think we're going to go through the seven
practical tips that you suggest for small businesses.
Speaker 2 (01:40):
When it comes to pricing psychology.
Speaker 1 (01:42):
And the first one was actually really interesting and I
felt like that was going hard straight off the bat,
but that.
Speaker 2 (01:49):
Was the ninety nine cent mark.
Speaker 1 (01:51):
So like the left digit effect, and it essentially says
that some price points are better than others. Can you
tell me a little bit about why that.
Speaker 2 (01:59):
Might be true?
Speaker 3 (02:00):
Hi, Victoria, Thanks for having me. So. The god left
digit effect has been around for a very very long
period of time and basically it works on customers perceptions
that nine dollars ninety nine is perceived to be cheaper
than ten dollars, which it is, but only by a sense.
(02:22):
But it is quite a successful strategy because of the
perception that it creates. But there is a couple of
caveats around it, and the big one is that a
price point ending in ninety nine cents is associated with
something that is discounted or on sale. It's not necessarily
(02:44):
associated with a quality product, which typically have price points
ending in zeros or without decimal places full stop. The
history of this is really interesting though, because as best
as I can trace, the practice may actually go back
to the Bon Marche department store in the eighteen sixties
(03:07):
in Paris, where by having to open the till and
give the customer change it reduced or minimized the likelihood
that the person behind the till may just put the
ten franc note in their pocket. They had to.
Speaker 1 (03:23):
Ah, so it wasn't even about pricing. Psychology was all
about naughty stuff.
Speaker 3 (03:29):
Yeah, hijacked my behavioral economics and pricing psychologists, maybe, But
nevertheless it does. It has been around for a while,
and it actually serves a useful purpose from from various aspects,
not just psychological pricing perspective.
Speaker 2 (03:44):
So does this mean.
Speaker 1 (03:45):
That if I'm a small business and I'm thinking of
putting a product on the market, I should be considering
left digit pricing or is that something I should be
taking into consideration, or I guess how big is the
impact here?
Speaker 3 (03:59):
There's different types of impacts, So obviously you would use
it more in the reject shop than you would in
a Louis Vuton shop at the top end of Colin Street,
for example.
Speaker 1 (04:09):
I cannot imagine walking in and they're like, oh, this
is one thousand and ninety nine.
Speaker 3 (04:14):
But that's not going to happen. So there are places
to use it and there are places not to use it.
But the other thing I was going to say was
that the other important consideration is when you go to
change the prices, because when you go and increase prices,
which most people want to do it sometime, particularly in
the current climate, there was a lot of price increases.
(04:36):
When you have those psychological price points or those vanity
price points of say nine dollars ninety nine or nineteen
ninety nine, you are more likely to see a response
from the customer when you break that psychological price point,
So when you try and go to twenty ninety nine
or twenty one ninety nine, or even ninety nine to
one hundreds. So there are pros and cons which you
(05:00):
should address with open eyes.
Speaker 1 (05:01):
So essentially, if we're a premium brand, maybe it's something
that we're not going to consider as being as impactful.
Speaker 2 (05:08):
But if we're trying to be quite.
Speaker 1 (05:09):
Competitive in the market, and maybe we have a product
that could be in an area that's quite saturated, it
could be something to differentiate ourselves.
Speaker 3 (05:19):
Yeah, it could be. And it also seeguys nicely into
one of the other points in the article around price
being indicator of quality. So if, like if you're a
startup business and you've got either an evolutionary or a
revolutionary product, there's a very real possibility that customers have
absolutely no reference price in mind. They've got no idea
(05:43):
what your price should be. Ask getting one what they
think that the price of an airfare from Melbourne to
Sydney or Cydney to Brisbane should be, and they will
have a reference price absolutely, it will come from a
previous journey or advertising or something like that. So when
you're in that realm where people are not familiar with
your product, price is an indicator of quality, and a
(06:04):
price point that ends in zeros will reflect quality and
there'll be questions asked about it if it doesn't in
a zero.
