Why 3 Is The Magic Number in a Pricing Strategy - Ninjodo

Why 3 Is The Magic Number in a Pricing Strategy

How to Price a Service-Based Business

Have you ever wondered why prices tend to have 90, 95 or 99 cents?

You know, $19.99 instead of $20?

It may be small change, but the 1 cent difference can actually skew people to buy a product. This is called a pricing strategy and it’s designed to play with your psychology.

It’s the oldest trick in the book – using 9 in your price.

We read prices from left to right, so our brain tends to round down the number instead of rounding up.

Buying a shirt for $19.99 almost feels like you’re paying $19 even though you’re closer to $20.

This has been carefully studied. One of the research often cited is by the MIT and the University of Chicago. They conducted a test where a garment was sold at a few prices including $39.

What they found was that not only did the $39 price tag outsold the rest, it even outsold a lower price of $34.

Think of Apple’s move which rocked the music industry – offering 99 cents per song in iTunes. Browse through the Kindle store and you will find loads of book prices ending with 99 cents.

How to Price Your Services

You can still use the psychology of pricing if you’re selling a service instead of a product. Using 9 in your price is just the tip of the iceberg.

In this article, I’m going to try and convince you to offer choices as part of your pricing strategy.

This technique is also called price anchoring.

When you offer a few options, you are reframing the customer’s mind to start comparing based on value instead of price.

More specifically, they are comparing one of your prices with another of your prices, instead of your one price, with any competitors they’ve seen or heard of.

Retailers use this trick all the time. Sometimes a product is slow to sell. But the moment they introduce a slightly improved product that is more expensive, the old product starts to fly off the shelves.

What happened? The old product did not change. The old price didn’t change either.

It’s because people feel they are getting a good value out of the first product when they have something to compare it to – the new and more expensive item.

So, what’s the magic number?

3 Pricing Options

A 3-option pricing strategy seems to be the sweet spot.

We are conditioned to think in threes:

  • Small, medium, and large.
  • Gold, silver, and bronze.
  • Goldilocks had to try three different porridges until she found the best one for her.

Get the drift?

The following TED video explains anchoring best.

Behavioural psychologist and bestselling author Dan Ariely conducted an experiment where he offered 3 different subscriptions to the Economist.

Option #1: Online subscription to the Economist at $59

Option #2: Print subscription to the Economist at $125

Option #3: Print & online subscription to the Economist at $125

When presented with these 3 options, an overwhelming majority of 84% picked Option 3. But you can see that the difference between Option 2 and Option 3 isn’t much to the point that the former seemed useless.

When he removed Option 2, the majority of people started picking Option 1 – the cheapest option.

This is what price anchoring is all about.

Offering choices, no matter how useless they are, actually helps people decide even when they don’t know what they really want.

Ok. So, you’re not selling burgers with a side of fries and milkshake. It’s easy when you are selling tangible products.

How do you offer options when you are selling an intangible skill?

Well, the good news is you actually have multiple skills you can offer and it’s all in how you present them.

So how do you go about creating a 3 tiered pricing strategy when you’re in s service based business:

The Mid-Tier Pricing Package

List all your skills or services down so it’s easy to see them.

If you are a graphic designer, for example, it may include services such as interview and research, conceptualisation, sketching, storyboarding, revision, etc.

You want people to at least choose this package so this will be your mid-tier offer.

The Basic Pricing Package

Next, what services are needed to deliver basic work? As in what is the bare minimum required to still get a good result for any would be client?

Take your time and figure this out from your client’s point of view. Strip down your medium package to just core services. If you find it difficult, your basic package might be the first phase of a larger project which can be broken up into multiple stages.

The Premium Pricing Package

Finally, take a look at your mid-tier package and give it all you got.

Think of how you can go the extra mile to make it really worth your client’s money. Add in extra sessions. Give additional reports, sketches, analytics, and the kitchen sink.

Just like that, you instantly look like a professional.

A pricing strategy with 3 packages that are clear and transparent.

The clients know you’re not giving them one price and another smaller client a cheaper price, which can be a common practice.

You’re also laying out all your hard work and expertise in one chart to your prospects to see (which trust me, will save you hours on the phone justifying your prices).

I’ve found that people are more likely to turn me down when I give them one price.

After introducing packages to my pricing strategy, the responses went through the roof. Not only did I receive more enquiries, I also experienced a higher conversion rate in my business, which in turn meant more sales and cash to the bottom line.

You’ll be surprised at how many people will choose your most expensive package just because it’s the most expensive one.

This is because you have subtly converted them to buy based on the value they are getting, and some people just want the best.

All is not lost even with a basic package either. Quite often people will dip their toe in the water to try you out as it were.

They often become repeat customers or upgrade if you do an excellent job.

Do you want more step by step guidance with this pricing strategy, plus action items and pro tips? Click on the button below to download this free 5 step strategic playbook where I outline clear and simple strategies you can implement immediately that more than doubled my consulting business in less than 12 months.

About the Author

Simon Ogilvie-Lee, Founder & CEO of Ninjodo.