The Significance of the Start Price
Posted by James Marland on Tue, Dec 06, 2011 @ 09:39
I picked up “Priceless: The Hidden Psychology of Value” by William Poundstone and read it during my summer vacation. There are a few neat ideas in it which I intend to share over my next few blogs. As the title indicates, it deals with the psychology behind price; often this is thought to be the exclusive domain of B2C, but even in the most complex B2B sales situation there is still a human buyer who will review your price. This book has insights into how prices are perceived and evaluated.
One of the key concepts is the concept of a price “anchor”. This is basically the first price mentioned by either buyer or seller. It’s extraordinarily hard to shake loose from the anchor price or Start Price as we will refer to it, even if it is fairly ridiculous. There are many experiments to back this up. Once you understand this, you see how the concept of Start Price is very significant in B2B pricing.
Most pricing teams invest heavily in optimizing the Target Price, and conventional wisdom says that giving your sales teams a target to aim for is good practice. But because B2B sales cycles usually consist of several rounds of negotiation, what should the opening offer be? The experiments tell us that the buyer is subconsciously influenced by the Start Price, even in later negotiating rounds. Economic theory is trumped by psychology.
Do you have a methodology for recommending a Start Price? In many companies the Pricing Department doesn’t and the Pricing Software doesn’t support it. Since you never recover from quoting a too-low start price, it should be pitched as high as possible, but not so high that the buyer won’t take it seriously. A price that is not taken seriously does not become an anchor and you effectively have no Start Price. A simple but valid approach to Start Price is to go for a high percentile in the segment (e.g. 90th percentile). You have confidence that the buyer won’t laugh (since someone once paid it), but it should have the subtle effect of signalling to the buyer where the final price should be.
The book also has a section on why prices ending in .99 are endemic, and as you turn the book over, you discover that the retail price is, in fact £9.99.