There’s a dumb mistake entrepreneurs make when they price their products and services…
…and it leaves a TREMENDOUS amount of revenue on the table.
Are you making it?
And if you are, don’t worry. It’s EASY to fix once you know what it is.
Don’t take my word on that though…
Instead trust the hard data and the real-life case study I share in the premiere episode of Social Triggers TV.
Case Study: Is The “Trade-Off Effect” Killing Your Average Revenue Per Customer?
Let’s take this a bit further…
Every business has three types of customers: customers who want discounts, regular customers, and customers who want the red carpet treatment.
And while the advice I shared in the video above might seem like a “trick” to get your customers to spend more money, in reality, all you’re really doing is ensuring that your pricing caters to each customer segment.
But what I’d like to now elaborate on is this: When you add a red carpet option, you’ll find that most people will avoid it. You’ll also find that people will avoid your cheapest option, too.
Why?
When people buy products and services they avoid the extremes (the cheapest and most expensive) and settle for the middle ground.
(I’ve got interesting research and data on that too, but I’ll save that for another day. So make sure you hop on my free newsletter).
Now I want you to do two things:
1. Leave a comment below this video and tell me about how you came up with your prices. I’m curious because one of the MAIN questions people ask me is “How much should I charge for [insert anything]?” And I suspect your experience will be helpful to others needing some guidance.
2. Open up your favorite email program, and send an email to 2 friends that says “Just saw this video about pricing. I think it will help” and link to this article.
And on that note, I hope you enjoyed the premiere episode of Social Triggers TV.
I’ve got several more videos in the pipeline, and another day lined up for shooting later this month.
So make sure you’re on the email newsletter (and subscribe to my YouTube channel) to ensure you don’t miss out on any of videos.
- The paper I referenced in the video is called "Tradeoff Contrast and Extremeness Aversion" by Itamar Simonson and Amos Tversky. It was published in the Journal of Marketing Research.
- I first stumbled on the study about the trade-off effect in the book Predictably Irrational by Dan Ariely. To learn about more research just like that, check out this Social Triggers Insider episode with Dan Ariely.
{ 204 comments… read them below or add one }
Bam indeed.
That breadmachine story is fascinating. I’ve heard it in a few places, and it continues to slap me in the face.
In a hypothetical scenario, íf I had a coaching program at $1,000 and a product at $500, the another product at $250, would it work, or does it have to be the same coaching program or product?
What’s your take, sir?
P.S. My prices were pulled out of thin air
I say do it….sounds like your taking his advice exactly!
I first read about it in Dan Ariely’s book Predictably Irrational, but I thought I’d share it again simply because it’s something people need to know about.
Derek you are a total rock star! Love this video, even though your yelling at us, I’m so engaged! Keep it up
Ha ha Susie.
I’m not yelling… I’m just loud
Woot woot! Huge congrats on the launch of Social Triggers TV Derek! I love your loud-talking self…and the message is pretty sweet too
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Dude, you straight killed it with this. Production quality is off the hook. Your logo intro animation is ballin’. And not to be a total ass kisser, but you look like you’re getting in shape too (I’m not hitting on you).
Way to make me feel like an underachiever!
Aside from being wowed by the production, the info is invaluable. You’re so right, most beginner entrepreneurs might as well pull numbers out of a hat. If they are basing pricing on something, all too frequently it’s based on competitors’ pricing, not on consumer psychology.
Someone who does a great job with pricing tiers is Chris Guillebea with online products.
Anyway, great job man. I’m obviously going to subscribe to Social Triggers TV.
I’ve never seen so many compliments in one blog comment in my life. This is going on my wall. Thank you.
Glad you liked the content too.
take it like a man Derek! great production for sure. I’m subscribed.
Awesome stuff, Derek. It’s the little things like this that make all the difference between a successful and unsuccessful entrepreneur. As someone debating on how I should price my packages, this is a huge help.
You’re welcome Jonathan. Do let me know what you end up coming up with.
