Transcription
So, someone asked me to talk about pricing. So, so let's do that, shall we?
There are, I suppose, give or take, about 10 pricing strategies that you'll see used regularly. I'm not going to list them all; I'm going to put them on the screen here so that you can have a you can have a look at them.
So, I'm not going to go through all 10 of these strategies because half of them you either probably already know or you should be avoiding. What I want to focus on there is maybe five of the more interesting ones, the ones that actually change how a luxury client feels about what they're buying.
So, the the first one, I suppose, is charm pricing. And um then there's the price-quality signaling, partitioned pricing, skimming, which you shouldn't be doing, and uh two-part tariffs. Which depends on the kind of industry you're in in luxury. It depends whether you use it or not.
But let's let's take charm pricing, for example, which is the one that's actually most um most common outside of luxury. We also call it left-digit pricing or the left-digit effect. It's essentially the habit of ending a price just under the round number. So, 19.99 instead of 20, or 1,999 instead of 2,000. Because we read prices left to right and lean far too hard on that first digit, um the whole thing lands lower in the head than it really is.
So, it works beautifully in a supermarket. Not so much in luxury. It does actually the opposite in luxury because the price, you know, sharpened to 99 says that someone has worked out the lowest figure that you're going to tolerate. And that reads as bargain value, I suppose, which your most of your clients really aren't here for.
What you should be using in luxury is what we call prestige pricing. And prestige pricing are is whole number pricing. So, 200, 300, 400, 600, 2,000. Or, you know, 1,700, 1,650, things like that. Those more rounded numbers.
Then we have a price quality signaling, which is is simply that when people can't easily judge how good something is, they actually default to the price telling them how good it is. So, the more expensive thing must be the better thing. The higher you pay, the better the quality. I mean, it's not true, but it's still a cognitive bias that we all use, you know, the price quality bias.
But price quality pricing relies on that bias. And in in most of the economy, and in most pricing, that's that's actually a really lazy shortcut. But in luxury, believe it or not, where the quality is genuinely hard to assess from one product to another, the the price is evidence in and of itself that, you know, the higher priced item is better quality.
But I mean, again, there comes a threshold where that's not the case. Because you take, you know, a luxury handbag, for example. Leather can only go to a to a quality level before it hits a ceiling, and you can't get any higher quality. So, the price then is the signal. And then we go into status signaling and stuff like that. But the thing is, if you set your price too low, the client reads it as a confession that actually the thing that they're looking at isn't really worth very much.
So then you've got partitioned pricing. And this is the one that people get wrong most often actually because if this is where you break the price into, you know, tiny little bits. So the price example first plus delivery, or plus postage and packaging, or plus a deposit, or, you know, plus XYZs, and you start adding these little surcharges on.
And what it can do is actually lower the perceived total price, yes, but it's what you see budget airlines do. It's why they do it because the initial starting point looks good value, but by the time you add Ryanair, classic of this, and easyJet as well. By the time you add on luggage and seat selection and all the rest of it, it's actually the same price as flying British Airways or Swiss or one of the the legacy airlines.
So every single add-on, if you do this in luxury (which you absolutely shouldn't; I don't recommend you do this in luxury at all, but I have seen some newer luxury companies try it because they're embarrassed by their price), and then we're getting into the whole price embarrassment thing, but that's that's a whole other video.
But every add-on makes it look like you're trying to gouge the client for more money. So, use one number and include everything in it. That's the best way to do it. You know, don't say, 'Yeah, you charge somebody 500 pounds and then you charge them 6 pounds for postage and packaging.' Like, it's ludicrous! Just up the price to 520 and include the damn postage and packaging, or whatever it is that you've got as an add-on. It leaves It leaves a bad taste in your mouth.
Anyway, the next one is skimming. And I suppose it skimming is the one that actually sits most awkwardly within luxury. What skimming is is that it means launching high, so a very high price, and this is aimed at the people who are least worried or least sensitive to price. And then bringing that figure down over time as you work through the demand.
That's how a new phone launch does pricing, isn't it? So, the keen buyers pay a premium at launch, and everyone else waits for the price to drop in a couple of months. Now luxury does close to the reverse, or at least it should do close to the reverse. Your price should hold without going down, or it should rise. So, it should only go in one direction, or it should stay static. It should never go backwards.
If you drop your launch price a few months in, what you've done is you've done two things. You've told your first and best clients, you know, who came out and bought it as you launched it, that they've actually overpaid and that you've ripped them off. And you've trained everyone else, all the other type of clients that that you're targeting, to wait because the price is going to fall eventually.
Don't use skimming as a price strategy in luxury. It's really It's very damaging to your to your brand.
And then the last one is um what we call two-part tariff or split payment pricing strategy. What it does is it splits payment into an access fee and then a usage fee on top of it, or a membership fee, or joining fee, for example. You see this a lot with member services. So, you'll have a joining fee, and then you'll have the the membership fee itself.
Um, and the You find them mostly in private clubs and concierge models and stuff like that. And the clever part is that the entry fee, believe it or not, does as much status work as the actual membership fee itself because people value what they've had to qualify to get now, right?
Amex Centurion is a prime example of this, you know, the black Amex card. It's a it's a good example. So, it's $10,000 to join. And then it's $5,000 a year membership. So, the $10,000, yes, it may sound like a barrier to entry, but it's actually seen as a status flex.
[gasps]
One I've fallen into, unfortunately, but you know, it's neither here nor there. If you're running a membership program, it is actually really something to consider because it is it is a good model and it does work. So, there you go.
Anyway, those are those are the five primary ones that I think are the most interesting. Each one is is really a question about what price or what you want your price to say about you. And you have to remember what your price is saying about you. You know, because as as much as what it costs, the price is as important. And they're not they're not one in the same thing. So, you have to set your prices with that in mind.
It's not like the mass market or the mid market where you take the cost of sale or you take the the cost of production and then you add on your profit on top of that and that brings you to your price. Now, of course, you could do that, but then you wouldn't have a luxury a luxury good. The the price that you charge is is a reflection of the luxury service or the luxury product that you're offering.
Anyway, I hope that that answers some burning questions about price. Let me know in the comments if you do have other questions, and I'll try and answer them for you. See you in the next one. Bye.