The Psychology of Price
Page 17
Chapter summary
• Although it is usually more profitable to maintain different pricing points for different customer segments, this can allow third parties to arbitrage, buying at the cheaper price and selling at the more expensive price.
• Depending on the situation, you may not be able to directly prevent this, so you may need to make the product distinctions more visible, so that the third party is embarrassed into buying through the correct channels.
• Having control over the pricing environment includes shaping the customer’s first impressions so that you influence the perceived value of your product.
Chapter 18
The psychology of giving
I received an email from CTC in December asking me to name my favourite charity. This question always puts me in a dilemma. Is it better to look at where the money will make the most impact, perhaps in cost per life saved; or at where it will provide the seed for a sustainable future, which suggests a microfinance charity; or at whether I can see the impact directly, perhaps a charity that a friend works for, or one based in my own neighbourhood?
All of these considerations have their parallels in the questions that come up when we buy a product: are we focused on the short or the long term, on getting the most for our money or on brand familiarity?
After some thought I submitted my suggestion: a microfinance charity covering sub-Saharan Africa. January came around and I noticed that a charity appeal started to appear on the supermarket boxes of chocolate teapots. For every teapot, 5p was to be donated to a charity. And inside every box was a code allowing me to go online and cast my vote among a list of nominated causes, with the donations to go to the most popular.
Every time I bought a teapot that month I was sure to visit the CTC website and vote. My nominated charity had found its way on there, though it wasn’t the most popular – so I emailed all my friends to suggest they cast a vote too. Surely we could get enough votes together to knock that donkey sanctuary off the top position?
I talked to Maggie about the campaign. What had inspired it?
“You mean you don’t believe that we’re doing this out of pure generosity of spirit? Well, I suppose you’re right. It’s good for sales too. People are much more likely to respond to an offer of 5p to charity than if we simply took 5p off the price. Even though they could donate that 5p to whatever charity they wanted, it feels as though it has more impact when it comes off the profits of a faceless corporation.”
“And the voting?”
“The voting is important because it gives people a sense of control. If you imagine donating 5p directly to charity, it would feel trivial – it is such a small amount, it’s almost not worth giving anything at all. The feeling of influence from a vote on the destination of a £50,000 donation is much greater. Although the objective difference you can make is just as small, the vote allows you to believe that you are part of something bigger.”
“Kind of cynical.”
“Well, the objective effect might be tiny, but it does create a genuine feeling of loyalty between the consumer and the charity. It’s a little like voting in a general election. The chance that your vote makes any direct difference is tiny. But the act of voting gives you a chance to affiliate yourself to a philosophy of life, and the knowledge that you participated in the democratic process is one of the things that help us all feel that society is working for us. This works the same way. You have signalled your support for the charity you care about, and there’s a good chance that it encourages people to go out and support it in other ways too.”
“Doesn’t it run the risk that people feel they’ve done their bit, and they don’t give any more?”
“That could happen. But you might have noticed that we tried to counter that by prompting people to make an extra donation after they have voted. We even match some of the additional donations ourselves.”
“And how’s it working out commercially?”
“Sales from that channel are up about 15%. Definitely worth it for us as well as for the charities.”
Throughout the rest of the month I watched the voting totals move. My selected charity stayed near the top of the rankings, but those donkeys provided tough competition. I promoted the vote on Twitter, on Facebook, through my blog and with repeated emails to my increasingly annoyed friends; it seemed to make a difference, though presumably the donkey fans were doing the same. I can only imagine the sales of teapots to voters went through the roof – I bought 30 or 40 of them myself during the month.
As the 31st approached, the vote counts grew steadily. At midnight on the 29th, my sub-Saharan microfinance fund was on 44,200 and the donkeys on 44,350. By the 30th, it was 46,750 versus 46,795. And at 10pm on the 31st, 48,841 for Africa, 48,855 for donkeys.
I refreshed the website every few minutes to see the latest count. The tension sat somewhere in between the end of the football transfer window and presidential election night in November 2000. Was there any time left to influence the result? Had any of my friends bought teapots and not yet opened them? Was my local supermarket still open?
At 11.30 I decided to go out and buy their stock of teapots. After all, I was going to drink them the next month regardless. I might as well have a last chance to influence the vote.
There were 16 pots left on the shelf and I took them all. Four were premium Ecuadorian chocolate and cost more than I usually pay, but why not spoil myself for a good cause?
Back at the computer with 12 minutes to go, I ripped open each of the packets, pulled out the voting code and entered it into the website. The vote counts gradually crept up in both columns … 49,010 for microfinance, 49,015 for the donkeys – and I had only three teapots still to open.