Speaker 1 (06:12):
That's actually really important to consider as well, because if
you're new in this space and trying to prove yourself
and you've spent a lot of time, energy and effort
crafting a premium looking brand to then chuck a ninety
five on the end of it or ninety nine on
the end of the price, you don't want to just
give your consumer reason to doubt you after you've put
in all that energy.
Speaker 3 (06:33):
Yeah, exactly.
Speaker 1 (06:34):
So I think the next thing I want to ask
you about is making product value super clear.
Speaker 2 (06:40):
And how do we do that?
Speaker 1 (06:42):
How do we start saying to our consumers the value
of this product is X, Y and z or it
is superior in comparison. And I mean, you can do
that obviously with the left digit effect, but how do
we make it clear to our consumers.
Speaker 3 (06:57):
I always give the example of Apple. You've done a
lot of workshops over the years with various people startups
and stuff like that, and one of the one of
the interesting questions to ask people is what do you
like about Apple? And you know what people never say.
They never say I love the prices. They say I
(07:17):
love the features, I love the brand, I love how
it all works together. You know, the warm and fuzzy
feeling I get from using app that the packaging people
keep the packaging. But nobody ever says I love the pricing.
What Apple has really successfully done is desensitized customers to
(07:39):
price and sensitize them to value. You know, there's there's
a whole combination of things. A lot of this pricing
psychology stuff can assist with that. Another related example is
the context or the environment that a product is purchased in.
So Richard Taylor from the University of Chicago, who won
(07:59):
the No Economics Prize a couple of years ago for
behavioral economics in the eighties, did the think of the
beer on the beach experiment, And.
Speaker 1 (08:07):
That sounds like a whole bunch of fun kind of experiment.
Speaker 2 (08:09):
I'm not going to lie.
Speaker 1 (08:10):
I'll be involved.
Speaker 3 (08:12):
So he has a whole bunch of students. You know,
you're sitting on the beach on a hot day, and
I'm going to go to the Rundown grocery store at
the end of the beach and grab us a couple
of ice cold beers. How much are you prepared to pay?
And you know, nineteen eighty dollars? They said something like
a dollar fifty or something like that. He said, Okay,
(08:32):
now I changed my mind. Instead of going to the
Rundown grocery store at that end of the beach, I'm
going to the five star hotel at the other end
of the beach, where they have exactly the same beer,
eat exactly the same temperature. What are you prepared to
pay now, and the average response is about two dollars
sixty five or there about. Gosh. Now, traditional economic theory
(08:53):
says that is the same product. There's absolutely no difference
between the two product. The willingness to pay should be idea.
Behavior economics says no, the price is different because the
context in which the second purchase is being made is
completely different from the first context, and a premium can
be obtained for that.
Speaker 2 (09:13):
I love that.
Speaker 1 (09:14):
I feel like it's so important to understand that as well.
And it's not necessarily about the product, which a lot
of people think, I've got to pack my product full
of so much more value or offer so much more.
It can often be about the experience and about that
sales process exactly so.
Speaker 3 (09:33):
And like you think to yourself, Okay, well I don't
sell beers at one end of the beach or the other.
How do I apply that in my business? Well, take
the example of say Gap and Old Navy and Banana
Republic in the US. One is the bottom end of
the market, one's the mid end of the market. One's
the top end of the market. You go into Gap
and you've got the polished pine floorboards and stuff like that.
(09:56):
You go into old Navy and it's got brushed concrete.
That's how the context is different, and that helps to
reinforce the different prices in the two stores. The same
can apply to a website. I used to work for
a company where we sold motorbikes online and we change
the background image from a dirt bike to a Harley Davidson.
It's stuff like that which changes the context in which
(10:18):
your prices appear that help make a bit more difference
to the bottom line.
