The Nuances of Pricing Strategy
Data & Profits - Finding the Sweet Spot.
Pricing is one of the more studied topics in business. It's known impacts on consumer psychology, and in turn purchase patterns, can be significant. Striking the right price can have a great influence to your overall profits.
Anchor pricing, analysis paralysis, fear based pricing, and even the psychology around how the human brain perceives numbers and symbols tend to have important effects on people's purchasing behavior.
While there is a dizzying amount of research available, in this article we'll focus on three pieces of advice professionals offer that are most relevant to the tour and activity industry.
#1: Analysis Paralysis
Studies have shown that too many choices in products and prices can slow down, or worse - discourage, the purchasing process. Pricing structure and the value applied to products play a major role in consumer buying decisions.
According to research out of Yale, if two similar items are priced the same, consumers are inclined to just walk away from the purchase. Definitely not the desired response you want!
Along these lines, there is a theory around “price anchoring.” Anchoring is a common cognitive bias that refers to the human tendency to rely too heavily on the first piece of information offered when making decisions.
how that translates in pricing your products, is that studies show people want quality and don’t mind paying for it. In an experiment designed to explore effects of price anchoring, researchers performed three tests with the price of beer at a bar. They started with a single beer offering at $1.80. When a premium (i.e. more expensive) option was offered next to the $1.80 option, four out of five people chose the premium option. On the other hand, when a cheaper option was added to these two, suddenly the value of the $1.80 appeared more attractive and 80 percent of participants chose it.
The most successful test was when they set the $1.80 as the cheapest option with two more expensive offerings: everyone chose the two more expensive options.
In consumer’s minds, the price of a product subjectively correlates with quality when compared to other similar—or even same—products.This concept can be translated and applied to activity and tour operations. In your business, do you have too many tours, products, or ticket types at similar price points? Could it be confusing customers and actually discouraging them from making a purchase? Is it possible to add a premium priced offering for the segment of people who always want the very best and perceive price to be a symbol of that?
You can also use that high-end product to position your best-selling product as well priced. As the beer study illustrates, it’s important to experiment with pricing and apply value to your products in order to differentiate them from one another.
Both experiments illustrate the importance of simple, tiered pricing structures that make it easy for consumers to make buying decisions.
# 2: Pricing is too Low or Fear Based
It can be worrisome to price your product at a premium for fear of discouraging customers. However, when your price point is too low, potential customers mistakenly conclude that you do not have much to offer them. Buyers can be more willing to pay, if they believe that a higher price signals higher quality.
A higher price point illustrates confidence in the value of your product. It’s easy to forget that the experience you are offering is incredibly unique. For some guests, it’s a once in a lifetime adventure—and one they are willing to pay for, especially if the operation has thoughtful staff, high-quality facilities, and offers little things that make the experience extra special. This leaves room to consider pricing your product at a premium while eliminating the worry associated with being competitively priced or the low-price leader.
Here’s a great example from Treetop Trekking in Canada:
Treetop Trekking’s many park locations offer top-notch experiences with great staff, excellent courses and an attractive and easy-to-use website. The zip line and aerial game trek is its most valued and popular product. For many years, the company also offered customers standalone zip lines at several locations, which were included in the treks at no additional charge. Even for free, not everyone opted to ride them.
In 2016, Treetop Trekking made the standalone zip lines an optional add-on to the trek for an additional price (ranging from $10-$15), and it was a hit. The popularity of this add-on not only resulted in increased sales, but it also helped with scheduling staff, which reduced labor costs. This is a great example of applying value to an offering. Buyers can be more willing to pay if they believe that a higher price equates to more value or a higher quality experience.
Cause # 3: Other Psychological Influences
The journal of Quantitative Marketing and Economics conducted in-depth research revealing prices ending in “9” were so effective they outsold even lower prices for the exact same product. In comparing sales of women’s clothing priced at $35 versus $39, the study found that the clothing selling at $39 outperformed the lower price on average by more than 24 percent.
It also became apparent that when a currency sign appears next to the amount, human nature is to automatically connect the purchase to our own wallet—and what is or is not inside there—leading us to believe the price of the item has an immediate impact on our budget and that the item in question is more expensive than it actually is.
All in all, nuances in pricing are important to pay attention to as they impact both the purchasing decision as well as the value the consumer feels they are receiving in exchange for being your customer.The Flybook is the most advanced activity and tour operator booking software for companies that offer any combination of tours, rentals, activities and lodging. Manage all your needs in one place with online reservations, digital waivers, guide assignment, marketing automation and more.Tour by IndustrySCHEDULE A FREE DEMORead Next: Boost Your Bookings by Maximizing Your Local Business Partnerships