Pricing psychology is such an important part of every business and behavioural economics can go a long way towards understanding why customers react to deals the way they do. Here are eight lessons from how my gym botched the deal.
Over the past few months the gym had sent me text messages offering $18 a week memberships, the same price as my weekly Zumba class. This was their attempt at winning me over by saying, “You may as well because that’s what you’re spending anyway”. Why didn’t it work?
Lesson 1. Don’t ask your customer for a commitment without rewarding them beyond what a “casual” customer would receive. Because the offer was texted to my phone, any other benefits of membership (better change rooms for instance) were not explained. If using this strategy, parcel the benefits with the price in each and every communication. A text saying: “Unlimited Zumba plus full access to pool, yoga + sauna no add cost” might have been better.
So now $18 was anchored as my membership price expectation.
Lesson 2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged. This of course can work very well for a savvy business because it sets an upper limit against which you can offer discounts.
The other important aspect here is that $18 anchored the price in context. The $18 for gym membership was seen as relatively expensive and yet I have spent more on that in yogurt in the last two weeks. When I was later comparing a cheaper deal to that anchored price, I was judging them relative to gym prices only, not other lifestyle costs.
Lesson 3. Take the opportunity to broaden your customer’s frame of reference with other price anchors to influence how your pricing is perceived. And the other anchors don’t even have to be relevant! Duke University’s Dan Ariely has demonstrated that numbers as random as the last four digits of a social security number can influence the price people are willing to pay for wine. My gym could have cited average costs per week of internet, train travel or something else just to broaden the context in which I was judging the value of the membership.
The gym next texted me a deal for $16 per week. Hmm… that was getting more like it; I would be saving on my Zumba! Note how I thought about it as saving money rather than spending less money; this is the concept of sunk cost where people fixate on the incremental change (saving $2) rather than the outlay (paying $16).
Lesson 4. Sunk cost is extremely powerful because your customer’s mind will be busy calculating the differential value rather than worrying about the actual cost.
But another week elapsed before I took action and the offer reverted to $18. So I now had an upper price anchor of $18 and a lower price anchor of $16. This is another useful technique for savvy businesses because you can help your customer understand that the deals are not forever, and they need to act when one crops up. The concept at play here is loss aversion, where it hurts to lose a potential discount.
Lesson 5. Sequencing favourable and less favourable deals can help drive take up. Petrol pricing is typical of this behaviour where we rush to buy petrol at its low ebb during a particular day of the week.
So then it came to my next offer. A rep from the gym called me and offered $13 per week. Well, that was too good to refuse. I had rejected $18, so this saved me $5, and I had missed out on the great value $16 offer, so I was ready to sign. And the fact that a rep called me rather than texted probably didn’t hurt either because it distinguished the deal from others.
Lesson 6. Make sure killer offers cut through as special and close the deal.
Having arranged to meet the rep at a specific time and had that confirmed by him via text that day, I was a bit confused when told he had gone home for the day.
Lesson 7. Customers hate being bounced and it can jolt them from a future focus (I’m going to me a gym member) to current focus (if this is how they treat prospective customers…). Confirming an appointment only to sub in a colleague who does not have full background information gets your customer in a negative frame of mind when you want them to be thinking “yes!”.
Fifteen minutes later his colleague met with me with the latest offer. Here’s how our conversation went:
So I walked away.
The gym almost had me, and had used different anchoring techniques to finally get me to a position of commitment. Spooking me with a more expensive deal was a mistake they could have easily avoided by clarifying the deadline for the $13 offer.
However, the most surprising part of this is that had they come back and offered me a deal somewhere between $16.50 and $13 I would have signed. Whilst $14 or $15 was more than their best deal, I could have worn the fact that that offer was for a limited time and I was still doing better than $16.50. What’s going on here?
Think back to sunk cost. By turning up ready to sign, I had psychologically “spent” $13, so anything that was closer to my end of the pricing spectrum ($13) than the gym’s ($16.50), was acceptable.
Lesson 8. Just because you’ve anchored the price low doesn’t mean you necessarily have to go there to win the business.
In actual fact they called and honoured the $13 deal so I am now a paid up, committed member. Fair to say there were some bumps and turns in how the local gym influenced my decision to do business with them, and it didn’t need to be so clumsy. I trust you will be able to apply these eight lessons to engage your potential customers.
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