All marketing activity eventually drives customer to a pivotal moment — to purchase or to abandon the process.
When making that purchase consideration, the customer is weighing the cost versus the value. A key (but not sole) element of cost is price.
So in this MarketingSherpa article, we explore important factors to consider when determining how to communicate the price of your products.
Read on to learn from a diverse array of sources, including a professor from U.C. San Diego who studies pricing, buzzy tour company startup Museum Hack, and an ecommerce site that sells live insects.
by Daniel Burstein, Senior Director, Content & Marketing, MarketingSherpa and MECLABS Institute
(As seen in the MarketingSherpa newsletter. Click to get a free email subscription to the latest from MarketingSherpa.)
Age might just be a number, but price is so much more. Human beings inherently have a hard time discerning the value and cost of things. They are not logic machines that see a dollar amount and instantly compute whether it is the exact right price aligning perfectly at the nexus of the demand and supply curves.
We’re inherently emotional beings driven by often unconscious triggers, signals and biases. And for many things we buy, we aren’t experts enough in that industry to know what a fair price should be anyway.
So how and when you present price can help customers better make sense of it. Many factors affect that perception of price. Here are seven factors to consider when building your pricing strategy.
Factor #1: When to present price
The order of price presentation can influence customer perception.
“In our work, we saw patterns of brain data suggesting that people change the way they shop for everyday products, depending on whether they see price tags before or after they see the associated product. When products came first, people seemed to be asking, ‘Do I like this?’ When prices came first, people seemed to be asking, ‘Is this worth the money?’” said Uma R. Karmarkar, Assistant Professor, Rady School of Management and School of Global Policy and Strategy, University of California, San Diego.
There isn’t a specific pricing order that works best for every kind of product. Customers evaluate different products in different ways.
“For example, if you ask someone, ‘Do you like these batteries?’ they might struggle to answer. Most people don’t think of batteries in terms of how much they like them, so they might be less interested in buying, even for a good deal. But suppose you ask, ‘Are these batteries worth $5?’ Answering that is much easier, particularly for a good price! In fact, we also showed that people were more likely to buy ‘functional’ or ‘utilitarian’ products like batteries and water filter pitchers when they saw the prices earlier in the decision process. We think this happened because the price-based question fit those kinds of purchases better,” Karmarkar said.
So your goal is to find the optimal time to present price to the customer.
The below video shows an experiment with a large sports entertainment provider that sought to increase conversion on its main landing page. MECLABS Institute (parent research organization of MarketingSherpa) helped drive a 97% increase in conversion by finding the optimal location of the price in the customer journey.
You can watch the full video at Pricing Strategy: Leveraging customer psychology to maximize average customer value.
Pay special attention to where in the customer journey you present price when you are paying for traffic. If you don’t include price in an ad when you’re paying for clicks, are you buying low-quality traffic? If you include price and are the low-price leader in your market, will you get tire kickers only interested in seeing how much shipping costs? If your price is high in the market, will potential customers ignore your ad before they have a chance to learn about its value?
The Adlucent team set out to determine whether showing price in an ad on social [media] affects the performance of campaigns for a wellness brand. The ad with no price had a Return on Ad Spend (ROAS) of $0.50, while the ad with the price had a ROAS of $0.96. So having price in the ad resulted in a 93% increase in ROAS. “This could be because shoppers may already have a price-point in mind, and seeing the pricing upfront is a positive,” said Olga Rangel, Senior Account Manager at Adlucent.
Here is a look at an anonymized version of the ad:
The team also tested retargeting for the wellness brand, along with a woodworking brand and a mattress brand. “In retargeting, we noticed that price mattered more with products that had higher price points. There was not a significant difference with lower price points,” Rangel said.
For the mattress and woodworking brand, which both had an average order value (AOV) above $200, there was a lower click-through-rate (CTR) for ads with the price in the ad but a higher conversion rate (CVR) and ROAS. So less money was wasted on people clicking just to check the price.
“For retargeting [higher AOV products], including the price in the ad is beneficial because it gives the customer a better picture of what to expect. For a high-priced item, this makes it easier on the shopper who has been price comparing,” Rangel said.
As for how the price is displayed, there was no significant difference with putting the price in the ad caption versus as an overlay on the creative.
Factor #2: Price standardization
For services companies just starting out, sometimes the focus is on creating custom packages for each new client. However, that is difficult to scale.