Speaker 1 (10:22):
And I think that that's really important to understand deeply
as well, because what you're talking about with the change
of a dirt bike to a Harley Davidson, you weren't
doing that. So they click on the website and they
go cool, a Harley Davidson. It's actually that subliminal feeling
of this is more premium or this is more luxury,
and they, underlyingly are going to think that your value
(10:44):
is higher than somebody else or one of your competitors,
purely because of the signs you're giving off. Yeah, but
we're talking before about price being an indicator of the
quality and that left digit effect. But how do we
actually use price to tell our consumer that they are
purchasing a valuable item and really teach them that this
(11:08):
is worth more. And I mean we're talking about okay,
Louis Vuitton wouldn't have one thousand and ninety nine dollars
and ninety nine cent bag, but they have one thousand
dollars shoes, and if we compare that to a Kmart
pair of shoes, we intrinsically assume that that quality is supreme,
when in reality we know some luxury retailers are still
(11:28):
sourcing their content from the same place as Camart.
Speaker 2 (11:32):
So what do we do.
Speaker 3 (11:34):
We should put a link in the show notes to
the pay LESSI experience in the US a couple of
years back. So I don't know whether you saw this
or you remember it, but there was a shop in
a mall in Los Angeles that change their name from
pay less to pay Lessie.
Speaker 2 (11:55):
Oh my gosh, I have seen this.
Speaker 1 (11:58):
For a second, I was like, oh, I don't think
I have no, I have seen this and it is hilarious.
We definitely will put this in the show notes.
Speaker 3 (12:05):
It is absolutely hilarious. I mean that again is an
example of the context in a store changing and for
the benefit of the listeners who haven't watched the video.
Yet they were payless shoes with pay less ee price
tags put on them. So there were forty dollars shoes
that in some cases were marked up into the hundreds
(12:26):
of dollars, and people the stuff walked off the shelves.
Speaker 1 (12:31):
Because people were buying it and they were so proud
of their purchasers to find out it was a forty
dollars pair of shoe. But essentially they just assumed that
the value was there because the prices were there and
they hadn't heard of this and this.
Speaker 2 (12:44):
Is so nice.
Speaker 3 (12:46):
Yeah, and it's really worth watching the video to the end,
but it was a great experiment to see, you know,
the difference between you know, what customers think and what
they actually do, which is at the heart of a
lot of behavior economics and pricing psychology.
Speaker 1 (13:01):
And if we apply that to the small businesses in
our BBC community, I guess that's something that we really
need to be aware of as well, because so many
of us don't have the confidence or the tools or
the skills at the time of launching, so we often
undervalue ourselves and then when you go, oh, well, now
I've got it. I've been in business for a year,
(13:22):
I want to increase my prices, and it's very hard
to make that jump. So sometimes you have to take
that jump at the start and use price as an
indicator of quality, regardless of how you're feeling about it.
But it is hard to do that. So John, what
would your advice be there?
Speaker 3 (13:40):
One of the most powerful things that any business can do,
and to be honest, should do, is always offer customers
three choices. The technical term for this is goldilocks pricing.
The non technical term is extreme dissubversion. But it's good
(14:00):
the best, small, medium, and large. And here's why it's
important and why it works. If you have one offer,
you've got a fifty to fifty chance of closing the
deal and that's it, end of story. If you have
two offers, you are going to force the customer to
make a price based decision, and roughly in about sixty
percent of occasions, they will probably opt for the cheapest
(14:22):
of the two. When you give customers three options, there's
two things that happen. The first thing that happens is
the customer thinks to themselves, which one do I buy?
And that's different to thinking to themselves do I buy.
The second thing that happens is you force them to
make a value based decision because they need to go, Okay,
(14:43):
I've got three options here, what explains the difference between
the three prices. So Goldilocks extremeless aversion, and that can
actually be a vehicle for small businesses to test the
appetite for price increases. And you may actually head into
another realm of pricing psychology and behavioral economics, which is
(15:06):
the decoy effect. So you could make one so expensive
that it actually makes the other two options look really good.