Sheer genius! Now I just need to come up with a “whole shebang” package. I do have different levels to offer, but would like to sell more of the upper end. My pricing came primarily from determining estimated hours to execute each service plus my costs. Thanks, Derek! Once again, you rock!
Good start Dana on the pricing. What’s missing from your calculations are what value your clients would assign to your services (it’s usually more than you would) and the profit (the reward for doing all this hard work).
Not to generalize, but most women calculate prices based on what they need like you did. You also want your prices to include funding for your growth like paying for a VA or doing your own video!
Derek, I already shared Social Triggers TV on both my fan pages, and will definitely be talking about price anchoring at my bootcamp in Oct. Wanna be guest faculty?
That’s a start. There are other techniques to make the upper end more attractive than the lower end tiers. I’ll have to write more about that as another article or another video.
Thanks! I look forward to that. I’ve just gone in and revamped the entire thing-the Page was updated this week. Hope it’s easier to understand and more attractive.
Dude! Great video! Being a part of James Wedmore RMI program I can tell you worked with his script model. You killed it and great content of course. I’m totally going to try this.
Love the eyebrow part and the puppet master reference. Keep up the hustle’!
If you look at his script model for videos, you’ll notice that that’s exactly how I write all of my blog posts and do my podcasts too
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This is great advice Derek, and I can see how it applies to WordPress plugins, for example. What’s your take on having a free version of your product, apart from the paid version? So many WordPress plugins have the free version and the pro version, do you think they are losing out by having a free version?
Absolutely. I Do think having a free version can tank the sales of your paid version and I know a lot of people who have data to back that up.
Great stuff as usual Derek! I notice this pricing strategy a lot on web apps. Very common to have 3 pricing tiers. Hmm… it must work. Keep the good stuff coming!
You’re welcome Mark. Glad you like it!
Great lesson today Halpern. I’ve probably had 30 pricing iterations in my time as a business owner. Each time I’ll kick myself for the time I wasted in not implementing sooner.
P.S. You’re crushing these videos. Keep it up.
Dude, thanks. I’m happy to hear you like it. There’s a few things I’d like to improve on, but hey, that’s what iteration is all about.
Yes yes yes!!!!!!!
Love your insight Derek and read all your emails.
You are absolutely right. Most will choose the middle package but you will have those that want the red carpet and will pay for it.
Thanks again for reminding me to change my two package approach to three.
Glad you liked the video Nat, and when you do change it, I’d love to hear about your results.
Derek- Awesome job my man. GREAT to see you doubling down on video. I feel proud
Yea dude. Video is the answer for us Lacoste wearing junkies.
Hi Derek,
How much should I charge for a online membership program that teaches people the basics of stock market investing?
Thanks for your help.
That’s not a question I can answer. There would need to be LOADS of other information available to make a decision on that.
Derek,
The tiered pricing or different levels is used heavily in sports marketing. In fact we call it walking them up the ladder, but more times than not most buyers would go the middle pricing route.
On a side note, the sound quality is much better on this vid. Helps hearinh impaired folks like myself.
Best
Sean
Awesome. Also working on getting an interactive transcript live for these videos for sub titles too.
lol.. the transcript of this vid is hilarious!
Click the subtitle button under the YouTube video and select the (automatically generated) English transcript.
For example, the translation of bread machine (time/translation):
1.25 greg machine
1.27 thread machine
1.36 red machine
1.43/1.46/1.53 pregnancy
And my favorite, the translation of the 10k package
2:49 the tank package
Man, just a few weeks ago I had to give prices for web development.
I did the exact same thing. I gave a high price for a custom website, and when I saw that little cringe in the dude’s face, I told him about the cheaper alternative (with a ready-template).
He took the cheaper one, immediately. I wish you had made this video earlier. But anyway, I will soon have to follow-up with another client. Negotiations aren’t going my side there at the moment, but we’ll see how it turns out!
Thanks for the advice. It goes into use tomorrow!
So, Loren, when you saw him cringe did you think to just ask him about his thoughts BEFORE discounting you? You assumed it was only the price that troubled him. You know the saying about that one.
