November 22, 2017 by Razvan Rogoz
The Reason Why Undercutting Your Prices Doesn’t Work
From the desk of Razvan Rogoz,
How are you? Are you kicking ass? Are you having great day? Mine surely is great. I’ve just finished my morning routine, during which I’ve got some great ideas (including a grid based goal setting approach) and some general life improvement ideas from Brian Tracy.
Today’s post is about copywriting but before this, let me cover something. All my life I had a very heated love / hate relationship with to-do lists. I always thought that a new piece of software can help me become more productive. I’ve tried GTD, I’ve tried Stephen Covey, I’ve spent hundreds of dollars in planners and software and more.
Eventually I’ve understood that the system that works is the one that follows basic simple principles. So I’ve downloaded Todoist (this is very recent). I like this piece of software because I’ve been using it before, as a premium member and then forgot about it.
Initially I’ve just made a list of tasks and went through them. But as I was reading “Eat That Frog” by Brian Tracy, I’ve got the idea to prioritize. So I’ve took the most important three tasks and I’ve prioritized them as very important. Then I’ve took the next three and I’ve prioritized them as important. I’ve done this for three sets of tasks – nine in total. And it makes perfect sense. Now I am focusing on the nine most important tasks.
However … here comes the kicker.
When I’ve done this the first time, I’ve just prioritized the old. It was good but it wasn’t great. In other words, I was doing more of the same. Then I’ve deleted everything and started thinking about what I can do to achieve my goal. This lead me to a dozen new tasks that quickly become top priorities, overcoming the importance of all the others.
So it isn’t just about prioritizing, it’s also about brainstorming what to prioritize.
I hope this little tip will help you in kicking it and winning your day too!
But as I’ve said … today we’re not talking about productivity. Instead, I’d like to talk with you about pricing – how to price your products or services, why people buy value and not pricing, how pricing is a heuristic for value in general and how you’re most likely way underpricing yourself.
Now, Adam Smith once said in the Wealth of Nations that in a capitalistic system, the more you charge, the less demand you’ll have. This is how the free market should work (btw, I’ve never read Wealth of Nations so I may just be wrong with the quote but it is also a basic principle of economics).
Offer and demand is directly influenced by the price. If you have 1000 people who want to buy your product but you have only 100 products available, then you should raise the price until the point of equilibrium, that is – 100 people in demand. It makes no sense to have a marketplace that you can’t satisfy in terms of supply and to leave money on the table.
Air-lines do this very well. The seats are sold dynamically based on supply and demand. If there are many seats available, the price is lowered to increase demand and this generally works. If there are many people who need a seat and these seats sell out fast, then the price increases. This is why it is far more expensive to stay in a hotel or book a ticket during holiday season than it is during the middle of April.
There are only a few industries that actually use dynamic pricing based on demand and supply because most industries are regulated and can’t pull a stunt like that. You won’t go tomorrow to buy a can of Coca Cola and see that the price doubled just because there is demand. The prices are fixed.
In any case, this is the old way of thinking – that the cheaper it is, the more people buy. This is true until it isn’t because price is also a heuristic.
What is a heuristic? It is a mental shortcut designed to take decisions. For example, a cheap product may automatically be considered poor quality while an expensive one may be considered premium and durable. An Apple MacBook Air is considered far better than your average ASUS laptop because it is twice the price even if objectively, it is not twice the quality (I had a few, I know).
Heuristics are the tools our brain uses to not think too much. If we had to think about everything, we would be paralyzed. The world is just too complex. So we form shortcuts to reach decisions. If we see someone in a dark alley that looks like a thug, we automatically consider him a thug. He may be a philosophy professor but your mind doesn’t take into consideration alternative explanations but rather, the most convenient one.
If we see a piece of jewerely that is $10.000, we consider it automatically more valuable than the one that is just $1000, even if it may not be just like the food in a $500/dish restaurant is certainly not ten times better than the food in a $50 restaurant.
We have an internal mechanism in our subconscious mind that makes comparisons between what we know to be the average and any particular value and generally, in 99% of the cases, our brain always considers expensive to be good and cheap to be bad.
Heuristics control our life. Be it price or the halo effect (handsome / beautiful people are considered smarter, like there would be a correlation between physical beauty and intelligence), these automatic rules defy rational thinking but are as natural of you and I as it is our tendency to breathe or to close our eyes when we sneeze.
In practice, there are formulas to determine the value of any given item. These take into account the quantitative aspect (how much you get vs how much you pay), the quality, the reliability and a lot more. Needless to say, nobody uses them in day to day life.