The decoy may be the most expensive one or it
may be the cheapest one. So to give you examples
of those years ago, Telstra used to have I think
a two or a five gigabyte ISP plan. Now I
(15:29):
don't know anybody who would last probably would get would
get through a day on two gigabytes, but it got
people onto the product ladder, and then you could you know,
you would move through the product ladder as your usage
and needs change. So there's an example of a decoy
at the bottom of a product ladder. You can also
have them at the top of a product ladder. So
(15:51):
there's a cafe called Normals at the Meridian Hotel in
New York City and they have a one thousand dollar omelet,
but they also have a one hundred dollars one, which
one sells. What about a bottle of wine? Do you
ever buy the most expensive bottle of wine at a
restaurant by the subsiluately?
Speaker 1 (16:09):
Not, John, I'm young. I can't afford the most expensive
bottle of wine, but thank you for assuming I could
have that opportunity in life.
Speaker 3 (16:16):
But most the most popular selling wine in most restaurants
will be the second most expensive one.
Speaker 1 (16:23):
And is that something that we could adopt? And you know,
I know you said menu design, but this center stage effect,
can we maybe implement that on our websites or change
the way that we sell things online to actually adopt
this center stage effect and make use of it.
Speaker 3 (16:41):
Yeah? Absolutely, Yeah, So you know what I just talked
about regarding the three options that can equally apply to
a proposal for a listener who's perhaps in professional services.
That could apply to someone running a cafe with their menu.
It could equally apply to a digital business that might
be listening and how they have their pricing page set up,
(17:03):
which I think.
Speaker 2 (17:04):
Is so interesting.
Speaker 1 (17:06):
And I'm someone who does have a background in psychology,
but when I studied it, I had absolutely no idea
how that would end up applying to small business and
ultimately my own small business. And I think that is
just so empowering once you start learning about that, because
these are tips and tricks that you can start implementing
(17:27):
on your website or in your pricing models to feel
a little bit more empowered but also get the results
that you're looking for. You just don't go, Okay, cool,
this is the pricing model, this is how I'm going
to look at things, because you just think I'm so
excited about this product that I'm going to bring to life.
But then you're bombarded as a small business owner with
(17:48):
decisions like this to be making John, where should we
be focusing? I know this episode for a fair few
people is going to be a bit overwhelming because they're
going to go, what do you mean the pricing's wrong
or the values out or you know, maybe I'm not
doing it right. Where as a small business owner, can
we start focusing to have I would say the best
type of impact from the very beginning.
Speaker 3 (18:10):
The best answer to that question is is to rewind
back to the introduction where you say we're going to
actually have a talk about pricing psychology and value based pricing.
And it depends on whose paper you read, but typically
about seventy to eighty percent of companies price on a
cost plus pricing basis. So what that means is you go, Okay,
(18:32):
I've got costs X, Y and Z and so forth.
I'm going to throw a little bit of markup on
top of that and hope cross my fingers that that's
what the customer is going to pay. Most people do
not buy anything because of a customer's because of a
vendor's cost base. They buy because they get value from
(18:54):
the product or service. From my perspective, the starting point
for a you know, for businesses starting out is to
think about the value that you're providing and link your
pricing to value, either through discussions with customers or with
(19:14):
comparisons to alternatives.
Speaker 4 (19:16):
For example.
Speaker 1 (19:29):
Now, John, it would be a miss of me to
not mention the fact on this podcast that not only
do you work for MYO B and you're a very
valued member of their team, so valuable that they've actually
put you forward to hang out with me for the
hour on this podcast, but you're also an author and
you've written a book that essentially exists to help small
(19:51):
business owners understand value based pricing and monetizing their products
and services. Now I've introduced that in a way that
hasn't actually mentioned the title of your book, and usually
I would do that as an articulate young woman. But John,
could you maybe tell us what the title of the
book is and why it's really hard to google?
