Ron Baker is a world-renowned expert on pricing. His best-selling books include Professional’s Guide to Value Pricing, Sixth Edition, The Firm of the Future, Pricing on Purpose, Measure What Matters to Customers, and Mind Over Matter.
He is also the founder of VeraSage Institute – the leading think tank dedicated to teaching value pricing to professionals around the world.
Receipt Bank and Ron recently kicked off an expert-led webinar series hosted by Ron himself, the first being “Value Based Pricing 1.0.”
In addition to his practical guidance on pricing, he also explores the psychology behind pricing methods. To mark World Mental Health Day 2020 on October 10th, here’s Ron’s insights on Price Psychology.
People tend to buy emotionally and justify intellectually, which makes the study of price psychology and behavioral economics a worthwhile endeavor. Essentially, there are two characteristics of price psychology:
1. Price leverage
2. Pricing emotions
This is a question of who has the most (or least) price sensitivity at a given point in time. Before an engagement begins, the firm possesses the price leverage. This means the customer is at their height of price insensitivity––because a service needed is always more valuable than a service that has been delivered.
Once you start or complete an engagement, the price leverage shifts to the customer.You’re left trying to recoup any portion of your price the customer is willing to pay. This is why accountants around the world do not achieve 100% of their “standard hourly rates,” as they tend to set prices after the work has been performed—a bad time to discover the customer doesn’t like your price. You would be better off knowing that before you do the work, since you could possibly change the approach, scope, or other aspects of the service.
There are three primary pricing emotions each customer will encounter at various times throughout the purchasing cycle:
1. Price resistance
2. Price anxiety
3. Payment resistance
Price resistance is the proverbial “sticker shock”––an initial reaction to your price. The best way to overcome this emotion is by educating your customer as to the value you provide.
Before the consulting firm McKinsey & Company starts client work, it claims it has to provide at least three times more in value than the price it charges. What would happen if firms were to use this approach? They would have to focus on value before any work was performed.
Sticker shock is a healthy emotion, one that tunes you in to each customer’s price sensitivity. If you fail to induce sticker shock, you are most likely under-pricing your services.
Price anxiety is also known as buyer’s remorse. You can mitigate this emotion by constantly staying in touch with your customer, assuring them they made the right decision in hiring your firm by managing and exceeding their expectations, and offering a remarkable customer experience. You can also offer a Value Guarantee, which dramatically lowers buyer’s remorse.
Payment resistance is simply the customer’s unwillingness to pay the invoice. Who enjoys paying bills? Payment resistance is overcome by involving the customer in the design, price, scope, and payment terms of your services. Once people commit to a Fixed Price Agreement, they are more likely to act in accordance with that commitment. This dramatically lowers accounts receivable, financing, and collection costs, and the bad feelings that result from slow payment.
Look out for Ron’s next webinar in our series: “Value Based Pricing 2.0” on Wednesday, October 14th.