Establishing pricing plans will create certainty
The best advisors incorporate three different pricing tiers. Not because three is a handy number, but because there are three phases of consulting and having three options is scientifically proven to be more effective.
The three phases of consulting
In Peter Block’s book, Flawless Consulting, he discusses three phases for any consulting project:
Contracting phase: This is where you establish scope and general expectations for meeting a goal. This is also where you set project boundaries in order to manage expectations in the future.
Discovery phase: This is where you conduct a thorough analysis of the business, uncovering all necessary data points for understanding the ins and outs of what makes the business tick.
Solutions phase: This is where you develop strategic initiatives for reaching key objectives and schedule feedback sessions to alleviate doubts and plan next steps. You educate all employees on the impact of the solution and how it will make their lives better.
The science of pricing
If you read the Malartu newsletter, you know I don’t pass up a chance to link science and business. So let’s talk about behavioral economics.
It’s scientifically proven that we (humans) have no perception of value
But you just said clients want VALUE AND CERTAINTY?!
Hear me out.
Through the SPIN selling process we have determined there is value in your service. What we don’t know, is the maximum price they will pay for that.
Here’s the truth about relativity according to Dan Ariely, famed behavioral economist and author of one of my favorite books, Predictably Irrational:
At the outset of seeing a pricing plan, we have no real way of determining which is better. The best we can do is compare the cost and benefit related to each tier.
For example, The Economist wanted to offer these subscription options:
1. Internet-only subscription for $59.
2. Print-only subscription for $125.
But they realized that very few people would pay that much for print so they added a twist.
1. Internet-only subscription for $59.
2. Print-only subscription for $125.
3. Print-and-Internet subscription for $125.
By adding this third option for the same price as the second, they changed the basis for comparison. In this new setup, you essentially get the online version for free if you pay for the print, which makes the 3rd option more attractive.
Also, you’ve got two options for the same price, which makes it easy to compare those two and choose the “better” one, and disregard the first option, even if it’s half the price.
That last part is key: By making one plan slightly better than the other, the cheaper plan was relatively ignored.
Here are the results of the experiment:
Results with Two Tiers:
1. Internet-only subscription for $59. – 68%
2. Print-only subscription for $125. – 32%
Results with Three Tiers:
1. Internet-only subscription for $59. – 16%
2. Print-only subscription for $125. – 0%
3. Print-and-Internet subscription for $125. – 84%
In this example we have no idea about the real value of each option is, the best we can do is compare the cost and benefit related to each one.
Take this one step further by anchoring your clients to a higher price
The first price tag associated with a product or service has a decisive role.
So, when launching your advisory plans, take into account your potential buyers perception of your service. Low prices are perceived as cheap, while high prices are perceived as quality.
Going one step further, create a perception that supports your pricing policy. This is how some people can get away with charging ten times the price for the same thing as others.
Or, as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”
There are two interesting concepts from Predictably Irrational to ponder for your premium pricing plans:
1. Arbitrary coherence.
This refers to a situation in which our judgement is initially influenced by often random anchors, but our following decisions will be coherent and logical relative to those anchors. So if we start bidding low for a service, for whatever reason our following bids are likely to be lower, relative to our first one. We compare our decisions to the first one we made.
2. Self Herding
We’ve all heard about the herd behavior. But as it turns out, you don’t always need a crowd to experience herd behavior.
Take someone who hates Starbucks, but buys a coffee from a local ‘Bucks during a business meeting. Next time she sees Starbucks, she remembers that it wasn’t as bad as she had expected so she gives it another go. By the third time, she’s familiar with the different names and the ambience so she goes in again. Soon our friend is happy to pay $5 for a coffee, although she resented that idea a while ago.
The point is, we look back at our past decisions and experiences and see them much the same way we see a long queue of people in front of a restaurant. If so many people want to get that lunch, it must be good. If I’ve been to this place so many times, it must be good.
This principal promotes your ability to charge a premium price on a recurring basis. Of course, the initial service experience must be good for this to work.
Now that we understand the science of pricing, let’s tie this together.
#build #bulletproof #pricing #strategy #advisory #services #Malartu