Speaker 3 (20:16):
It is not actually, because if you just type in
Flo double C into Google, you should get the word
Flox Knox in a hilification.
Speaker 1 (20:26):
Oh yeah, this is exactly what I would have been
looking for.
Speaker 3 (20:29):
It is the longest F word in the English language.
It is one let alonger than anti disestablishmentarianism.
Speaker 2 (20:37):
Oh that's exactly what I thought. When I saw it.
Speaker 1 (20:40):
I was like, Wow, he's really going for it.
Speaker 3 (20:43):
So it's not it's not in everybody's vocabulary. But it
is a beautiful word for pricing because it means the
habit of estimating something as valueless.
Speaker 1 (20:56):
So can you maybe step us through. I know in
your book you have a few deen step value price
canvas is what you referred to it as. How do
we apply that to our business? Obviously I'll be linking
this book in the show notes to throw that out
to our community because I do think it will be
a really valuable read. But can you give us the
(21:16):
TLDR Because if the title is anything to go by,
I feel like it's not the shortest book in the world.
Speaker 3 (21:24):
I'm hoping that it's a very easy and effective book
to digest. And the reason for the canvas. So the
book is in two halves. The canvas is described in
the first half of the book, and the canvas helps
you understand that your value that your product or service
provides to customers. And the canvas evolved because when I
was talking to you know, startups, entrepreneurs and side hustlers,
(21:47):
they were all using the business model canvas, but they
actually had nothing in the revenue model box. So the
canvas is designed as an exercise to work through. You
don't necessarily need to fill out all of the quadrants,
but the price of going through each of the fifteen
steps will help someone identify the value they provide. The
second half of the book then helps you price on
(22:10):
the basis of value now that you've understood it from
the first half of the book. So it goes into
four different methodologies. There's a methodology called customer value analysis.
There's a methodology called economic value analysis. There's a short
sharp methodology called the Van westerndor price sensitivity meter, and
(22:32):
then it wraps up with a five step approach to
developing a SAS or a subscription model.
Speaker 1 (22:38):
And when you talk about subscription models, are you talking
about ongoing service or are you talking about the offering
payments in installments as a subscription model.
Speaker 3 (22:49):
So the definition of subscription I use is sell once,
renew many. So there is a generally a monthly recurring
fee that is charged for a particularly service. Now that
service can be a tech service like we offer at
n YOB, or it could be you know, there's so
(23:11):
many different dog food. Dog food is available on subscription.
Headphones are available on subscription. There's a whole proliferation of
goods as well as services that are increasingly becoming available
on a subscription model. Not every product is perfect for subscription.
And dog food is one like dogs eat every day
(23:34):
and they're not fussy on varieties, so it works. Really
good coffee, you know, is not as good, but it's
still something that a lot of people drink, you know,
two cups five days a week sort of thing. So
it's got pretty predictable demand to it. And there are
some products that just absolutely you know, have very low
(23:57):
likelihood of being successful as a subscription product. So the
first point of call has got to be is there
that recurring and predictable usage of the product or service
that I'm providing which I can convert to a subscription?
Speaker 1 (24:15):
All right, John, to pivot from talking about subscription models
to talking about paying in installments. We know, because you
said just before, people love options like the Goldilocks effect.
But should we be offering multiple different types of payment
opportunities to our clients or does that potentially shoot us
(24:35):
in the foot?
Speaker 3 (24:37):
No, it doesn't necessarily shoot you in the form. I
always like to make the distinction between setting prices and
getting prices. And setting prices is putting the dollars and
cents onto a price tag, if you like. But then
how you get the customer to give you those dollars
(24:58):
and cents is all about how you get your price,
and that's things like terms and conditions and installments can
be you know, should be part of the terms and
additions and they can work for you. So you know,
smaller price points, reduced price sensitivity, So you know, there
(25:19):
we less price sensitivity around a fifty dollars a month
subscription than are six hundred dollars per year. Even pricing
per day that makes the price even smaller. There are
plenty of examples around that express the price in a
smaller unit, but that's still charged the same way. But
just the fact of expressing it as per day, per month,
(25:42):
per year actually affected the attractiveness of the.
