Fairness in Pricing
Do you have questions about fairness in pricing? This episode features a discussion of this topic between Jonathan Stark, Curtis McHale, Philip Morgan, and Reuven Lerner. Tune in to learn more!
Do you think it’s fair for someone to charge you more for a product than they charge other people?
Reuven’s answer is that it is fair, but annoying. He wants to feel as if he has gotten a good deal, which is based on price for him. It’s fair to charge different people different prices, but he wants it to be to his advantage. Jonathan’s take on this is that people are bad at absolute value. Is thing worth X? He argues that value should not be based on price, but instead on value. He does not believe that the word fair can be applied to pricing at all. Curtis suggests some people equate fairness and value. He buys locally and will pay more sometimes at local stores, because he sees value in that. This is called the “feel good feeling.” Philip describes that he has two decision-making skills when it comes to price. The first is that money is not infinitely available, which he dislikes sometimes because he feels like it holds him back. Then there’s a no brainer category where if something has value to him, he doesn’t compare price. But he does have a threshold where he refuses to overpay, much like Reuven. ####How do you calculate overpay? Philip suggests that there’s a feeling that he can figure out what the lowest price that a product sometimes gets sold for is and what overpaying would be for that product. Jonathan doesn’t compare the price he is given to what other people spend on the same product. He personally determines the value that he will get out of the product. Philip suggests that the value depends on situation. Jonathan, who says that it has no value to him so he will not pay much for it, gives an example of a screwdriver. He still won’t shop around to find the cheapest one – just the cheapest one for him. ####Two Types of Consumers: Maximizer and Satisfier Curtis explains the difference between the two different types of consumers. A maximizer has to find the best price no matter what. For instance, if they buy a pair of jeans but then see a cheaper pair of jeans, then the value of the purchase made decreases. A satisfier has the mindset that if he finds a product that is cheap enough for them, they don’t think about the purchase again. Jonathan has never heard of these terms before, but based on the descriptions, these are the two types of people he hears from through emails.
Why does this topic matter?
Because, as freelancers, you will set prices for products and services so there is a need to be aware that those two camps exist. Jonathan thinks the best clients are the ones not looking for the cheapest price, which are the satisfiers. He calls these the value shoppers because they are looking for the best product. Curtis agrees that maximizers create the “race to zero” – they lower your price quickly. One group of people will be angry no matter how you sell, so just pick how you are going to do it and stick to that path.
Can you sell to both groups?
Reuven believes that you can sell to both groups although it is challenging. He doesn’t believe many have the luxury of choosing what types of clients they work with yet. The proposed solution is to create a monopoly of a market of one; to differentiate yourself so there’s no other business to compare yours to.
Philip suggests that pricing is a big part of the overall positioning of products.
There are low-end and high-end brands that are controlled by price differentiations. He uses BMW as an example. They couldn’t drop the price to $20,000 all of a sudden. Consumers would not be happy because it would no longer be a status symbol or a high-end brand.
It will be difficult to do value pricing well if you believe that there is fairness in pricing. While there is no scientific evidence to support this belief, Jonathan sites that his experience from clients has informed this belief. There appears to be a correlation between people who believe in fairness in pricing and their ability to value price. Because these people believe they are being unfair with their prices, they lower their prices, which make it tough for them to make money. He suggests for these people to attempt to offer products as services instead and establish set prices. This pricing point may be a better fit for these types of people’s personalities. ####Relationship between the price set for something and your brand. Philip tells a story about a Hi-Fi Man, a Chinese company that makes headphones. They made headphones in the one to two thousand dollar range. The quality was known as less than what you paid by people when they first came out. In the last six months, they introduced a product priced at six thousand dollars. The reaction from people was very negative. There is a relationship between brand and a company that can justify a price - they couldn’t. Questions are asked when this happens.
What does this mean for freelancers?
Some freelancers decide they are going to price every service as the same thing out of fairness to their clients. But it wouldn’t be nice or fair to charge different clients different amounts of money for the same work. Every client wants a different result. Hourly billing is bad for everyone. People should set prices they are comfortable with selling to their clients. They should be self-aware of their pricing and know what kind of buyers they want to attract.