Setting Your Price: Why $99.99 is better than $100.

 

Some people often wonder why prices are set at at numerical values that are close to round numbers. Instead of ending in .00, which can be simplified to a simple decimal point “.” – prices are set a little lower and have lots of digits, ending in repeated 9’s – $99.99, $999., etc. The way our brains process information is such that seemingly minor price changes have huge impacts on how they are perceived. This is why when setting price points it is better not to round off to an even number, like $100, and instead use $99.99.  Read on, I’ll show why when you are setting your price why $99.99 is better than $100.

Theory

One tool in the arsenal of marketing executives to help set prices is the “van Westendorp Price Sensitivity Meter” – hereafter vW-PSM (consult Wikipedia if this is new to you)  This tool works by asking target buyers a series of questions that probe their attitudes toward the product/service and their expectations on price. The tools works by analyzing the interaction of answers. The questions are simple – they are:

  1. What price for this product/service is too low such that you would doubt its quality?
  2. What price would you expect to pay for this product/service?
  3. What price would you think is a bargain such that you would definitely buy the product/service?
  4. What price for this product/service is too expensive such that you would not buy it?

I will not bore you with a dissertation on the  the van Westendorp Price Sensitivity Meter. Its a tool that has been used and, erroneously, abused. If you want to learn more about this tool then here is a link. This is an article written by my colleague Nico Peruzzi. It is based on some projects using the van Westendorp approach we did together while I was an exec at Drobo.  Nico’s thought provoking article is “The van Westendorp Price Sensitivity Meter – Are We Using It Incorrectly.”

Practice

In order to understand why $99.99 is better than $100, look at van Westendorp question #4: What price for this product/service is too expensive that you would not buy it? The responses show how small price differences like $.01, or $1.00 cause people to react differently. Depending on your product, if you are even $.01 more expensive it can cause a large percentage of your target market to think you are too expensive to consider purchasing.

The image below shows the responses to a 2010 survey exploring response to a hypothetical consumer personal cloud storage product. The survey was completed by 1,694 people — a huge number given given research practices at many high tech companies. This chart shows the cumulative probability distribution (CDF to any math geek readers) of the price at which the product is too expensive to buy.

 

There are two important lessons in this chart that you can use:

Pricing discontinuities – don’t step on a land mine: there are price ranges that vary by a few dollars where there is a huge shift in the percentage of your target market who think the product is too expensive to buy. I have marked these with the arrows on the diagram and the price points at which the discontinuity occurs (in this study a $3-4 dollar difference separates the “steps”).  By observing the sudden “jump” in the stair step curve you can understand the perceptual impact of a minor difference in the expressed price. These explain why $99.99 is better than $100.

Price indifference – don’t leave money on the table: between the jumps, there are broad price ranges over which buyers don’t perceive a difference. In other words, you can price at the high end of the range, or you can “leave money on the table” by pricing too low. In the results shown above, each of the “steps” is about 30% wide. By this I mean that the next “jump” is at a price point higher than the one that triggered the current plateau.

Insights For You To Use

The van Westendorp Price Sensitivity Meter is not the perfect tool. It is best used when there is no ability to change the product specification and your are looking to set the best price. This is a very common situation – like if you are the marketing VP who joined a startup a company with a “ready to launch”  product that has not had proper market vetting. Is this an ideal pricing tool? The full vW-PSM approach gives noisy results. I will discuss these in future posts if there is enough reader interest. The key benefit of the van Westendorp approach is setting a price that maximizes attractiveness to your target market, yet doesn’t leave money on the table.

A Real World Example: Amazon Kindle Pricing

To show that the discussion above is not “analysis paralysis” (link to: ) or worse . Consider the 9/28/11 introduction of the new Amazon Kindle . Amazon’s CEO and Founder Jeff Bezos introduced the new Kindle product family, making effort to position it as a low cost competitor (against the unspoken Apple iPad.  Bezos’ presentation had an analysis  singing the reasons why a Kindle priced at “$99” (and, implicitly, not $100) would excite his customers to buy.  Amazon wants to hit a home run and make their new Kindles very successful. Setting a price on the correct side of a van Westendorp price discontinuity is one key to that objective.

Still Not Convinced?

If you still have questions or doubts — let Tactics remove them. Contact us. We will to do a vW-PSM for you and test how YOUR customers value your product. We are confident we can show you why when Setting Your Price: Why $99.99 is better than $100, $199 is better than $200 and $999 is better than $1,000.

 

 

Google vs. Yahoo, or “Must Have” vs. “Nice to Have”

Executive summary:  Google became a “Must Have” service to its users and customers and is reaping huge financial benefits. Yahoo! is a “Nice to Have” product and is suffering in mediocrity. Read on.

Using “Must Have” and “Nice to Have” as an analysis framework yields insight into more than tangible products. It can be applied to services. Lets apply it to two well know Internet companies Google (www.google.com, Nasdaq: GOOG) and Yahoo! (www.yahoo.com, Nasdaq: YHOO ). Can the Must Have, Nice to Have model explain their different outcomes? We will see that their very different situations, as measured by stock price or market capitalization, are due to Google being a Must Have product with stellar financial performance, while Yahoo! is in the doldrums.