Speaker 1 (25:45):
Offer, which I think is quite interesting and definitely applicable
to a lot of businesses as well, especially if it's
a product that people might use every day. You can
really justify your value and be like, okay, cool, it's
less than a coffee per day. People go, oh, actually
that makes sense. That is worth more than a coffee
per day to me. But in the grand scheme of things,
(26:07):
they might be looking at the price trying to justify
it to themselves. You're providing them with the justifications.
Speaker 3 (26:14):
Yeah, And that's a really good point.
Speaker 1 (26:16):
It's because people find it very hard to contextualize a purchase,
especially when you look at the grand cost of it.
That can feel really overwhelming. It's like, you know, all
like in this because I'm a I would love to
think fashionable younger female in cost per wear. So I
have had this argument for a very long time with
(26:37):
my friends who are very into fast fashion. They'll be like, oh,
this you know top was sixty bucks, or this skirt
was one hundred dollars and Victoria cannot believe you'd spend
three hundred and fifty dollars on.
Speaker 2 (26:48):
X, YORZ.
Speaker 1 (26:49):
That's ridiculous. But I find myself wearing it for six
plus years and my friends are throwing those things away
at the end of a season. You kind of go, okay.
But if you looked at cost per ware and maybe
this is my way of justifying more expensive purchases, but
I would argue that I'm getting more value out of that. However,
(27:09):
if someone hadn't introduced me to the concept of cost
per ware, I would be feeling a little bit guilty
about the fact that I'm spending more than my friends
on a particular item. So I think it is definitely
about teaching people how to justify it to themselves in
a way.
Speaker 3 (27:26):
So there's a couple of things to unpack there.
Speaker 1 (27:29):
One, my shopping addiction is first and foremost.
Speaker 3 (27:33):
And I'm going to do this in a covert way.
So there's two things to unpack there. One is that
people are better at making relative decisions than they are
making absolute decisions. So you can compare a price increase
to a magnum price. That is easier to do than
(27:53):
saying the price is going up three dollars sixty. That's
the first thing. The second interesting thing to unpack there
is the price of a dress. If I show you
a dress identical dresses, one is sixty dollars, the other
one is one hundred dollars with forty percent off. So
it is sixty dollars. Which one sells the most.
Speaker 1 (28:14):
Oh, the one hundred dollars one with a forty percent off,
because I just think.
Speaker 2 (28:17):
It's more valuable.
Speaker 3 (28:18):
John, It's that, but it's also you know you're getting
a bargain. And the psychology of the consumer today is
they love the thrill of a hunt to find that
forty percent off, and they love the thrill of the
kill to get forty percent off because getting it gives
you bragging rights with all your friends. Look, I've got
forty percent off this dress, so you can again, you
(28:40):
can use that in your pricing strategy if you're in
a retail environment and stuff like that. It also means
that an integral part of any business's pricing strategy has
got to be discounts. Because discounting is not going away
in a hurry. It is proliferated over the last ten
or fifteen years. But the critical thing for small businesses
(29:03):
gives and gets. If you're going to give someone a discount,
get something in return, get a longer contract, get a
larger sale, something. It's a negotiation, not a surrender.
Speaker 1 (29:15):
I like that, and I think that that's something we
can all apply to what we do, because I think
that discounting for a while has been seen as something.
Speaker 2 (29:23):
Like should I do it? Shouldn't I do it?
Speaker 1 (29:25):
I know with my content, I have an online course,
and I deliberated four weeks over what the price would
be and how that would work and compare it to
every other course on the market, even though I couldn't
find one that was even comparable, which is why I
started it. But then I looked at it and I
was like, do I do discounts? Do I not do discounts?