So what does this have to do with you?
Well, let’s say you’re selling a service like web design. Everyone is asking $500 for a simple website. You’re asking only $250 because you have excess capacity. This means you have space to take more clients or you can make the website faster, creating two websites in the time it takes others to make one. In any case, you do your math and if you had a limitless supply of customers, selling it at $250 makes a lot more sense than at $500.
The problem is that when someone will hear that it is just $250, they won’t understand that you are talented and that you can earn more by having more customers than less. They’ll just think that it is of poor quality because you’re asking just $250. You’re doing him a favor, you’re doing yourself a favor and yet, it will actually work against you.
However, this could be turned around by rationally explaining why you’re charging just $250. You see, the “cheap is bad” heuristic is generally just an objection. Objections can be solved. If you explain why he’ll get the same quality as with $500 and explain in terms he can understand the entire thought process, the objection will be eliminated.
The problem is that it is just easier to charge $500 or $1000 and be done with it as there are very few cases in which it is worth justifying a low price, selling it as a viable option as opposed to simply increasing the price and letting heuristics work for you.
Let me give you an example from my life.
Some time ago, I’ve met this girl. She was beautiful and smart. Yet, I had no time for a relationship and I was in a stage of my life where work came first. I said no again and again. The more I said no, the more she wanted this. Eventually, we make out. Then the magic wears off. The fact that I positioned myself exclusively by not wanting her made her want me more. Rationally, I would need to play easy to get so we can enjoy beautiful moments together as soon as possible. But I’m not rational neither are you. What makes sense on paper rarely makes sense in human behavior.
So personally, I know that it is easier to get a customer at $1000 than at $250, for the same service. At $250 you are a beginner or an amateur. At $1000 you are someone who delivers something good. The strangest part? There are no objective standards. Clients don’t know what to expect at $250 vs $1000. If they knew what you’re doing, they’d not hire you but rather, just do it themselves or manage the project with low cost labor.
If someone comes and asks me how much is a sales copy, maybe he catches me in a special moment of my life. This means I’m either too sad or excited, I like this person and want to work with him or her no matter what, I like the project, I would have done it for free, etc. There are 1000 things that can go in my mind and that can make it a non price transaction.
But if I say $100, he’ll look at me and wonders why he wasted his time. I think it is worse to say $100 than $0. At least when it is free, he thinks that I have nothing better to do with my time. At $100, I just suck at my job. If I say $3000, he may afford it, he may not but he’ll surely treat my offer with respect. At $3000 I’m something he appreciates, at $100, I’m just a waste of time, even if the service is exactly the same.
So when I see someone charging $1 per 500 words, I form an image in my mind. I’m thinking of a person that barely speaks English, somewhere in a third world country, who is going to share everything I say with friends, who is never going to deliver on time and which work I can’t even use. Maybe he is the next Hemingway and he charges a symbolic price without even needing the money because he’s a trust fund kid and loves to write … but in my mind, I’ve drawn the conclusion. He must suck. The price is too low.
I know that this is unfair but the marketplace works just like dating. Price yourself too low and people will draw false conclusions about you. It’s not your fault or their fault, it’s just that we’ve evolved to use heuristics.
So what’s my advice to you?
The more you charge, the more valuable you’ll seem. Of course, you must also deliver but if you can deliver at $500, then you can also deliver at $1000. The truth is that when it comes to copy, I give it my best no matter if it is $500 or $4000. If anything, the difference is only in the prospect’s mind. He decides first how good the copy is based on the price he paid and then he reads it. Of course, copywriting is about results but I’ve seen an interesting trend – when the copy is cheap, the traffic is amazing and that’s why there are many sales. When the copy is expensive, the copy itself makes the sale.
I could go on with this but you do get the point. Price yourself above to what you’re pricing now. I’m not saying to increase it by ten times (you could though, depending on your market). I’m saying that a 50% – 100% shift is more about how you think about yourself and your skills and less about how good you actually are.
Does this mean that I overcharge my clients? No. But there is no set price for services. There isn’t a book that determines how much something should cost. When I was in London, I was paying about $15 for a Big Mac plus fries. If you go in some parts of the world, the price is $3.
When I was in Romania, I used to pay about $0.25 per kilometer for a taxi. In London I don’t remember exactly how much it was but I know that it was at least ten times more than that. If people buy, it is the right price. If nobody wants to buy and the objection you always get is the price, then yes, you’re probably out pricing yourself but for all intents and purposes, most people underprice and overdeliver than overprice and underdeliver.
So increase those prices, okay?
Sincerely yours & your friend,