If you’d asked, something like “I see you made a face…” he would’ve TOLD you directly. Once you knew his concerns you could’ve offered other things besides money to meet his needs.
Remember, in negotiations you both want the same thing: work well done at the right price. The fun part is finding the balance.
Loran, if you use it, be sure to email me what happens. Would love to hear about your results.
I’d love to hear, too, Loren. Just remember to listen and clarify. And, if you say something wrong, just say so and go again. Do overs are allowed!
I liked the content. I can use the informaiton. I will share it with our Technology group and others in our accounting and consulting firm. I will also share with clients.
As an industry, CPAs and lawyers struggle with pricing of professional services. The majority are stuck in the method of hours x rate per hr. (i.e., cost plus pricing) I am trying to move away from hourly rates and use value pricing. (See “Pricing on Purpose” by Ronald J Baker.) That method requires more knowledge and understanding of the client, what their needs are and matching the product/services to their needs.
I suggest you drop the cuss words (damn and hell). Not because I am a fuddy duddy – its because your position is well made without that type of emphasis. You seem to be too classy of a professional to need to use language that might offend even a small percentage of prospective clients. Including that in the video causes me to pause and consider what would others who I forward this to think of me. As CPAs and consultants, we are careful about our referrals because if I recommend you, your performance if poor reflects badly on me.
Keep up the good work.
Patti, perhaps you aren’t Derek’s ideal customer… just saying. I struggled for a while about being something that I’m not, trying to please everyone by being professional and keeping my voice “corporate” but that’s not me.
Passionate people use words that help them to explain their passion. If someone is offended when I curse, I know that they will be offended when I tell them other things (like your website sucks). When I realized that my best customers understand my passion and accept my brutal honesty, my quirkiness and my way of communicating and that it was the worst customers that were offended by it, I felt liberated and I’ve never looked back.
So… if your customers are uptight and would get insulted by someone who swears, don’t refer them to those of us who do. It’s quite simple.
Cheers!
I’m with you here. I didn’t actually script those words in my script. It was just what came out of my mouth during that moment of filming, heh.
But its something I should look into. I think these videos can appeal to a wide array of people, and I don’t really need to use the word Hell.
There’s loads of other four letter words that fit well there.
(kidding… Patti’s point was well taken).
She called you “classy”!!
Hi Patti,
Thank you for pointing that out.
But to be totally honest…
I didnt even realize damn and hell was a curse until you pointed it out.
Heh.
Damn it Derek. What the hell are you doing? Just kidding. I’m loving the video and I like your passion too. Keep it up.
Travis Van Slooten
I think Patti brings up a good point here, Derek. On the one hand, I totally agree that you should be your authentic self. When you start to water down your personality and become someone you are not, you lose your spark, if just a little bit. On the other hand, making a few tweaks here and there (something I know you like doing) might further your reach and expand your audience, as Patti suggested, without making you feel like you are selling out.
Hey Derek! Great Video! Your personality makes this topic a bit more approachable
It’s much appreciated! I have been avoiding this topic.. My excuse for having 1 fixed monthly package is that I want to give 100% of my effort, – having packages seemed like I’ll be putting in less effort into the smaller packages which will not produce the results that I want for my clients. Hearing you say that you’re the guy who opts in for the expensive package, is like having a friend who only shops at Nordstroms, wich totally makes sense! Thanks so much for this high quality video. Looking forward to more 
Would you be surprised to hear that I basically only shop at Nordstroms, too?
Derek,
Really digging the video man, it’s a good look.
As for the subject matter, pricing is one of those this that a lot of people hit & miss on (myself included). Sometimes it’s not intentional, other times it’s because people don’t feel like they’re worthy of asking for such prices and end up lowballing themselves out of a ton of cash.
When I fall into this “trap”, I think about the Dunning-Kruger Effect. Most highly competent people don’t know just how competent they actually are.
Definitely some good (and timely) food for thought here.