(29:46):
Does that take the shine or the value away? And John,
You're absolutely correct. When I offer a discount, the sales
go through the roof. In comparison, to the month to
month sales. It's as though people are waiting for it.
Speaker 2 (30:00):
So are we.
Speaker 1 (30:01):
Putting ourselves on the back foot by discounting something and
giving the consumers the knowledge that we will do it
so they're holding out for that purchase. Or should we
be discounting more regularly than just at Christmas or at
milestone occasions.
Speaker 3 (30:16):
So again there's a few things to consider there. While
I'm not an advocate of cost plus pricing, it is
through analyzing your profitability that you will know whether or
not those incremental sales from discounting are profitable or not.
And perhaps I should flick you through a matrix which
(30:37):
really simply calculates the impact of discounting. So I've got
two matrices that actually show you what sort of volume
up if you've got to achieve two offset a discount,
and I can't know what the other one is, but
they're really useful matrices. You know, people think their revenue
goes through the roof, and it may well do, but
(30:58):
it does need to go through stronomically depending on your
margins for profitability to be achieved. But then the other
example is, you know, going back to the example I
gave before, do you you train the market to buy
when you're only on sale? You know, if you look
(31:19):
at some of our biggest retailers and so forth, if
they haven't got Manchester on sale or towels on sales
or kitchen We're on sale, their footfall is down. And
a lot of it for some of those retailers is
because they have trained the market just to come in
when they've got stuff on sale.
Speaker 5 (31:34):
And yeah, of course I'm worried about yeah, and you've
got so let it make the customer earn the discount
gives and gets like if you're doing online courses, you know,
sign up three of your friends or something and the
fourth person's free or something like that.
Speaker 3 (31:50):
There are ways already out there to adapt their models
to specific industries. There's not a lot that's new in pricing.
A lot of it's already been done. You just need
to look around and see what others have done.
Speaker 1 (32:03):
And I think that's an important point as well, to
do your research and look around at what everybody else
is up to and see if that might work for you,
because it doesn't always work. And I guess that leads
into my question about the sunk cost fallacy, which essentially
describes our tenacity or tendency sorry to follow through on
something that we've already invested time, energy, effort, and money into.
(32:25):
And I guess this applies to small businesses and relationships
and jobs and literally everything in life. But when it
comes to business, you recommend that we actually employ this
sunk cost fallacy?
Speaker 2 (32:39):
Why would we want to do that to ourselves?
Speaker 1 (32:41):
John?
Speaker 3 (32:43):
Well, again, there's you know, if you've got customers that
purchase things frequently, you can almost create a subscription out
of that. So Amazon, Amazon do this really well. Catch
do it really well as well. You know, you sign
up for a membership of I can't remember what Catch
(33:05):
is called, but you sign up for you pay the
ad your fee for it, and that gives you discounts
I think, on deliveries or so forth for free deliveries.
And there's certainly evidence out there that because people enroll
in those programs, when the opportunity arises, they try to
(33:29):
amortize their participation in those programs as much as possible
by buying lots of stuff.
Speaker 1 (33:35):
And is that something that small business owners should be
considering or talking about? And I mean it makes a
lot of sense. And as an Amazon Prime member myself.
I do see the email pop up into my inbox
to say, Victoria, it's Amazon Prime Day, don't miss out,
and you find yourself browsing through things you definitely don't
(33:57):
need and sometimes don't even want, but it seems like
a deal at the time. But it's one of those
things that you go, Okay, that works for Amazon, they're
so big, it works for eBay, so big catches the same.
Is there a way we could scale that back for
a small business.
Speaker 3 (34:13):
It would depend on the business. So it's a bit
like our discussion about what goods and services make good
subscription businesses. It depends, but there'll be things like you know,
like there's predictable demand and little little change in variety,
the stuff that makes dog food a good subscription product.
