If You Offer One Price, It's Probably the Wrong One

Go back a few years, and you’d find that most bookkeepers charged by the hour. It was crazy on so many levels and I spoke loads about why. Fortunately, time has moved on and the majority of bookkeepers now quote with fixed prices.

While this is better for clients, it’s introduced a very new type of crazy. The crazy of offering one single fixed price. However personalised for a particular client it’s more than likely the WRONG price.

We all place different values on the same item, so it’s virtually impossible to offer a service at a price that everyone thinks is right. For some people your price will be too high and they’ll walk away. For others it’ll be too low and they’ll either walk away or end up paying much less than they otherwise would.

If you manage to get the price right for any of your potential clients, it’ll certainly be more luck than good judgement.

Let me give you an example. Imagine that you’re in the market for a new laptop. I come along and offer you an Intel i5 with 8GB of RAM, a 15.1” Screen and a fingerprint scanner. How much would you pay? Get a figure in your head, but don’t cheat.

Now imagine I tell you that the price is £649. Did you honestly have that price in your head when I asked what you’d pay? For some people, £649 is far too cheap, they’d have a figure of £800. To them, the laptop might appear inferior simply based on that price. They may walk away because they believe that you get what you pay for.

Others, while still thinking it’s too cheap may grab it with both hands leaving over £150 of potential profit on the table that I could have had. They want a better service and are more than happy to pay for it.

Often, we erroneously believe that our clients are looking for the cheapest service, but that’s seldom the case. It’s the mismatch between what we believe people are looking for and what they are actually looking for.

Then there’s another group. The group who had the figure £499 in their head. For those people this is too expensive. They are probably already on Google looking for a better deal elsewhere.

We can argue that those people were never our ideal clients, but maybe they are, Maybe we’ve just offered them a laptop they don’t need. They maybe don’t want a fingerprint scanner and would be happy with 4GB of RAM.

What if I had offered a choice instead of confronting you with a yes/no decision. Instead of asking “Will you buy this laptop?” I asked “Which laptop will you buy?”

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This is very similar to an experiment that was carried out by Daniel Mochon in his research paper “Single Option Aversion” for the Journal of Consumer Research. In this experiment, Daniel told a group of 129 people to imagine that they were thinking about buying a new DVD player.

Randomly, the group was split into three. The first were offered the option of buying a Sony DVD player. The second was shown a Philips DVD player and the third group shown both.

Each group was asked if they would buy the option, or one of the options in group three, that they were shown or defer the decision to look for more options.

In the case of the group shown the Sony DVD player 9% decided that they would buy it, leaving 91% to defer the decision. The Philips group was a bit better, 10% decided to buy it, with 90% deferring.

In the third group, something very different happened. 32% chose the Sony DVD player and 34% chose the Philips DVD player, leaving just 34% deferring their decision.

In this experiment, Daniel showed us that as consumers we have an increased desire to continue our search when presented with only one option. It also shows that even if consumers find an option that they’d be happy to purchase, they may forego this in order to find a comparison.

In our previous example, if we had offered a range of laptop options we’d have been more likely to get it right with specifications and price point.

While too few choices can create issues, too many choices can be overwhelming and lead to a paralysis. I’m sure we’ve all seen or experienced the joy of taking a child into a sweet shop. Three choices is normally chosen because of two other effects, the compromise effect and the decoy effect.

The compromise effect, sometimes referred to as the goldilocks effect after the popular fairytale character, suggests that when three options are given which are difficult to compare a buyer will generally take the middle option.

It allows us to avoid the most expensive and the cheapest options and feel that we’ve somehow got a great deal.

In a paper by Simonson and Tversky participants were shown two microwaves. A Panasonic for $180 and an Emerson for $110. 43% chose the Panasonic and 57% chose the Emerson.

When a third option was added at $200, the Emerson share dropped from 57% to 27% and the share of the Panasonic went up to 60%.

In the decoy effect, the third product is placed to make one of the other two look more appealing. Research was carried out by Dan Ariely using an advertisement for a subscription to The Economist.

In the first experiment, he showed a group of students three options. The first a web-only subscription, a web and print subscription for double the amount, or a print-only subscription for the same price as the print and web.

Unsurprisingly, no one chose the print-only subscription, with 84% opting for the web and print and only 16% choosing the web-only option.

In terms of choice, the print only option appears inferior to the web and print for the same price. This makes it a useless option, or does it? When this option is removes and the experiment run with a different group of students 68% now chose the cheaper web-only option and 32% chose the web and print option.

The print only option may not have sold any, but it was important as it made the web and print option look vastly superior.

When Williams-Sonoma introduced a new bread maker for $275 it bombed. Sales were awful. People had great difficulty justifying spending that amount of money on a machine that made bread. You may think that having seen such dreadful sales that Williams-Sonoma discontinued their bread maker lines, or cut the price, but you’d be wrong. Instead, they did something much more daring and successful.

They introduced a bread machine that was slightly bigger and better. This time they priced it at $415. In comparison, the $275 bread maker looked like a steal and sales rocketed. Williams-Sonoma had used the decoy effect with huge success.

These effects are used by many businesses across the world. Jewellers have long known that the best way to sell an £800 watch is to put it between a £700 and a £1,000 watch. Apple uses the decoy effect with their iPhones. Even McDonalds and Costa use these effects with food and drinks. Everywhere you turn you’ll see examples of these effects in day to day life.

As bookkeepers, we too can use these too.

• If you price work individually for clients, don’t assume that you know what they want. Instead, offer three services at three price points.
• If you decide to standardise your packages, make sure you offer three options.
• If you experience price resistance it may not be that the price is too high, it may be that the client hasn’t fully understood the value.