You actually have that in the reverse. Dunning-kruger is when people think they’re better than they are. Like all people thinking they’re above average drivers.
Got it.
As soon as I finish this comment I’m going to change my pricing.
I only offer pricing per tutoring session, now I’m going to create packages of services.
Such a simple idea …. your friend, you readers and I Thank you.
I’d love to hear how this turns out for you. Make sure you email me at news@socialtriggers
Totally Fab! Loving this first episode of social triggers Derek. I am going to implement this pricing strategy on the landing page I am currently working on. Can’t wait for the next episode.
Thank you Frances.
Another dumb mistake when it comes to pricing is when people rely on a standard margin or markup on what it cost to make the product. This comes into play more on physical products rather than informational products, but you see it all the time. Price should be determined on value not on what it cost to make it.
Yes, for sure. I notice a lot of Etsy store owners doing something like that. It’s bad practice.
Derek,
You are doing something great here – loving Derek TV (my name for it!). Your eyebrows are great
don’t change a thing.
I am thinking about this topic in relation to my intuitive healing services and how to offer different packages. Problem is, I’m always worried my prices are too high already – and fear I am excluding people with too high pricing. Often I attract people who say, “I can’t afford it”.
You’re probably gonna tell me I am not charging enough!
Thanks for inspiring me, as always.
There’s always a fine line when trying to figure out how much you should charge for whatever it is you’re selling.
But you have to just look at it like you have different customer segments. Right now it appears you’re not grabbing any of the lower end customers.
That just makes total sense!
Fantastic video, Derek!
Now a question: When you’re selling an hourly service vs. a product, can you still tier? You make a compelling case for me to develop a few standard product lines, but if I normally bill $100/hr for design, what tier options exist within that format? Wouldn’t seem ethical to charge clients different rates for the same service, plus, they talk to each other. Curious to hear your thoughts — thanks!
Hi Will,
Excuse me for jumping in. I think I can provide a good insight here. I’ve been charging as a freelance consultant for over 15 years. I was a management consultant to software companies and sold out to my partner when we were well into seven figures, to persue other interests. You Definately should always be quoting packages. Raise your hourly rate then offer a defined number of hours for a project at a lower rate. Have them pay it as a retainer up front to lock in the lower rate. Works wonders. Even better, go to larger clients and get a monthly retainer to have you available. If you go over the number of hours allotted then still give the a discount, just not as much. If you are under, then you don’t owe them a thing. I’ve done t for years. The higher quality clients that cause you less trouble will be fine with this. You’ll eventually lose the pain in the arse clients. Hope that helps, and best regards.
You should avoid billing by the hour and instead bill by the project. That’s how all the top designers do it.
It’s called productizing your services.
Also, I’d love to see your portfolio sometime.
Hi Derek,
I am a social media consultant. I am still figuring out how to best package my services. My question: would you put prices for services on the website? I can see the pros and cons of doing it. Would be great to hear your opinion on that.
Thanks,
Sandra
Great job, Derek.
I planned to have this run on my second display while I worked but you wouldn’t allow it. You DEMANDED my full attention.
Inspirational. I’d love to follow your video lead … I’m afraid I don’t have the bandwidth or production value team.
Joe
I’m glad it worked. I’m excited to see the audience retention metrics tomorrow when they come out.
I also forgot to include another interesting pricing example I’ve heard of. I forget the company that used it, but it was in regards to subscriptions of print and online. The pricing was:
Online only: $50
Print only: $75
Online + Print: $75
That third option is so magnetic because it gives the buyer such an easy comparison. Is the “print only” really worth $25 more than the “online only”? Perhaps… But is the “print + online” better than “print” at the same price? Absolutely. People get drawn in on easy comparisons.
Greg, I believe that was The Economist magazine. That offer hit a home run for them. Readers thought it was a mistake – it was purely intentional — now The Economist includes the Online benefit in all their offers… and throws in a bright red Economist T-Shirt. [Best, though, is their student rate.]
Jay Rosenberg
Dan Ariely talks about this study in Predictably Irrational as well. I believe it was the first chapter.
