What We Can Learn About Pricing From Menu Engineers
gigaom.com
gigaom.com
Using some of these tactics could backfire depending on how educated or savvy your target market is. Think of spam messages, those over the top tactics used to work on more people, now for most educated people that type of hard sell doesn't work.
Of course it all depends on the target market, if you're selling blankets with arms the bar is a little lower.
edit: the strange phrasing "Ariely also..." in the second section makes me think the writer was regurgitating pop econ chapters themselves, and then decided at the last minute to find a "menu engineer" to say them instead.
There are plenty of people who call themselves "tree doctors" yet medical doctors have no problem with that (and certainly don't go all tribal and True Scotsman about it). Perhaps the difference is that in the public eye, the term doctor is synonymous with the qualification, whilst "engineer" has yet to reach that status?
I'm Canadian and I have a bachelor's degree in Computer Science. I don't call myself an Engineer because other than being against the law, I have a certain respect for the amount of work the people who earned the title went through.
Also, if they majorly screw up, (though this isn't nearly as likely in software, it's usually happens when bridges or buildings fall down) an Engineer can have his accreditation revoked.
Which is why legally calling yourself an Engineer in Canada, software or otherwise, has a certain status associated.
So yeah, that trick definitely works.
Actual utility, much like truth during a court battle, is a big advantage. Sure, it's not overwhelming, but it helps a lot. If you are providing actual utility, your customers will do your marketing for you.
Personally, I think the choice depends a lot on what you are good at. If you are good at marketing and have little technical and/or engineering skill, sure, you will get more out of marketing. But the opposite can work too.
Personally, I'm always very amused by people telling me I should raise my prices. I started out selling FreeBSD jails (with an actual utility close to my current $8 product) for $40 each. I rented two. Switching to xen, then dramatically dropping my prices (well, and a few years of actually, you know, learning what I was doing) helped me a lot.
Marketing is easy when you have obvious and objective advantages over competing products. You can yammer all day about this or that or the other, but if you can point at your price sheet and say 'hey, look- I'm kinda like that other guy, only 1/4th the price' well, for price sensitive customers, that's a difficult to refute reason to give you a shot, especially if the advantages your competitors cite for the price premium are not immediately testable.
Differentiation is only in your interest if you are better at marketing (and/or have higher costs) than the competition. In my case, the competition is much better at marketing, and my costs are such that I can dramatically undercut them while making a profit, so it makes sense for me to just focus on providing a decent product while occasionally saying "Hey, look at me. I'm kindof like the competition, only 1/4th the price!"
secondly, the view that undercutting (for the same objective value) will always be interpreted correctly by the customer is a little naive. In reality you often don't want to undercut your competition by too much for exactly the same reason my initial post was about: perceived value.
The thing is, I've tried setting prices at par with the competition. Sure, it was high margin in terms of computer hardware, but computer hardware is the cheapest part of the equation. Cutting prices dramatically is why this project went from being a net loss to paying for my rent and a new server or two every month. It became much 'higher margin' because it's cheaper to just give everyone 4x as much ram than it is for me to compete on marketing with the other players in this field.
Sure, there are people I'll never appeal to, and that's fine. There are some real reasons why you might want to pay extra to have a 'real company' handle your VPS rather than three guys.
I think that if you want to retain credibility, you can't pretend that you can serve everyone.
Besides, I'd go nuts if I had to teach unix to every middle manager who decided to sign up. Slicehost is great. if you need a bunch of hand holding, use them. Sure, you've gotta pay for it, but you know what? tech support is a soul-sucking job. It's incredibly difficult to maintain a good support organization, and I think it is quite reasonable to charge extra if you are able to do so. (I mean, assuming slicehost's support is as good as people seem to say; I haven't personally used them. But I hear nothing but good things.)
if you know what you are doing, and if you have a system, like mine,[1] that allows you out of band console, rebooter, and rescue media, you don't need very much support. This is good for you and good for me, and my prices just don't work, otherwise. Hardware is cheap, good people willing to do tech support are not.
