Articles

How Unusual Pricing Can Slow Sales

One of the strangest promotions I’ve seen in a long time is buying a drink at McDonald’s for one dollar.  The kicker is that you choose the size without the price changing. Would you like a small or a large for one dollar?

One conversation went like this:

I’ll have a small Coke.

The person’s friend whispered, They’re all one dollar. Get a large.

No, a small is fine. I’m not that thirsty.

Soda calories and waste  notwithstanding, the person could have saved part of her drink for later. She also could have shared some of her drink with her companion. Or she could have simply asked for the large size in case she turned out to be more thirsty than she anticipated.

The bigger point is this: a moment of wary hesitation is caused when pricing doesn’t seem intuitive to a purchaser as they scan the offer for a hidden catch. The McDonald’s offer is strange and its results are a marketing psychology paper waiting to be written.

I saw the same phenomenon at online grocer Peapod. As grocery shoppers, we’re conditioned to understand that a larger bulk size often results in a lower unit price. That’s been a retailing axiom for decades and created the rise of the warehouse superstores.

But on this particular day, the larger size was once again less expensive than the smaller size. As you can see below, the unit cost for a larger box of Raisin Bran was lower as one would expect. This difference was so great, however, that anyone buying a smaller box was paying a premium at the unit cost level and at the total price level.

Almost no one understands that without first thinking about the issue.

Buying an extra 4.8 ounces of cereal (25% more) reduced the total cost by $1.29 (34%).  And that just doesn’t make sense to people. We understand that the unit cost is and should be lower, but the 45% decrease made buying more cost less.

There was undoubtedly a good reason for this price just as there are reasons why someone might prefer a box of cereal that is 25% smaller. You’ve already thought of several reasons for both when you read that sentence.

And that’s the problem.

Display of two prices

 

 Pricing should never make someone think, “Why is this deal different than the pricing I’ve come to expect?”  More of something does not normally have a total cost lower than less of something. Yet that’s exactly what happened. At least the drinks were the same price for a larger size. The cereal actually cost less.

Your takeaway as a business leader is that pricing outside the norm of expectations  without an explanation leads to hesitation when a prospective buyer searches for a hidden gotcha. That kind of pricing slows and possibly risks the entire sale because anything unexpected slows down a sale.

I understand when the local bakery posts a sign late in the day that says “Oops, we baked too much” or why Broadway-savvy theatergoers buy tickets the day of their show. Those are norms we’ve learned as American consumers.

Ask someone unfamiliar with your pricing strategy to see if they can look at your prices and articulate your pricing strategy. If they can’t, you’ve got a potential sales objection that may leave prospects wary of doing business with your organization.

News

Perhaps the most telling indicator of the intense competition Microsoft faces in an industry it once dominated is that my search for Microsoft’s financial statements took me to their listing Google Finance’s page where I could peruse their financial expectations.

Time is the consistent balancing factor for your financial plans
Time is the balancing factor for your financial plans

A spate of articles bemoaning the cyclical nature of King of the Mountain in American industry will undoubtedly follow today’s news that Microsoft will lay off 18,000 employees–about twice as many as Wall Street pundits previously projected. You’ll undoubtedly read about the railroad barons giving way to Edison’s Bell Labs before technology from wars made Detroit rich. The technology leaped to offices, giving way to AT&T, Xerox, IBM and now our very own Microsoft.

Weep not for Redmond, friends. Microsoft will be just fine for quite some time. Its strategic miscalculations are famous: not struggling a  nascent Apple struggling to stay alive at 5% market share, the ugly mismanagement of its antitrust war with the government and its failure to put an Internet-capable device in every home during the holiday season of 1991 when Google co-founder Larry Page was otherwise occupied getting ready for the Senior Winter Dance at East Lansing High School.

Forget the Money Talk about Microsoft

We all have a piggy bank we use for rainy days.  Microsoft has kept about $5 billion in its piggy bank for years.  Sure, they took on debt this year, like maybe you did if you managed to get a home equity line. But they used to buy one of the world’s top cellphone manufacturers.  If you not so coincidentally subtract Microsoft’s debt from its purchase price of Nokia, you end up with about $5 billion.

If your great uncle Edmund gave you 100 shares of Microsoft, that’s a nice little evening out every few months because the stock earns about $2.60 per share.  Over the last four years, while Microsoft the butt of Zune jokes, Google destroying Bing in the search world and continuing to give life support to Windows Phone, the company earned $78 billion.

The earnings from Microsoft’s last four years would allow you to buy 20% of Google’s stock.

High finance isn’t played like fantasy football, but the bottom line is that Microsoft will be around for a long time.

The company still has 80,000 employees, and for now, the company’s operating system still runs the world. Until some company can make an Excel equivalent that pleases CFOs, the company’s Office product will stick around.

Your takeaway as a small business leader is to ensure that the financial ratios expected by the members of your Board, by yourself and the plan you’ve written and by any lenders remains consistent.  The bigger takeaway is to have a contingency plan for big events to keep your finances consistent.

What happens if you lose your best sales rep?  What if a new competitor opens? What if a key executive gets sick, or heaven forbid, dies?

Assume one of these things happens in the second half of 2014.  What will you do to ensure 2015 is consistent with the financial plan stakeholders expect from your organization?

 

Resources

“Microsoft Corporation” at Google Finance
“Larry Page” – Wikipedia
Image: Clocks and Money” by hisks
Articles

Sharing Business Value Reports

Antivirus company AVG pushed a great report to me earlier today called a “Threat Report”.   The security company with the ‘Freemium’ model wanted me to give them credit for protecting one my computers from a series of problems.  It’s a smart, relatively passive way for the company to prove its product’s worth to a user who is a potential up-sell.

silver-beacon-marketing-logoSilver Beacon Marketing does a similar thing, showing clients their return on investment (ROI) for advertising campaigns or other goals from our search engine optimization efforts.  That is proprietary data that few would publicize, but I’ve lost count of the number of times a referral has quoted their friend’s ROI to me. Sharing your business value is easy.

Bragging about the number of threats your computer stopped is something you might share with anyone.  The whole thing sounds like fun.  And even a small adoption rate can mean some great exposure.  Let’s say that the report showed your level of web savvy and a fun rating about your computer’s strength along with some Twitter and Facebook share buttons.  Your product gets valuable exposure every time someone sends that report to their Twitter or Facebook stream.

Enabling that sharing function is only a part of the battle though. Sharing has to be simple–absolutely frictionless–to get the best possible return.  And that’s what I experienced today when I reactivated a StumbleUpon account.

Signing up was easy–only four fields after I clicked “connect with Facebook”.  And the company was smart enough to ask, “Hey, since you’re recommending pages to strangers, how about recommending them to your friends?”

Why not?  That makes perfectly good sense.  And with each post to my Facebook page, StumbleUpon gets a big endorsement from me to anyone connected with me.

Asking that question is smart.  My Facebook friends might not have a StumbleUpon account, but all the work is done for me if I want to post a link to my Facebook page or other social media channels. That is completely frictionless.

Your takeaway as a small business leader is to consider how your company communicates its real business value to stakeholders.  Special bonus points if you make sharing that information easy.