Image Credit: Steve
One of a product manager’s hardest tasks is to come up with a price for their product. Our goal here is to use our product development definition to pick a price that will maximize revenue for our company while at the same time not scaring away our customers. We’ll create a price and then we’ll watch and see what happens. If we see sales start to go down we’ll quickly step in and perhaps run a sale or a promotion in order to offer our product at a lower price. However, if this doesn’t fix things, then we’ll have to lower our price. What product managers need to understand is that there is a pricing trick that they can use to make their products more desirable.
The 0.99 Trick
Any time that a product manager goes to a grocery store and they’ll see examples of what behavioral-pricing researchers refer to as “the left-digit bias.” This occurs when an item is priced at $1.99, the idea is that consumers will think of it as $1.00. This happens because the mind compares the left-most digits before it can round up the numbers. What this means is that people look left first. It’s a common marketing strategy that every product manager should recognize. The big question for product managers is whether it works. The good news is that according to new research, it does. But only sometimes.
Knowing when it does and doesn’t work can save a product manager a lot of money. In order to determine if you should use this strategy, consider for a moment if a packaged-goods company with a 9% net profit margin were to change its product prices from $3.00 to $2.99. If this strategy of pricing a product just below a round number doesn’t end up producing a big increase in demand, it could reduce the company’s profits. That would not look good on anyone’s product manager resume. In a recent paper it was concluded, based on a series of studies, that “just below” pricing is more powerful when consumers evaluate multiple prices side by side, and less powerful when consumers compare the price in their heads with what they think the product should cost based on their own experience. In the study it was found that when consumers see a jar of peanut butter by itself for $3.99, in their minds they round the price up to $4.00. But this is not the case when two jars of peanut butter are displayed side by side. When study participants were shown a premium brand priced at $3.00 alongside the store brand priced at $2.99, the mind compared the left-most digits first, before rounding any numbers.
What Customers Are Thinking
When a customer sees $5.00 versus $3.99 presented side by side, our brains are actually comparing $5 to $3. When this happens, we instinctively think that a drop from $5.01 to $5.00 is less than a drop from $5.00 to $4.99, even though the difference is identical. However, when competing cookies were shown one at a time to other participants in the study, the customers showed almost no left-digit bias. It turns out that when we have to call up a comparison price from memory, the left-digit bias is diminished. The researchers also looked at scanner data from 11 locations of a major grocery-store chain, and found that just-below pricing was most likely to boost sales among light users of a category.
In this case customers have less-developed price knowledge and are thus prone to compare the prices of other products on the shelf. Heavy users of a product, on the other hand, will draw from past purchases and their memories of those prices to determine whether they believe that a .99 pricing strategy represents a good deal. Product managers should understand their consumers’ purchasing patterns. They should price heavy-use items with round numbers and use just-below pricing for infrequently purchased items, like canned goods, so that the left-most number is low. Additionally, product managers should always provide a reference point on price tags when discounting prices to boost sales.
What All Of This Means For You
Having a product that our customers want is one of the key tasks that product managers have to deliver on. However, our product manager job description tells us that we also have to price our products in a way that will cause our customers to want to buy our products. This can be very hard to do. If we charge too much, our products won’t sell. If we price them too low, our company will lose out on a lot of potential profits. What’s the best way to price a product?
It turns out that there is a secret to pricing products. If we make use of what is called “left-digit bias” then we can price our product at x.99 and cause our customers to believe that the product costs less than it really does. People tend to focus on the left most digit (x) and not the “.99”. However, product managers need to understand in which situations this technique works. The just below pricing strategy works when our customers are evaluating competing products side-by-side. However, it does not work as well when customers compare the price in their heads with what they think the product should cost based on their own experience. This means when customers don’t know what a product should cost, using the just below pricing strategy can boost sales. However, if they know what a product should cost, this technique will not increase your sales.
Product managers are responsible for making sure that their product is a success. In order to make this happen, we need to make sure that we set the correct price for our products. Using the “just below” technique can help us to boost the sales of our product in the right circumstances. Knowing when to use this technique and then using it correctly is the key to making our products be even more successful.
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™
Question For You: What should a product manager do if using the just below pricing strategy does not work out for them?
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What We’ll Be Talking About Next Time
In this digital age in which we are living, we create our product using our product development definition and then our customers can purchase our products and then go home and write a review of it. This review can be posted online. This means that what one of your customers says can be seen by hundreds, thousands, or even millions of other potential customers. How big of a deal is this? Clearly if people are taking the time to read reviews of products before they make a purchase, it could be a big deal. However, do these online reviews really matter?