(34:34):
There'll be equivalents on you know, membership plans and stuff
like that, which can translate into into products that are
catch like or Amazon like.
Speaker 1 (34:45):
And I think that you could potentially even stretch that
into an email subscription, so it might not necessarily be
them quote getting their money's worth, but make the most
of the membership you've got, and you could start referring
to your DA or your email list as your community
or as a subscription so that when you are emailing people,
(35:07):
it's like, oh, you're in this exclusive community. Make the
most of it, or give them access to exclusive discounts
or potentially making them feel like they get access to
products before other people do without having to employ a
paid subscription model. So I think that there's potentially a
little bit to learn there, like for small businesses, because
(35:29):
I don't even do that, and I think it could
be something that might, you know, make it feel a
little bit more exclusive. And I feel like this has
been such an insightful episode to actually learn a bit
more about what that looks like and how that could
potentially work for us. And I mean not every single
tip that we've shared or piece of advice that you've
(35:50):
shared is going to be applicable. But that's what you
have to do as a job as a small business
owner is work out what's going to work for you
and what's not a maybe doing a little bit of
trial and error and seeing how these things could be employed.
Because at the end of the day, as much as
we spoke about the ninety nine cent mark or what
you're calling the left digit effect and creating value for
(36:13):
the consumer and making sure they see it, know how
to do it, and offering lots of value and offering
lots of different pricing options for them. At the end
of the day, pricing psychology is about so much more
than just putting a dollar amount on a product and
knowing that people will purchase it. John, is there anything
that you would like to leave the BBC community with,
(36:35):
Whether that is a tip or a trick or a
podcast you recommend. It could be the Beer on the
Beach experiment to look into, or I remember before we
started recording, you recommended a podcast that you've done historically.
How can we learn more about this?
Speaker 3 (36:51):
My other favorite video on YouTube is called The Wicked
Sick Project.
Speaker 1 (36:56):
What is that?
Speaker 3 (36:58):
The Wicked Sick Project? So this is two guys who
buy a BMX bike on eBay and then they put
it back on eBay, but they change the description of
the bike and they make stuff, They make shit up.
They say this bike has done fifty thousand skids and
(37:18):
twenty thousand bunny hopes and so many monos and all
that sort of stuff. It should have sold for roughly
the same prices they bought it for. They sold at
a five hundred percent premium because they changed the context
in which exactly the same bike, they changed the story
around it, the context they changed it to a five
(37:41):
star hotel from a Rundown grocery store. And I think
that's one powerful message that I always leave people with
when you think about your pricing, do you want to
be the Rundown grocery store at the end of the
beach or the five star hotel?
Speaker 1 (37:55):
I like that, and I feel like that is a
beautiful place to stop. Thank you so much for sharing
with us so much thought, so much energy, and so
much of your knowledge. I feel like I am ever
grateful for MOYOB being able to connect me with people
like you so that I can learn more about small business,
but also our community can for free, which is honestly
(38:18):
such a special thing to be able to share. Fantastic,
all right, Thank you so much once again to John
for joining us and sharing his plethora of experience.
Speaker 2 (38:40):
Who would have.
Speaker 1 (38:41):
Thought that we needed to take into consideration the left
digit effect, or how to make product value clear, or
even what anchoring is. And once again, thank you so
much to our friends at NYOB for sharing their experts
with us so that we can learn from them. Honestly,
each and every single week I learned something new and
I'm genuinely so great grateful to have such a team
(39:01):
to rely on. But as always, that is all we
have time for today. So just before we head off,
we'd like to acknowledge and pay a respect to Australia's
Aboriginal and torrest Right Islander people's, the traditional custodians at
the lands, the waterways and the skies all across Australia.
We thank you for sharing and for caring for the
land on which we are able to learn. We pay
(39:24):
our respects to elders past and present, and we share
our friendship and our kindness. See you guys next week
for another episode of the Business Bible.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!