Objective, testable arguments appeal to my market, and 'Hey, I'm kindof like slicehost, only 25% the cost' is a very strong, testable argument.
But my central point is that you should focus your marketing effort. saying "I am all things to all people" is an obvious lie, which will cause most technical people to write you off as worthless marketing garbage before you get a chance to explain what you are actually good at. Figure out what you are good at, and focus on and talk about that. Be consistent.
Sure, Perceived value is what you get paid for, but unless you are a whole lot better at marketing than I am, increasing objective value is by far the easiest way to manipulate perceived value. Besides, increasing objective value makes me feel good about myself, and increasing perceived value without increasing objective value makes me feel kinda slimy.
[1] in the interests of full disclosure, and, uh, in not getting people signing up then exercising my 30 day money back thing, I will point out that my system sucks badly if you want to provision a new server, or if you want to resize your server. I'm working on it. But I do think my system does a very good job of emulating a remote server in a co-lo with a serial console, a rebooter, and a rescue CD in the drive.
I feel like this is representative of why technical people leave money on the table in general. every product has a laffer maximum, objective value doesn't really exist.
also you are getting that you can maintain your current pricing structure completely unchanged except for adding some premium option that you don't intend to actually sell (you can price any added features that you don't really want to support so high that on the off chance someone does buy it you won't mind working for that money), right?
Maybe. what about comparative advantage? I can probably compete with the best SysAdmins my competitors hire. Yeah, some of them are better than I am, but it's at least a contest, you know? I'm not completely outclassed. I have a fighting chance.
Put me up against the best marketing guys my competition can hire, though, and I'll be humiliated. I'm just not very good at manipulating emotions, so I'm better off if it appears that I'm not trying.
That, and I still don't believe I'm leaving money on the table. my growth rate right now, (a bit over a server a month) is probably about optimal. It's fast enough to be exciting, but it's slow enough to be not overwhelming. The hardware margins are fine; a full server more than pays for itself in two months. Really, any more than that is just silly.
I think what I need to be focusing on now is automating the bits of support we are currently (badly) doing by hand, that is, provisioning and re-sizing domains. Next, I think, backups, as that's the biggest threat right now. Data-loss events are horrible.
well that's a different signal, depending on your market (technical people in this case) it could be a superior signal.
I mean, I am trying to signal that I'm one of you. I'm not going to fuck around in an attempt to extract pennies from you. I'd be doing this for free if that didn't carry some serious negative consequences. If you are not a nerd, you have no idea how much many of us hate talking to sales every time we need to buy new equipment or space. Like most marketing signals, if I don't follow through, if this isn't an honest signal, the market would believe me for about five minutes.
Also, yeah, we are all biased, even nerds. I'm sure you could, for a short while, trick nerds into paying more because of those biases. But I'd bet money that they'd figure it out, probably sooner rather than later, and they'd be mad at you.
If you are selling to the middle managers who tell nerds what to do, it's different. But I'm a long ways from being able to hire someone who can pull off that sort of thing.
First, like I said, smart business owners base their businesses on commodities they can get from multiple vendors.
Second, All of my marketing is focused on saying 'Hey, you can treat what I'm selling like a commodity.' - the thing is, I am selling something that is fairly similar to what my competitors are selling. But my competitors are good at marketing, and they charge quite a bit more than I need to. It's in my best interest to not differentiate, to instead say 'Hey, I'm kind of like those guys over there' - I want to turn the market for what I'm selling into a commodity market. Sure, a commodity market is best for consumers, but in my case, it's also better for me, because it slashes my marketing costs. I mean, it's not entirely fair to my competition, I am benefiting from the work they have done to introduce people to this class of products, but I think it's not unethical. This is just what happens as a market for a particular good or service matures.
From what I understand, marketing costs (or referral fees) have traditionally been a huge portion of the cost of providing shared hosting, and the barrier to entry into this market is only slightly higher.