Then a glance at my Twitter account told me I wasn’t the only one doing this. “Microfinance”, “teapots” and “donkeys” were all showing up in the “trending topics” list – apparently the vote had caught the attention of the social media crowd. My messages, along with dozens of others, were being retweeted again and again as the clock ran down.
I opened my last teapot, voted and refreshed the screen as 11.59 became midnight. The votes ticked over: 49,460 for microfinance … and 49,458 for the donkeys.
The next morning Maggie put out a press release thanking voters for their commitment (and, by implication, the thousands of extra sales that CTC must have made in the last week of January). They gave an extra gift of £10,000 to the donkey sanctuary as a consolation prize – which I suspect was planned all along – and the microfinance fund got £74,000. Each charity had also raised more than £30,000 in additional donations from voters.
When Maggie shared the sales figures with me later in February, along with customer registration details from the website, it appeared that the campaign had attracted around 30,000 new customers as well as the extra sales from existing consumers. As I learned later that spring, this must have been very helpful in some negotiations that were already under way at this time. The Epilogue reveals how those turned out in the end.
Giving money to charity is, on the face of it, an impossible action in the world of normal economics. If we are rational, selfish individuals, why would we voluntarily give up some of our resources to other people? It makes a mockery of economic thinking.
Of course, we often do give money away. In the UK, charities have an income of £26bn a year, of which 20% is from donations – about £100 for each individual in the country. And this is ignoring the much bigger ‘gifts’ we make within our own households – after all, do children do anything to earn the free rent and meals their parents give them every day?
Understanding why we give money to charity is crucial for the charities themselves, but it also sheds useful light on the buying process for companies of all kinds.
The most common explanation of charitable giving is known as the ‘warm glow’ effect. Giving money to charity makes people feel good. This rather broad motivation can in turn be broken down into the following.
• They want to feel connected with others (a social benefit).
• They want to feel a sense of balance for selfish or negative actions (cancellation of guilt, or ‘indulgences’).
• Some people feel that profitable companies ought to share their money, and charity is a way to redistribute it (political motivation).
• Some want their generosity to be recognised by others (social status).
• Those who have been giving to charity habitually may feel an impetus to continue doing so (habit and routine).
• For some people, charities are about influencing other people’s lifestyles in a way that they think is improving, perhaps by helping the beneficiaries become ‘more like me’ or supporting people who are already ‘like me’ (identity).
• There are many other influences that can cause people to donate – religion, duty, guilt and more.
An important aspect of these motivations is that they are hard to measure. It is difficult to say whether £10 worth of guilt is much different from £5 worth; or will your friends be twice as impressed by a donation of £200 than £100?
The difficulty of putting a clear value on these benefits means that they are especially susceptible to influence by the techniques described in previous chapters. If you are designing a fundraising form for a charity, you can strongly affect what people give by changing the way you ask for their money.
Anchoring is especially powerful. If you first ask for £50, then suggest £20, donors are more likely to give than if you start out at £20.
Hyperbolic discounting works well – it is easier to sign up to give money later than to pay it now. This is one of the reasons why a regular monthly gift works well: £10 per month is easier than £50 today.
Free offers and bundling are effective too. If you want to sign people up for a monthly donation, try giving them a few different benefits in return. A newsletter, free entry to an exhibition, a badge or pen – whatever the offering might be (as long as it does not cost you much) it will expand the perceived value of the transaction and increase the likely donation level.
Social norms also make a difference. If you can show your donor that other people are giving a certain amount, it will create a strong pressure on them to match it. Given the lack of firm rationale for any specific donation, the existing behaviour of one’s peers is perceived as good evidence for the appropriate action.
How to apply it
If you run a charity, you can follow the broader process described since the beginning of the book just as a profit-making business would do. Analyse the values of your donors, look at the positioning of your charity, the segmentation of your givers, the anchors that you create and the structure of deferred payments and bundles.
If you run a conventional business, you can still use the psychological effects of charity – as CTC did in this chapter – to boost your business and help a good cause at the same time.
Look at how you can make your customers feel good about buying from you by simultaneously giving to charity. The size of gift per purchase does not make a lot of difference – 5p in the case of CTC was little more than a token amount – because the emotional values which the consumer satisfies through a donation are hard to quantify.
You can also increase engagement with your product by a link with a charity. Most people care more about charitable causes than about your brand (which is not to say they care more about charity than about their own interests). An involvement with charity, such as the voting process used by CTC, might capture their attention better than some of your other marketing activities.
Look at your benefit matrix from Chapter 1 and the customer segmentation from Chapter 4, and think of what those values tell you about the different kinds of customer. What values are they likely to share that are relevant to charities? For some people, charity is about sharing their values with others; for some, the activities of a charity directly fulfil the donor’s goals in life. If you sell financial services, you might find that a charity oriented towards microfinance will fit with your customers’ attitudes of self-reliance and investment. If you make food, a charity whose goal is hunger relief might be a better match.
