The psychology of pricing
Here are some tips on how pricing is perceived:
‣ Your pricing is perceived to fall within one of 4 bands, from high to low:
Unaffordable, like a ₹10 lakh laptop. This is not even under consideration.
The customer can buy with discomfort, like my ₹2.6 laptop. I had to think about it for a while before buying it, and the negative emotion that I was overpaying tinged the purchase. I feel Apple took advantage of me. If someone asked, I wouldn’t recommend it unqualified — I’d say it’s excellent but costs 2.6. This negative emotion transfers over — the next time I buy earphones, I’ll seriously consider a different brand from Apple, which will probably be better and cost the same.
Buy comfortably, such as if the aforementioned laptop cost me 1.75. In this scenario, there is no hesitation or discomfort when buying. I’ll feel I got a fair deal. It’s not just the product but also the buying experience that would be good. No resentment builds up that comes in the way of future purchases. This is where the maximum brand loyalty gets built. This is where you’ll make fans.
Too cheap, such as if the laptop cost less than a lakh. I wouldn’t buy it because it wouldn’t be good enough.
(The numbers would be different for each buyer, so take the above as an illustration.)
Be in one of the middle bands to increase sales.
‣ People perceive a number with fewer digits to be cheaper. For example, $9K is perceived to be lower than $8500, despite it being the other way around arithmetically. If you were thinking of quoting a client $8500, quoting $9K increases the chance of your proposal being accepted because it’s perceived as cheaper, gives you an extra $500 of free money! This is different from how it works normally, where if you want your offering to be perceived as cheaper, you have to leave some money on the table.
‣ People don’t make decisions based on your price. Rather, they map it to a psychological price, which is a simplified mental model, and they make decisions based on that. For example, if you quote $27K for a project, and another consultant quotes $20K, you’re not at a disadvantage. Why? Both of them map to a psychological price of “Twenty-something” based on the most significant digit. Since both of you are charging the same psychological price of twenty something, price is no longer a factor in the decision-making. So the decision is made based on other factors like who’s likely to deliver better results. It’s not about being cheaper; it’s about appearing cheaper. On the other hand, if you quote $27K and another consultant quotes $17K, then your psychological price is twenty something, and his is ten something, which are different, so the price becomes a factor in the decision. So, if you’re about to quote 20K, you might as well quote 29K, because it’s free money. On the other hand, you should think thrice before you quote 30K, because though mathematically it’s almost the same as 29K, psychologically it’s in the next slab of thirty something. You should let go of the 1K dollars difference to get the contract and reduce the risk of losing 29K. 10K, 20K, 30K, etc are inflection points. At each of these, you’re perceived to be in a different slab of pricing.
‣ If I were to give someone a discount, I’d much rather give them a $10K discount than a $9K one, because both cost me almost the same, but the former is perceived to be more generous.
‣ Sometimes it helps to frame things as a discount. For example, if you were to say, “I charge $100/hour, except for interviewing candidates, for which it’s $175”, it may come across as arbitrary. The client may think or ask, “Why should I pay more for interviewing?” Explaining that interviewing is depressing and so you charge more may not be convincing, because why should the client pay more if you dislike something? To avoid this problem, present it as, “I charge $175, but for <this kind of work>, there’s a discounted rate of $100.” Discounts are completely up to the seller, so people can’t question them. If you go to a restaurant and there’s a discount on Citibank cards, do you demand why it’s not offered for HDFC? And if leads do debate the discount, I respond with, “If you don’t like the discount, I can remove it and charge everything at $175. Do you want that?” This is an example of framing: we’ve framed $175 as the standard price, and $100 as the discounted price, rather than framing $100 as the standard price, and $175 as an elevated price.
‣ Does it make a difference whether you charge $1K per month or 12K per year? Your first instinct might be to say no, because 1 x 12 = 12, but it does make two differences: first, phrasing it as $1K per month implies that they can discontinue any time. But if your service takes a year to produce full results, you don’t want them to discontinue after a few months, because that’s lose/lose. When you phrase it as “This costs 12K per year”, you’re subtly communicating that they should invest for a year before evaluating results. You could still charge 1K per month, but you’re presenting the bigger picture first, that they should invest 12K and a year of time before deciding whether to continue. Billing is different from pricing. Billing is a detail, to be disclosed later. Similarly, if your project takes 6 months to deliver results, you should phrase it as $6K for 6 months. Second, presenting a price over a longer time interval like a year, such as $12K per year, rather than monthly gives you flexibility to front-load the payments, like $3K for the first month, then $2K for two month, then $1K for five months.
‣ Don’t break down a price, such as by saying “This projects costs $100K, of which $30K is for architecture and $70K is for implementation” unless you want people to be able to pick and choose, such as by saying, “I don’t want architecture, so I’ll just pay $70K for implementation.” This doesn’t make sense, since architecture is foundational, so don’t break it down. Just say, “This project costs $100K.”1
‣ Avoid saying “no” if you can instead say, “Yes, for an increased price.” For example, if you want 3 months to do a project, but they insist on 2, ask yourself, “If I were paid $100K, would I do it in 2 months?” If the answer is yes, then ask yourself, “If I were paid $80K, would I do it in 2 months?” If yes, ask yourself, “How about for $60K?” Eventually the answer will be no, and by conducting this dialogue with yourself, you’ll discover your price. Then tell them, “The project costs $40K if you want it in 3 months and $80K if you want in 2 months.” This is better than saying, “No, it will take 3 months”. For some reason, the word “no” puts people into argument mode. They’ll turn off their mind and start arguing, “I want it! I want it! I want it!” It’s like telling a child he can’t have ice-cream. Saying “yes, but it will cost $80K” shuts them up.
‣ Don’t name an example price to illustrate a point. For example, don’t say, “Suppose the monthly fee is $4K. Invoices need to be paid by the end of one month, so by Jan 31, you need to pay $4K, then by Feb…” When you say this, many people will take it as you committing that the monthly fee will be $4K, even if you’ve said it’s an example. So find a way to make your point without using an example price, such as: “I’ll invoice you every month. The invoice I’ll send in Jan should be paid by Jan 31. The invoice I’ll send in Feb should be paid by Feb 28. And so on.”
In the above example, what if you want to charge for architecture up front, and for implementation when the architecture is done? In that case, should you break it down? Well, you could, but consider giving them a payment schedule that says how much amount they need to pay on which date. For example, if architecture takes 2 months and implementation takes 4 months, instead of saying “$30K for architecture and $70K for implementation”, say, “$30K due today, and $70K after 2 months.”
Another question you may have is that you may need to break it down to cost the project correctly. In that case, break it down, but don’t share the break down with the lead.