There's a dumb mistake entrepreneurs make when they price their products and services
that leaves a tremendous amount of revenue on the table.
Are you making it?
Probably.
Keep watching.
A few months ago I was talking to my friend Chris Johnson who creates this high quality
demo videos for huge companies and start-ups.
He's got two packages one for about ten grand another for fifteen grand.
I cringed.
He was leaving a few hundred thousand dollars a year on the table easy.
What's worse I see so many entrepreneurs who sell information, software, freelance, consulting
making this same exact mistake day in and day out.
Why?
Because most business owners --hey!
pay attention-- because most business owners don't know about the psychology that goes
into setting profitable prices for their products and services.
Most business owners actually just sit back and think to themselves hmmm, what should
I, they just pull a number out of a damn hat and that's it.
That might work for some people who like losing out on money but for smart entrepreneurs that's
dumb as hell.
I'll explain, in a study by Simonson and Tversky they share a story about William Sonoma which
was then a mail order company.
They talk about how William Sonoma introduced a new bread machine into the market and this
bread machine they thought was going to sell extremely well.
Well it didn't.
It didn't sell well at all.
However, this is when they decided to introduce a new bread machine.
A bread machine that costs fifty percent more than the original bread machine.
The first bread machine cost two hundred and seventy five dollars.
The second bread machine cost four hundred and twenty nine dollars and what happened?
Sales of the first bread machine the cheaper bread machine almost doubled.
It's not what they were expecting but what happened was people were exhibiting this like
trade off effect.
They didn't wanna buy the most expensive option so they decided to buy the cheaper option.
This happened for a couple of reasons the more expensive option acted as price anchor
making the cheaper bread machine appear cheaper and look like a deal but as Simonson then
went on to point out in his paper there's a tradeoff effect happening where people would
rationalize purchasing the less expensive option by avoiding purchasing the most expensive
option.
Now take this back to my friend, my friend with the ten K package and the fifteen K package.
What was going down was people were avoiding the fifteen K package and then taking the
ten K package and it was killing his average price per transaction but it got worst.
People didn't even just pay for the ten k package they would try to haggle that package
down even further.
So what did I tell him?
I told him to create three packages one for ten, one for fifteen and one for forty.
First, there are companies and idiots like me who would always take the most expensive
option no matter what.
So you might as well have it there and there's an added benefit.
Now people would be trading off the forty K option for the fifteen K option instead
of trying to trade off the fifteen K option for the ten K option.
And there's also one more benefit when my friend instituted these three packages people
stopped trying to haggle his prices down.
How annoying is that?
You don't want someone telling you how much you are worth.
But check it in a total twist of fate the following day right after he implemented these
three packages the next day he was landed a contract for thirty thousand dollars.
YES!
Now let's take this back to you.
How are you pricing your products and services are you offering multiple levels of service?
Are you offering three separate packages?
If you're not you should test using three or even four packages as soon as possible
to help prevent the trade off effect for minimizing the amount of revenue you pull in per customer.
I've known about these psychological studies for quite some time but I always assumed that
everybody knew about it but when I told this to Chris and he didn't know I was shocked.
This is why I am creating this video right now.
So for you, do you know a friend that you think could benefit from this pricing knowledge?
if so go ahead send them a quick little email, give them the URL to this video and send it
their way you might be saving their business.
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What's with my eyebrows right now.
I keep making my eyebrows go up there like, there like there's a puppet master controlling
my eyebrows right now.