If you’d like to see how other companies are using this approach, look up Masala Masala. They manufacture fresh curry sauces, and from the proceeds of every pot the company buys a meal for an underprivileged person in India. Project 7, an American company, provides a broad range of products including water, mints and coffee. For each product, some of the money goes towards a charitable cause, for instance feeding hungry people in communities in the USA. Not only is the charitable benefit in each of these cases relevant to the product category (by buying food, you help feed someone else), but each company has chosen beneficiaries in a country which they feel will resonate with the values of their customer base.
Then examine your price points and see how a charitable contribution can either increase purchases or increase the amount people spend, without hurting your margins. You may well want the charity you support to achieve a certain level of income from the promotion, and this might affect the amount you choose to give. In any case, consider that the impact of a given charitable donation is likely to be greater than the impact of a price change by the same amount.
Tactically, charitable contributions can also be useful to smooth the way to a price change (a 10p rise in your price can be made more acceptable by a 5p donation to charity in the initial period of the new price point). They can also provide an advantage over competitive products or services which are otherwise similar to yours.
Some companies, instead of donating a fixed amount per purchase, set up a foundation and donate part of their profits or revenues to charity via that route. This can work, but makes the donation a less salient part of the purchase process. When the customer feels that their own choice of product has a very direct, tangible benefit to the charity, it is more likely to affect their buying decision.
Finally, charitable schemes often have a novelty effect, which may wear off after a time. Therefore you will probably want to run your scheme for a fixed duration. This can help to provide an extra last-minute sales boost at the end of the lifetime of the scheme, though there may be a small drop immediately afterwards as a few sales are merely brought forward into the promotional period.
Chapter summary
• Charitable gifts are often highly symbolic, meaning that the amount of money given or spent has little relation to the emotional value that the donor gains from it.
• The amount given is therefore less influenced by rational factors, such as value for money, than by expectations and social pressure.
• All the same psychological techniques that apply to regular pricing can be used, often with even stronger effect, for charitable giving.
In focus
How many pricing models are there?
This list isn’t exhaustive, but if you want some inspiration for a new pricing approach, take a look at some of these and imagine how you can apply one – even if it seems unsuitable for your product or service. Some of these models can be combined (for example piecework prices with inflationary increases). Many of the techniques described in earlier chapters can be used in conjunction with these: anchoring, for example, can work with nearly all of them.
1. Flat, fixed product prices.
2. Bespoke quotes for each customer.
3. Monthly membership or subscriptions.
4. Percentage of value generated.
5. Percentage of some other number: asset value, size of transaction…
6. All-inclusive bundle pricing.
7. Cost plus a percentage markup.
8. Hourly rates for time spent (plus expenses or materials).
9. English auctions (with rising bids, as in an auction house).
10. Dutch auctions (with prices that fall until someone buys, as in the Amsterdam flower m
arket).
11. Second-price auctions (eBay-style).
12. Industry standard pricing (e.g. equity rates for actors).
13. Piecework prices (e.g. a per-word rate for journalists or translators).
14. Annual contract with inflationary increases.
15. Component-based menu pricing (e.g. the Dell website).
16. Base price plus optional add-ons (e.g. most airlines).
17. Name your own price.
18. Demand-based dynamic pricing.
19. Advance commitment discounts.
20. Free to one group, supported by another (e.g. advertising-funded media).
21. Freemium (a free version alongside a higher-quality paid version).
22. Interest charges.
23. Penalty fees (e.g. bank overdrafts, parking enforcement).
24. Blade-and-razor model.
25. Income-based charges (e.g. some trade unions charge their members a percentage of salary).
26. Marginal cost pricing.
27. Discounting for market share land-grab.
28. Declining price as adoption grows (common for technology products).
29. Random fluctuations in price.
30. Temporary promotional sales.
31. Seasonal pricing (e.g. for holiday accommodation).
32. Quantity pricing (three croissants for the price of two, or £300 for a five-person licence).
33. All you can eat.
34. Competitive price matching.
35. Equity participation.
36. Retainers.
Chapter 19
The ethics and law of pricing
Maggie used to get letters every so often – not from customers, interestingly, but typically from people who had read about her in the business pages – challenging the ethics of the pricing tactics she used. Unusually, Maggie was fairly open about her pricing strategies. Most companies keep all pricing discussions behind closed doors, either from fear of competition or because they are worried that customers will not buy if they think their profits are too high. Maggie had given an interview to the FT explaining some of the approaches she used: