Glass

Yesterday, I talked about one of the major reasons why startups fail: financial incompetence, which is responsible for 46 percent of new business failures. One of the major realms in which entrepreneurs struggle is pricing. That makes sense: Pricing is a complicated issue with which many of us have little experience.

In my previous post, I outlined four pricing mistakes that many entrepreneurs make; today, I’d like to explore four more:

1. Failing to Differentiate Prices Between Similar Products

Research from Yale suggests that if two similar products are priced similarly, you’ll sell less than you would if the products were priced differently. In one particular experiment, people more readily purchased chewing gum when there were small price differences between similar products, but they deferred their buying decisions when the pricing of the products was identical. A 3 percent price difference led to two times the number of sales!

If a quick look at your shop floor (or online store, or services page, etc.) reveals a lack of pricing differentiation between similar products, then your pricing model may be deterring up to 50 percent of your potential customers.

2. Ignoring Weber’s Law

At some point, you’re going to have to raise your prices. Price hikes are just part of business. There’s no way to avoid them – but there is a way to avoid the customer backlash and declining sales that sometimes accompany price hikes. All you have to do is follow Weber’s Law.

According to Weber’s Law, no price hike should ever exceed the “just noticeable difference,” or JND. The JND for a particular product will depend on that product’s price; for the most part, however, the average JND is 10 percent of the product’s value.

So, what does this mean? It means that, when it’s time for a price hike, you should keep your increase under 10 percent of your product’s value. As long as you don’t exceed 10 percent, it’s likely that customers won’t even notice the increase.

3. Your Prices Have Too Many Syllables

Sounds ridiculous, doesn’t it? Prices are numbers – and numbers aren’t made of syllables. True, but the human mind can sometimes be kind of weird, and this is one of those times.

DeskAccording to research, prices that have more syllables – e.g., prices that take longer to say out loud – are perceived to be of greater magnitude than prices with fewer syllables. So, even though $1,599.98 is two cents cheaper than $1,599, most people will actually perceive it (unconsciously) as being more expensive.

Wacky as it sounds, if your prices are a mouthful, then you may be deterring customers. Where possible, stick to fewer syllables in your prices.

4. Not Using Price Anchors

Studies show that people actually experience emotional pain when parting with their money. Anything you can do to soothe that pain will help your sales.

One way to ease the ache is to make your product look like a huge bargain by using price anchors.

In the past, many vendors used to use recommended retail prices (RRPs) as price anchors. They would display these recommended prices side by side with their store prices, which were often quite a bit lower than the RRPs. This made buyers feel like they were getting a bargain – which would soften the blow of the purchase.

These days, however, consumers have wised up. They don’t really pay attention to RRPs anymore. They know the deal.

You’ll have to try a more sophisticated approach to price anchoring – something like this: Say you are selling a commuter bike for $200.  You could tell your customers that the cost of public bus tickets to work every day for three years comes out to $1,000. The bike, therefore, can save your customer $800 over the next three years. Suddenly, the bike looks like an absolute steal – which makes the purchase a pleasure, not a pain.

Your startup will face many challenges, and it’s easy to get caught up in all the passion and innovation and forget the mundane stuff like finances. However, financial incompetence is a real killer for plenty of businesses. Don’t let your startup be one of its victims. Get smart about your pricing.



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