Never Confuse Price With Cost — Optimize Both to Increase Conversions
Thanks to capitalism, the market provides a very clear exchange of value. You provide a product or service to your customers, and they give you money in return.
That is the price. It’s listed in your brick-and-mortar store, on your e-commerce page, or negotiated with your sales reps.
Getting your pricing strategy right is essential to running a successful business.
But cost is so much more than just dollars and cents. So once you get your pricing strategy right, don’t stop there. Consider the overall cost of your product. Here are three examples of cost beyond price.
Example No. 1: The Cost of the Wrong Purchase Decision
I was reviewing the marketing for a security company recently. This security product has an e-commerce sales model, so the company must clearly advertise the price.
But that is not enough. Another cost the customer has is anxiety — what if the security doesn’t work when I need it most? What if I make the wrong decision?
For some products, the way to fight commodification (i.e. the customer just searching for the lower price product) is by better communicating value. For example, wine is just old grape juice with a better story.
However, for other products, the price fight is meaningless until anxiety around the cost of the wrong purchase decision has been alleviated. This understanding of your customers’ subconscious response to your product should inform when you communicate price.
It can also inform how you market. For example, many B2B products have significant wrong decision cost. Emerson Process Management had that challenge, because purchasers were betting a plant’s safety, and thus their career, on a seven-figure investment in the company’s software and services.
So the company launched an online course center called PlantWeb University that focused on educating sales prospects. The company removed marketing messaging and focused on useful courses that could truly inform the customer and reduce anxiety about making the wrong purchase decision.
Example #2: Opportunity Cost
If I ever had the opportunity to engage in an epic rap battle about economics, the first thing I would call out to diss is the “Supply and Demand Curve.”
You probably remember this chart from high school economics. At a price of $1, you can sell 300 units; but at a price of $2, you can only sell 100 units.
It’s a necessarily simplistic explanation of the way markets work to provide a basic understanding, sure. But is it still burrowed in your mind when you are marketing your products today? Because this simple model overlooks total cost.
And one cost that is totally missing is opportunity cost. Let’s take the price of a concert ticket, for example. You’d assume that more people would attend a $10 concert than a $20 concert. But at that price differential, perhaps the price isn’t even the main cost that is driving their decision.
For example, if that concert is at the same time as the big game, they’re not attending the concert of the band they somewhat like even if tickets are $0. But if the concert costs an extra 10 bucks and it is scheduled at a time that is free in their calendar (or even better, when they’re specifically looking for an anniversary gift for their spouse), they are far more likely to attend.
This is the opportunity cost.
And it applies to chocolate bars (“I would rather take on those calories from a Snickers than from candy corn”). It applies to a B2B software implementation (“That CRM is going to move the needle more than a new ESP, so let’s focus our IT resources there.” It even applies to free content (thanks for reading my article instead of Heather Fletcher’s article. I’m sure hers is great, too, but the opportunity cost is you don’t have time to read both articles before your next meeting).
And frankly, it’s really easy for us marketers to overlook our customers’ opportunity costs. Because we’re so focused on our own products, on the factors we can control, on our price-driven supply-demand curves. Did they purchase? Did they bounce?
Conducting a value proposition workshop for your product forces your team and your agency to consider opportunity cost by answering the question — If I am your ideal customer, why should I buy this product instead of any other product I can buy or action I can take?
Example #3: Time
Time is more valuable than money; because it is finite, while money is infinite. There is no limit to the amount of money you can earn in your life, but each of us only has just a set number of hours, minutes, and days before we “shuffle off this mortal coil” (to quote Shakespeare).
While most customers likely aren’t thinking of their time in specifically monetary terms, time is a mental cost.
Customers pay with time in three ways:
- Before a Monetary Purchase — For example, do you force customers to create an account to purchase?
- After a Monetary Purchase — Ikea is a great example of this. You’re paying not only with money for the furniture but with your time to put it together.
- As the Transaction — Some products don’t have a monetary cost at all. For example, you “buy” Facebook with your time and attention.
Make sure that any time cost you require from customers before the purchase is absolutely necessary, and be especially careful for hidden friction in your buy process.
If time is required after the purchase, help customers understand the value for them of paying with their time. Perhaps your product has less monetary cost because they put it together, or it has a greater ability to be personalized to their specific needs.
Optimizing Price and Cost to Increase Conversion
First, get your pricing strategy right. You can learn how to use timing and intensity in leveraging customer psychology to maximize average customer value.
Then, get a good understanding of the total costs you’re imposing on your customers and how those costs affect conversion rates. You can learn about Cost Force vs. Value Force in Value Proposition: Why do customers act?”
Daniel Burstein is the Senior Director, Content and Marketing at MECLABS Institute. Daniel oversees all content and marketing coming from the MarketingExperiments and MarketingSherpa brands while helping to shape the marketing direction for MECLABS — digging for actionable discoveries while serving as an advocate for the audience.