Over the past several years I’ve become much more acclimated with how pricing works. Obviously in order for your business to operate you need to be sufficient; bring in more money than it costs for you to create a product or service. In principal price is dictated by the market and is set in correlation to the value at which the person or group is willing to give up in monetary resources. Note – Price in of itself can add value.
What I find interesting about pricing is how people evaluate products and services today. Think about the following: why are people willing to pay substantially more for Apple hardware than Win-based hardware? Why do some people think buying an XBOX is expensive but still will drop $200 a weekend at bars? Why do some people spend $3000 on a bottle of wine or nice watch? Amazing huh? Thus, I’ve split these buying habits into emotional and economic. Therefore I like to think pricing schemes sit into two distinct subsets: Emotional and Economic.
Emotion based pricing, in a sense, means you can charge whatever you want. As humans we suck at assess value to experiences. It’s hard for our brain to process how much an experience is worth. Let’s look at the travel and entertainment business, their pricing is based on emotions. How much happiness does a $2500 trip to Mexico bring us? What would happen if we upgraded the hotel and that now becomes $5000? Do we somehow enjoy that more? As humans we rationalize these type of decisions with emotions. I can’t begin to think about the ridiculous amount of times I’ve spent over $80 out boozing with friends, and yet that same $80 could get me something that last much longer than a night out on the town.
Economy based pricing means you can charge based on a specific invested value. When you addresses whether or not you’re willing to pay for something the left brain kicks in. When a business decides to procure something they always are using economy based pricing. They always assess things like “What am I doing today that will make my life better with this product or service?” “How much does that cost today?” These numbers are usually really easy to assess. I think most humans are able to quickly calculate ROI’s when it comes to money, but lack the ability to see what a return of emotion equals (whether they do it in a rational sense is another discussion). Maybe are brains are so complex that we associated price and value with the amount of endorphins our brain produces.
Both pricing markets are proven ways to make money. However, what I really like about Emotion based pricing is that you can pretty much charge anything you want (which means you dictate whatever profit margin you get). How do you think Apple is able to get away with pricing an iPod at $200+ and yet the costs to them are minimal? That’s because Apple isn’t selling you an iPod, they’re selling you an experience. If you can sell an experience on top of your product or service (or your product or service intrinsically becomes an experience) you can be sure to increase profit margin. This is why I think the costs associated with people who focus purely on UX will eventually become the most costly to any organisation.
That’s some food for thought. Mmmm, food, I think need some chocolate…