Both are publicly traded companies. I will use an honorific notation to refer to them – their stock tickers. I will now refer to Yahoo! as YHOO and Google as GOOG. These companies have passed an important milestone – an IPO (initial public offering) – and have earned the right to be referred to by their stock tickers on the exchange where they trade.

Both YHOO and GOOG were started in dorm rooms or labs at Stanford University. YHOO was started first, initially offering a directory guide to sites on the web. It earned its YHOO moniker when it “IPO-ed” on 4/12/1996.  YHOO grew by continuing to add Web sites to its human created web catalogs. It also started creating content, adding properties as it grew associated with different topics or services. Do you remember their Auto, My Yahoo, Finance, Mail, Photo, Sports, etc, properties? All of these served as vehicles for YHOO  to earn advertising dollars by presenting a display ads (click to learn more) to visitors.

GOOG was formed about five years later, and it focused on providing automated web search to find information. Early leaders in this field were  AltaVista.com, Excite.com, Go.com, Inktomi.com, and others. By 1999 Google was building an underground fan base where I live in Silicon Valley. Its results were much better than their competitors. Their “Secret Sauce” was their PageRank algorithm. The company’s reputation exploded, so did its user base. The company earned its GOOG symbol when it IPO-ed on 8/19/2004.  Since then YHOO’s market cap has droped about 50% from about $40B to $18.8B  (this post is being written on 9/15/2011). GOOG has increased almost 6x from roughly $30B at the time of its IPO to today’s $175.2B market cap.

The graph below shows how GOOG has increased in market cap while YHOO has declined.

GOOG was able to leverage its ability to deliver superior search results to generate revenue by serving up relevant ads. They have been able to get advertising clients to compete against each other and pay higher prices in order to have their ads displayed at the top of the page. Using the auction market process known as “search advertising” – GOOG maximizes its income by selling display locations on multiple places on the page. There is even more benefit for GOOG – if a person actually clicks a link to go to the advertisers site then GOOG can charge even more. GOOG has perfected “cost per impression” and “cost per click” advertising models.

Similar beginnings, yet one company is worth ten times the other. What happened? Why did YHOO’s value shrink 50% while GOOG’s increased almost 600% in the same time period?

GOOG delivered much better results and the world quickly noticed. Better results and a large and rapidly growing user base enabled GOOG to offer contextually relevant advertising. This enabled them to serve up relevant ads vs. YHOO broad-stroke, poorly targeted display ads. Why? Search terms are indicators of intent. If someone entered a search query like “toyota camry vs. ford fusion reviews” into GOOG’s search engine, then it is a very good bet to infer that searcher is interested in cars, shopping, and these two brands. Thus GOOG could serve up relevant ads for auto dealerships, magazines, insurance, etc.

This is my explanation for their different outcomes: GOOG became as Must Have web service, while YHOO became (or maybe stayed as) a Nice to Have service. GOOG is Must Have for people searching for information on the web, and it is also Must Have for companies looking to deliver relevant advertising to potential customers at the time that they are searching for related information. YHOO is stuck with display ads, a crude and imprecise way of displaying ad. Display ads are the web’s billboards – things we look at once or twice and then our brains filter them out forever.

We live in a market economy. GOOG is valued over 10x more than YHOO because of the value it delivers to its community. Being a “Must Have” product delivers significant financial benefits over being a “Nice to Have” product. Its too bad for YHOO shareholders that its management team didn’t understand this.

 

Is Your Product “Must Have”, or “Nice to Have?”

aspirin, pain relief, must have product

Why do sales of some products grow explosively while others languish? It depends on the intrinsic nature of the product. At Tactics we have boiled this down into a simple question: is your product “Must Have”, or “Nice to Have?” Let’s explore the implications of this question and how its answered.

Why do companies or people buy products? Because they solve a problem. You can interpret this as the product being a solution to a particular PAIN experienced by the buyer. This is important because solution to PAIN is “must have”, meaning that the buyer will ultimately purchase a product. They may defer, but ultimately the PAIN is too much and they buy. This is the essence of a “Must Have” product. There are all sorts of examples. Cisco cures PAIN related to networking. Google solves PAIN related to searching and finding information on the web.

In contrast, a “Nice to Have” product is a discretionary purchase. It does not solve a user PAIN so there is no compelling reason to trigger a purchase. The fate of Nice to Have products is mediocre, unimpressive sales growth. Why? Because, by definition, there is no compelling reason to purchase. Lets look at some examples. First, the daily newspaper. Today it is a discretionary purchase. Written news is available online from many sources, often including free from the paper’s own website. Competition from Craigslist has replaced individual “for sale” advertising. Papers have shrunk in size, staff, and circulation. Other examples of Nice to Have products include many apps in the iPhone App Store. Examples include the dozens of “tip calculator” or flashlight apps. These are fun things to have, but not essential. That is why many are distributed for free, zero revenue, $0.00.

In future blog postings we will explore in more detail the ramifications of  the question  “is your product “Must Have”, or “Nice to Have?” The nature of the product influences how it is priced, sold, promoted – the entire range of activities of getting a new product into the marketplace.