Museum Hack offers “Museum Tours for People Who Don’t Like Museum Tours,” according to Elaine Glusac in The New York Times. In the tour company’s early days, the company would charge whatever it could for its team-building services, adjusting the service fee and actual activities to match client budgets. As the company grew and became more sophisticated, they realized this method was no longer sustainable and set standard pricing in each operating city with various options and upgrades at additional charges.
“This pricing model means that we do turn away some business that we would have accommodated before, but what we lose in those few deals we more than make up for in operational efficiency and reliability. This standardized pricing allowed us to reach $2.8 million in revenue, fully bootstrapped, which was enough to join the Inc 5000 in 2018 as one of the fastest-growing private companies in America, and then again in 2019,” said Michael Alexis, Director of Marketing, Museum Hack.
Factor #3: Order of different price levels
You can test the order that customers see prices. For example, the prices could be in ascending or descending order.
“For example, you are offered a package for $100 per month, which includes everything you need and more. Over $80, which has almost everything. Over $30, in which there is almost nothing. And free, in which [there is just] one function. It is unpleasant to lose, so [the customer] wants to take the more expensive package,” said Maksym Babych, CEO, SpdLoad.
This price ordering didn’t increase the overall conversion rate, but it did increase the number of purchases of the most expensive packages.
Factor #4: Shipping cost
For ecommerce marketers, shipping is a huge factor to consider for your pricing strategy. When we asked consumers how ecommerce retailers could improve the shopping experience, the top response for all groups was “provide free shipping.” For example, 85% of females age 65 and older identified free shipping as the top improvement for retailers.
Jeff Neal sells live insects to pet owners through Critter Depot. When the company first launched, they put a lot of effort into calculating shipping costs for customers. But the shipping calculators that were used to display the price for customers during the purchase were only right about half the time. So when the Critter Depot team actually printed the postage to ship, they noticed they often hadn’t charged customers enough for shipping in the website checkout process.
To make matters worse, there was a high bounce rate on the website once people got to the shipping calculator.
Now the company includes the cost of shipping in product prices and advertises free shipping. “It improved the customer experience because they know the exact cost for our product. Shipping has always been a hidden fee for online shoppers. We're eliminating that hated hidden fee and converting more visitors into customers,” Neal said.
Factor #5: Contract length
Many recurring revenue products offer a discount if the customer commits to a longer term.
“One of the best pricing lessons I learned was that many buyers are actually indifferent between annual versus monthly payments, and therefore having a monthly price that is significantly higher than annual (25% or more) will drive companies to annual plans, which of course is huge for your cash management,” said Phil Strazzulla, founder, SelectSoftware.
Strazzulla learned this lesson selling software to human resources (HR), a department that tends to have fixed annual budgets and cares much more about overall dollars paid in a year versus when they are paid, he says.
For example, if pricing options for a software were presented as $10,000 per year or $1,000 monthly (a 20% premium over the monthly rate), the vast majority of HR buyers will pay the $10,000 upfront. “This is great for the business as annual contracts have lower churn, higher success with implementation, and most importantly, put cash in the business’s pockets early,” Strazzulla said.
Factor #6: Competitor pricing
Your prices don’t exist in a vacuum, of course. And with the rise of the internet, it’s never been easier for customers to shop on price.
According to pricing software Prisync’s analysis of 295,377 e-commerce product prices in its database, the majority of companies set their prices based on competitor pricing. The team discovered that 36% of businesses pursue a pricing strategy that matches their competitors’ prices and 29% of ecommerce merchants pursue a strategy of beating their competitors’ prices.
“The majority of ecommerce businesses are leaning towards a highly competitive price [strategy] to attract and keep customers in this growing industry,” said Yigit Kocak, Inbound Marketing Manager, Prisync. “Retailers who want to succeed in this competitive landscape need to track market prices according to their product assortment.”
Factor #7: Price increases
Pre-announcing a price increase allows you to lock in business before the increase and prepare customers for the increase.
“In my experience, the best way to raise prices is to plan out a reasonable but intentional uptick in pricing (in our case, we're about to do one around 17%), and then promote the heck out of our existing pricing and push on it for three months rather than ‘a sale,’” said Cody Warren, SEO Specialist, Hook Agency.
The agency crosses out the future price in red and shows the specific date of the increase.
“It is an awesome tool for the salesperson, and he says this closes more deals than working for a similar company before who often changed up the offering and prices, confusing the customer,” Warren said.
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