Peep outlines the Economist example and quite a few others on this blog post, which is a phenomenal read from a smart guy: http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-learn-from/
This is a good one.
I’m building a course right now and I used this exact pricing strategy.
I don’t think I gave enough credit to the top pricing causing people to choose the middle price, though. Instead, I was putting a lot of faith in the middle price pushing people to the lower price.
I think if I adjust the prices a little bit, it’ll help emphasize the middle price a little more.
Good stuff.
Glad you liked it Sean and I’m pumped to hear about what happens when you change your pricing.
Awesome video Derek, and very timely as we’re about to release a new product next week that currently has two pricing tiers. Now you’ve got me thinking I should add a third…
I love the new show!
I wouldn’t postpone anything that’s for sure. But it’s something to consider in iterative development.
Hi Derek, this is the first time I heard of this trade-off effect and it makes a lot of sense. I should be doing this in my VA practice.
That said, I came up with my rates by combining average salary for my job and adding to that the costs of doing my biz from my own home. I used this same formulation in coming up with a baseline rate for hiring a Filipino VA. I shared it here but I’m planning to update it this weekend.
Thanks Derek, this is excellent and timely info for me.
I spent the past weekend revamping my Services page after reading a few articles about pricing recently, and what you say in your video (naturally) confirms what I read. The idea of price anchoring especially resonates, because I notice how it works on me when I’m considering buying something for myself. Guess I’m an easy mark. ; )
I especially like the idea of having 3 tiers of pricing as you outline here, so that’s one change I made. I still have a bit of tweaking to do, and, of course, I’ll have to see if it ends up making any difference (here’s hoping), but at the very least I feel like things make way more sense now re my prices and services than they did before.
How I came up with my prices: when I was working in PR (10 years ago), my boss billed out my services at $125/hour. The freelancers I used when I was PR Director at that company were paid $50/hour. So I took the lower of those 2 figures and multiplied it by the amount of hours it would take me to perform all the actions in my service package — then reduced the amount to come up with what to charge. My logic was, if people balk at that price I could always say, “well, if you hired me from a PR agency to do this same work it would cost a minimum of $1250 but I charge less than half that.” Ok, I know that’s not scientific, and I don’t want a scenario where people think I charge too much — but at least it’s a step above pulling a random figure out of a hat. : ) And it’s just a starting point anyway — I’ll recalibrate as I get feedback.
Love the pink — or whatever color — shirt that is. I know that’s your thing, and I gotta say, you wear it well.
That was hilarious! Love it! Seeing you is much more entertaining Derek!
had the same question that others are having. What’s the best way to price services in this way? Is it a package approach where you offer basic services at a low level, add on some more at the mid and then give them a premium package or even a monthly retainer kind of option? Just seems a little more complicated than the breadmaker example which was great info. Thanks, Derek. Oh, and if you could get a little more passionate it might show better on the video
…
Derek, what are your thoughts on the opposite price structure: selling many products for a small fee, and then lumping them together for a special price (upselling essentially), which is cheaper then buying them individually. That’s pretty effective too!
No regrets, we couldn’t have handled the volume of having sensible pricing.
Dude, you totally rock. I just love it. I am going to implement the strategy right away on my consulting business. Thanks a tonne for sharing. You were right. I just pulled some figures from my hat and priced my consulting services. Very bad of me.
Derek still on your list you are still crazy and still crack me up…..and of course your right LOL
I’ve heard that story and know this principle – it’s a great way to show prices.
Thanks for the reminder Derek. Great stuff.
I’ve found that the people who complain the most about pricing are not the clients I want. They nitpick me to the bone, and then don’t buy.
The ones who care less about pricing- either because they know they need the product the most, or have enough money to spend, are my best customers. Perhaps that’s because they knew that this was exactly what they needed? Or maybe it has more to do with their income bracket? I’m not sure.
Hi Derek,
I’ve been following your blog for a while now, so thought I would say hi. Enjoyed this little video, you practice what you preach (Duh
and keep it entertaining.
