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Tuesday, July 17, 2012

Pricing Strategy

How marketers can take advantage of consumers’ weak math skills

Pricing strategy can be a critical factor in the success or failure of a business.

When determining a price on a product or service or planning a promotion, consider offering something extra instead of offering it as a discount. According to a new study from the Journal of Marketing, that looked at consumers’ attitudes to discounting, shoppers prefer getting something extra free to getting something cheaper.

The main reason is that the majority of people are “useless at fractions.” For example, consumers often struggle to realize that a 50% increase in quantity is the same as a 33% discount in price -- they overwhelmingly assume the former is better value.

In an experiment, the researchers sold 73% more hand lotion when it was offered with 50% more in quantity than when it was offered with a 35% discount. Another experiment offered coffee beens for either 33% extra free or 33% off the price. The discount is by far the better offer, but the test subjects (college undergraduates) viewed them as equivalent.

Use this information in your pricing strategy.

For example: When advertising a new car’s efficiency, it might be more convincing to focus on the number of extra miles per gallon it acheives, rather than the equivalent percentage fall in fuel consumption
Another trick for your marketing repetoire  is to deliberately “confuse” your target customer with double discounting. In other words, people are more likely to see a bargain in a product that has been reduced by 20%, and then by an additional 25%, than one which has been subject to an equivalent, one-off, 40% reduction.

To sum up, when working on pricing strategy, keep in mind this math “blindspot”… as one of my coaching clients likes to: there are 3 kinds of people in this world, those who are good at math and those who aren't.

Source: The Economist -“Something Doesn’t Add Up” 6/30/12

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