Why Higher Pricing Sells
“How to figure your cost of living: Take your income and add 10%.” – Anonymous
We have talked about perceived value what it is, why it is important, and how you can use it to dramatically increase your gross margins. Id like to continue that discussion today.
Let’s start with a psychological observation.
People like to feel superior. This desire, which the Catholic Church lists as a Cardinal Sin, provides the emotional ground for an awful lot of selling.
By appealing to your prospect’s pride, you can persuade him to pay more sometimes much more than what you could charge if you pandered to greed alone.
Let’s talk watches. For $10 you can buy a perfectly handsome, extremely durable digital sports watch that will outperform and outlast virtually any other watch made. When they were first introduced into the market (over 20 years ago), they were so good and cheap that everyone predicted the demise of the analog timepiece.
Well, it didn’t happen. The new technology revolutionized the watch industry and changed the market forever, but analog watches survived not just survived, but prospered. According to a magazine article I read and misplaced, sales of $1,000-plus watches have more than doubled since the 1970s and continue to grow every year.
It’s Not Simply a Matter of Dollars and Cents
Why do people pay thousands for watches when a $29 one works just as well? Beauty? Not by my aesthetic standards. Have you taken an objective look at a Rolex lately? Tackeeee. Piaget? Like a muscleman in a tutu. Some Seikos are nice, but to the tune of $3,000? I don’t think so.
It’s not reliability. It’s not durability. Its not precision. And it’s not beauty. So what does all this extra money pay for?
In a word, prestige. Slap on an Ebel or a Cartier and you have instant credibility with the fashion police. Thrust out your Rolex-clad wrist and you announce to all those around you, I have arrived.
You need not say a word. What could be better than that?
Sometimes, supply and demand are psychological
In any marketplace from watches to tractors you will find luxury products selling for extraordinary prices. Yet in many cases the main advantages of these products are their prices themselves.
Cars range from $15,000 to more than a quarter of a million dollars. Suits can be purchased for as little as $100 or as much as $5,000. The same holds true for everything, from jewelry to sofas.
The myth is that price levels reflect varying degrees of quality. But the truth is that pricing more often reflects varying degrees of pride. Put differently, for every financial stratum there is a pricing level for just about every product and service you can think of.
If you make twenty grand a year you are happy to get your macaroni for 89 cents a pound. If you are a millionaire, you search for handmade pasta at 10 times that price.
The desire to be seen as superior gives marketers an opportunity to create higher-priced versions of almost anything.
If You Understand This, You Can Outsell Your Competition
In Boca Raton, Florida, 20 years ago, a very smart entrepreneur bought a large parcel of land west of the Interstate in what was then considered to be a very undesirable location. It was in an unpopulated area, west of the freeway and miles from the beach. There wasnt a store or supermarket in the vicinity.
Instead of competing with the frantic homebuilding that was going on east of the freeway, this savvy marketer spent the money to build an 8-foot cement wall around the entire perimeter of his property. In front of the wall, he planted shrubs. And he created a very elaborate entrance with pillars, pergolas, and arches. A guardhouse with a uniformed employee inside it finished the look.
This was Boca Raton’s first gated community and the first development to purposefully sell the promise of exclusivity. While other developers were emphasizing quality and value, our friend was selling prestige: Wait until your friends and relatives see this entrance and have to get permission from the guard to enter your estate.
The result? Lots that the developer bought for $5,000 sold for $20,000, while much more expensive lots on the better side of town were selling at less than half that amount. Today, the same lots cost a quarter of a million dollars apiece.
People will be happy to pay more for your product or service if you can provide them with prestige. The more prestige you can offer them, the more they will be willing to pay.
You Can Pay Pretty Much As Much as You Want for Anything
When I was first married, I bought used furniture, including dilapidated couches for $25. When I started making a decent living, I came into the marketplace of $500 sofas. As the years went by and my lifestyle improved, I had the pleasure of paying $5,000 for essentially the same thing.
I know $500 sofas still exist, but I cant find them. They are not inside the stores my wife drags me to. What I am confronted with instead are divans, chesterfields, chaises, and settees, all priced at what I used to pay for my yearly rent.
Sometime soon Ill talk about techniques for creating high perceived value, the cornerstone of any marketing plan to raise prices.
[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]