I am struggling to decide what to charge people. In the process of setting up my own little SEO business and will focus on small businesses to begin with since I don’t have the capacity for taking on very large projects. Yet.
I still don’t know what to charge after watching your vid since every SEO project will obviously be dependent on its scope, and I can’t publish prices on my site (still under development), since the pricing is dependent on the scope of the project.
Do you have any advice on how to tackle this type of scenario. I have been thinking that when talking money I’ll offer the “bronze, silver & gold” type of packages.
Another thought, slightly unrelated to this post, is that your brand of psychology is very Americocentric (obviously), but have you considered the difference between you yanks and us pommies (or the slightly more cerebral continental types). Brits are less impulsive, less reptilian responsive, slightly more measured in their decision making, a tad more reserved, a bit less inclined to IN YOUR FACE CAMPERS! Just want to reassure everyone that this is in no way a criticism, but there is a very definite difference in the cultural psychology of different societies, which may potentially have a huge effect on the tactics used to achieve the same goals.
All this aside, thanks for the helpful advice, you are certainly on top of your game right now and I have learnt a thing or two from you so far for sure!
Hey Guy! Yes Derek’s style is very American. I personally love that but as a Brit I know that his strategies might not always work in other cultures. Brits are more reserved when it comes to the topic of money but that doesn’t mean you can’t apply Derek’s strategies and adapt them.
With regards to your SEO company; having three packages sounds like a good idea. Don’t under price yourself because you have to account for the time it takes to do SEO work for clients.
Just start with a price/package and adapt as you go along. Testing is key.
Hey Victoria
Thanks for the input, I absolutely agree that many of Derek’s strategies can be adapted to our slightly more reserved culture
With regards to a pricing structure, do you have some experience in this area that you might like to share with us, from a Brit perspective? Any insights would be much appreciated :0
Hi Guy and Victoria, interesting conversation – I hope you don’t mind me butting in! I do consulting (in Denmark) and has been wondering whether I should have pricing available on the site presented as different standard packages. My consulting is not standardised, but I have wondered whether I am loosing out on clients by not quoting any prices on my site. Even with standardised packages, there would still be the option for clients to have individual options within the packages. What’s your take on this?
Hi Lisa,
I definitely think you should put your prices up on your website because it instantly weeds out the good/great clients. I know with my tutoring business, I waisted time with clients who weren’t willing to pay because I wasn’t clear on my prices. Also I think you should offer different services in the form of packages. That would allow those on lower budgets to get a taste of what you do and you could then up sell to them later on. Also allows your high end clients to get premium/ VIP service.
@Guy, depending on the type of business you run, there are a few ways around it. My uncle says ‘British people are cheap’ lol. Yes, he’s American! But he sort of has a point. We tend to buy things based on reputation and perceived value. If you can communicate the value in what you’re offering, that automatically increases perception and justifies a higher price tag.
Would love to hear more suggestions from fellow Euro entrepreneurs
One thing I recommend is including bonuses/extras in your offers. It doesn’t have to be expensive, it just needs to seem valuable to your demographic.
Hi guys,
I am Sandra. I am German and do social media consulting. Firstly, I think the strategies Derek presents work in every culture. It is more a matter of communicating them in the right way. I think Germans are even more reserved than the Brits. I’ve lived there and to me it seemed very American
I am struggling with my packages because they are almost always bespoke packages. But I do know that having them makes it a hell of a lot easier.
About prices on the website: I hear people who say don’t publish them because you want to pull clients in with the value you offer. You basically sell them on the offer before you mention prices.
On the other hand I see the advantage of having them openly because it would rid me of all the cheap clients who want my consulting time without paying for it….
any thoughts?
Sandra
Great stuffing.
As I’m typing this I thinking about how I’m going to add 3 pricing levels to my next proposal.
Any website developers/conversion folks have ideas for additional ‘add ons’ they include at higher price points?
How exactly do people scale their deliverables for different pricing points?
P.S. Social triggers video is off da chain!
Loved the “pay attention” focuser