$20,000 setup, $10,000/month; I will rent you 10 32GiB ram/8 core servers, and give you a gigabit connection to the 'net, and hold your hand when not working on prgmr.com;
See, I don't think that would increase the perceived value of my existing offerings. Just because you have the price posted, that doesn't mean people believe it's actually selling. Really, if you want to charge that kind of margin, you need to give half of it to a salesguy.
Yes, I understand that one of these 32GiB ram, 8 core servers is worth about $1500 to me, or $6000, to someone unable to assemble a server from parts. There can be no value without a valuer, so technically, there can be no objective value. (just like I can't prove that you are not a figment of my imagination. It's impossible to do with the tools provided by philosophy. But I am unlikely to live a very successful life if I act as if others around me don't actually exist.)
However, the price of a commodity tends to fall to just above the cost of production, because, in the example above, building a server is fairly trivial once you have a good ESD setup, so if you charge $3K instead of $6K for the $1.5K server, someone else is going to charge $2.5, or $2K, until you get down to the smallest profit margin someone will accept to do the job.[1] This is what I mean by 'objective value'
Of course, some businesses try to say "Oh, our product is not a commodity" which is fine, but I would argue as a businessperson, I want as many of the inputs to my business as possible to be commodities. The idea is that if I use commodities, it is easy to compare pricing between vendors, and if one vendor fucks it up, I can easily switch to another. 'differentiated' products usually cost more, but they usually provide less value for those very reasons.
Of course, some businesses seem to prefer to spend $6K on the $1.5K server, even after seeing another vendor charge $3K for what amounts to the same hardware. I don't know why this is. My theory is that the people making that decision, the managers, do not have enough technical knowledge to know that the hardware is comparable, but more importantly, they are more concerned with minimizing their own personal risk than with maximizing the total expected return for the shareholders, who are ultimately paying for the hardware.
Clearly, I don't understand that market. Quite possibly there are good rational reasons why they like to pay 3x what they need to pay for hardware. I don't target this market because while I can build good servers, this market wants something else. I don't understand them so I can not serve them well. Besides, there are many good companies serving that market, and right now, I'm scaling at a comfortable pace. Serving a large corporation would require speeding that growth perhaps more than is healthy.
I will stick with serving my people for now. If shareholders start demanding that larger companies watch their budgets more closely, well, I'm here, and I'm learning more every day. Hopefully, when that day comes, I will be prepared. Until then, there are enough technical people with hobbies and small businesses to make me quite comfortable
[1] see serversdirect.com - I have no experience with them, but a co-lo customer of mine uses them. their prices /as posted on the website/ are very good; about what I'd charge if you asked me to build you servers.
the longer your responses get the more I agree with you, so I don't think we have different priors, just a miscommunication somewhere.
I disagree. Sending the consumer false signals is a very different thing from actually producing a better or cheaper product.
Pointing out that you exist and that your price is X and some other measurable attribute is Y is ethical, I think, assuming you use consensual channels, and that your price is in fact X and your other measurable attribute is in fact Y.
So yes, good marketing is honest and is important for both the buyer and the seller.
This strikes a parallel to something 37Signals once said, many moons ago, though I believe I had misinterpreted their point. When they said it (or when I read it,) I assumed it meant that you should definitely throw a premium option out there because there are some people who always buy the premium option... even those who wouldn't consider buying a less-than-premium option.
It honestly never occurred to me that its primary purpose is to make the other prices look smaller by comparison.
In our two main products we sell more of the mid and higher priced options. My theory is that business owners (especially sole proprietors) like to think of their company and needs as bigger than they actually are ... "I can't get just the start/basic/hobbyist/limited plan. I need the veteran/professional/unlimited/premium plan."
So, in our experience, customers may not always buy the highest offering, but they will rarely buy the lowest offering.
Do you think that's an aspirational viewpoint, or that they are actually poor at judging their needs?
I explained in a previous comment that I think not differentiating, and instead competing on price and value can be a good strategy, especially when industry margins are high.