Dec 17, 2009

Predictably Irrational Offers Rational Pricing Ideas

Would you like choice A or B?

Human beings, when given a choice between: A or B
will choose the better of the two... or will they?

According to the research by Dan Ariely, author of  "Predictably Irrational", and an academic, people will actually not always make the right choice if influenced by a number of conditions.

For example, when presented with a slightly flawed "decoy" choice, which Ariely calls -A, the person will choose the choice that does not have the precondition flaw:

So A or B when presented with a slightly flawed "decoy" choice, such as A- or B-  when stacked together as A, A-, or B, the person chooses B, because A was presented with a flaw.

Or, when presented with the choice of subscribing to a journal and offered:

Choice #1:
A. Hardcopy subscription $29
B. Online Subscription $59

In choice #1, people typically choose "A" but when presented with:

Choice #2
A. Hardcopy Subscription $29
B. Online Subscription $59
C. Online Subscription + Hardcopy Subscription $59

In the second choice, people choose C considerably more than in the first example. In this case, choice "B" in the second option is obviously flawed, but people will choose C more often because they get something for nothing, in their mind (the hardcopy, in this case).

This is the argument and fascinating case study work shared in the book Predicably Irrational, by Dan Ariely.

The use of a "decoy" in pricing is critical if you wish to drive success of a higher-priced item.

This is also true if you set a precondition of a certain number in the suspect's mind prior to offering a series of numbers, they are more likely to think that number is "acceptable" as a price.

In addition, the use of zero cost items is essential in promoting a lessor quality item. Offer two of them with one free, and you drive sales.

So, in your pricing, are you offer just ONE price? Or, are you offering comparisons. Because, you see, people will buy based upon the COMPARISON guidelines YOU set. In addition, if you state a RANGE of VALUE prior to offering your price, the person buying will be associating value in that value range, and thus be more apt to offer or buy the pricing within a discount from that value.

For example, if you said "an offer like this, at our normal rates, would cost between $10,000 and $12,000" ut for this day only, you can buy at these special rates:

A. Offer A for $5,000
B. Better Offer B for $8,995
C. Both A and B for $9,995

In this instance, we're using three of the theories put forth in Predictably Irrational TOGETHER and thus, driving up both the likelihood that you'll sell the higher priced options B or C and also driving up the likelihood of prospects choosing option C - your highest profit offering. This is using the THEORY of FRAMING EXPECTATIONS with the THEORY of RELATIVE PRICING with the THEORY of DECOY PRICING. Another theory (not mentioned in Predicably Irrational but still a good pricing theory) is the THEORY of LIMITED AVAILABILITY. If people know they can only buy something TODAY, they rush to get it. It is like when K-Mart would run "Blue Light Specials" where the blue lights go on, everyone rushes to buy that item. It creates an "in-store" sensation that increases the odds people visit that store to get good deals. In this instance, it increases the odds they'll buy TODAY.

While some of these pricing strategies are already part of Cold to GoldTM, I'll be adding additional examples of ways to price products in the bonus "Marketing Maven Mashup" guide as we get closer to the online launch of Cold to Gold. Stay tuned...!

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