We are increasing prices because …

[tweetmeme source=”pricingright”] I saw a notice posted on the external doors of an ice rink that said,

Please close the doors behind you otherwise the rink will fog up

I did not stand around to measure how many followed the advice and whether this number was better than what it would have been if the sign had simply asked “Please close the door behind you”.  But other people have done such studies.

In the book Influence: The Psychology of Persuasion (Collins Business Essentials) author Robert B. Cialdini narrates the work done by Harvard Social Psychologist Ellen Langer on the power of the word “because”.

People simply like to have reasons for what they do.

It does not matter how relevant or meaningful the reason is. The word “because” made the difference in people accepting your request. This isn’t to say that giving reasons for requests works universally but  it does help to reduce resistance.

Take the case of price increases. When a marketer pushes through price increases without extending any reason customers resist those increases and perceive the price increase as unfair. But if the price increase were justified with a reason, a greater number of customers will accept it. In their paper titled, Perceptions of Price Fairness, researchers Gielissen, Dutilh,and Graafland  validated the hypothesis that price increases justified with cost arguments were perceived to be fair by customers.

Ellen Langer’s and Cialdini’s work point to another possible reason for customer acceptance of higher prices – it is not the justification itself but the mere presence of one.  This opens up opportunities for both B2C and B2B marketers to re-price their offering or capture greater value without turning away customers – just give a reason.

We see that in the earnings results of CPG brands that used commodity price increase in 2008 to push through their price increases.

Another case is for two-part pricing – asking customers to pay an upfront fee and then a per unit price.  Examples are mobile phone activation fee or registration fee charged by services. These upfront fees are nothing but pure profit for the marketer and find customer acceptance when justified with reasons, however trivial, like  processing fee or registration fee.  For B2B case, a marketer can charge additional upfront price with reasons like customizations or order processing.

Just give a reason! – “We are increasing prices otherwise we will go out of business”

I should note that this is a pricing tactic and not a strategy – if your strategy is wrong, any number of fine tuning tactics, even with reasons, are not going to help.

Footnote: It is a good idea to A/B test your reasons even though Cialdini and Langer say the specific reason is immaterial.

A Curious Case of Buffet Pricing

The simple explanation behind buffet pricing is capture value upfront (with a fixed price) and then sell food at marginal cost. For buffet restaurant, the marginal cost to serve one additional customer is $0. A moment’s reflection will convince you that once the raw materials are purchased and cooked into different  menu items the cost is sunk and hence the marginal cost is $0.

Choosing a fixed price model like the buffet is a pricing strategy.  The restaurant is committed to it and cannot change easily change. But does this commitment  limit the total revenue and hence the total profit? No. There are pricing tactics the restaurant can employ to take advantage of short term opportunities.

Diwali is the Indian festival of lights (and more depending on who you ask). It is celebrated today. One of the Indian restaurants that usually offers buffet lunch and dinners at a flat price of $12.95, is promoting a special Diwali dinner for $15.95.   I think this is a great pricing tactic, that fits with the strategy and is designed to increase profit.

It is arguable that the $3 is pure profit even though the restaurant is promoting an expanded menu with increased variety. The marginal cost is not going to increase from $0 and  their total cost is not going to change significantly. Despite the increase in variety the average consumption per customer is not going to increase (limited stomach volume) and the restaurant can reduce amount of food produced for each menu item.  In addition the special occasion and the attraction of increased variety in menu will also bring in more customers than usual generating additional revenue.

The net is an increase in short term profit from a pricing tactic that fits very well with the strategy. Committing to a strategy does not preclude you from capitalizing on short term opportunities and failure to do so is  “the slowest route to victory”.

How do you manage your pricing strategy and tactics?