What Pricing Strategy Beats The Others?
A business can use a variety of pricing strategies when selling a product or service. The price can be set to maximize profitability for each unit sold or from the market overall. Good pricing strategy helps you determine the price point at which you can maximize profits on sales of your products or services. When setting prices, a business owner needs to consider a wide range of factors including production and distribution costs, competitor offerings, positioning strategies and the business’ target customer base.
One of the best pricing strategies is Discount Pricing Strategy. Businesses use discount pricing to sell low-priced products in high quantities. With this strategy, it is important to cut costs and stay competitive. Discounts to reward volume customers, repeat customers and employees build customer loyalty. Loss leaders are effective for retailers who need to increase traffic in the store. If you want to sell more product, which would you prefer: advertising “price cut 33%” or “50% more” product? Functionally, the two are the same level of discounting. Researchers at the University of Minnesota found, though, that a “50% bonus pack” sold 71% more than a “35% discount,” even though the latter is a bit lower price per unit.
Our Brains are not good at Math
Our brains aren’t good enough at automatically determining which deal is best, which explains why a “50%” number looks more attractive than “35%” even when mathematically it is actually worse. For example people don’t realize that a 50% increase in quantity is the same as a 33% discount in price.
50% increase in quantity = 150% = 1.5
33% discount = 67% = 0.67
1 / 1.5 = 0.67 and thus 1 / 0.67 = 1.5
The researchers call this “base value neglect” – in essence, we look at the percent without paying attention to the number to which the percent applies!
Maximize Your Percent
The first thing is that you should always try to structure a promotion in terms of the biggest percent you can. (A “50% more” type approach may have the added benefit of carrying through more product.)
The paper notes that stacked discounts are also overestimated by consumers. So, “Take 25% more off” a price that is “discounted 25%” will seem larger than if the price is described as a “43% discount.”
Don’t Forget FREE!
Other research has shown that the word “FREE!” is a significant motivator for consumers – see The Power of FREE!. The Minnesota researchers were aware of this, so they eliminated the word “free” from their bonus offers to avoid distorting the effects of the subjects not paying attention to the base value.
You, on the other hand, should use FREE! whenever you can. Instead of “25% Bonus” or “25% More,” use “25% More FREE!” to maximize sales.
In short, combine the biggest percentages with the word FREE! and you’ll sell far more product than an equivalent discount.