This is a guest post by Ruben of Bidsketch, proposal software that helps creative professionals get more clients and grow their business.
Do you know why some clients consider you too expensive? Sure, it’s easy to chalk it up to them not having enough money or being too “cheap,” but that’s not what’s happening in many cases. Sometimes the number a prospective client gives you isn’t set in stone and will change for the right company.
You see, many times this number was set by one of your competitors; one that will “design” an entire website and host it for them for a ludicrously low price. What you’re experiencing here is the outcome of something Dan Ariely calls “arbitrary coherence.”
This basically means that the act of making a decision (or simply considering it) will influence the way similar decisions are made in the future. Being aware of this while keeping in mind how the decision-making process works will go along way towards helping you avoid becoming a victim of low-balling competitors.
The way this relates to pricing is that once a buying decision has been made (or considered), it will shape what people are willing to pay for related items or services. The key here is that simply looking at pricing isn’t enough. It’s the act of buying or truly considering it that creates a pricing anchor.
This doesn’t mean that once pricing has been anchored in this way, anything above that price won’t be considered. A range is set with an upper-bound limit (typically) above the anchor but the original anchor is always referred to when making a buying decision.
There’s a very interesting experiment that was conducted by Professor Ariely which shows arbitrary coherence at work:
“… We would ask them to jot down the last two digits of their social security numbers and tell us whether they would pay this amount for a number of products, including the bottle of wine. Then, we would ask them to actually bid on these items in an auction. What were we trying to prove? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: although initial prices are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”). So, would thinking about one’s social security number be enough to create an anchor? And would that initial anchor have a long-term influence? That’s what we wanted to see.”
When he analyzed the data back at his office it showed that the students with the highest-ending social security digits bid highest, and the ones with the lowest-ending digits bid lowest. This amazing behavior led to pricing differences of over 300%.
Another great example has to do with real estate. People that move to a new city remain anchored to the prices they paid where they previously lived. So when someone moves to a more expensive city they don’t typically increase their spending to match the pricing in that market. On the other hand, when they move from a more expensive city to a cheaper one, they tend not to decrease their spending so they end up buying a bigger/better home for the amount they were paying in their former city.
How to Fight This
The good news is that there are ways to fight this. The key here is to avoid having people refer to some other source for the anchor — you want to be the one setting that anchor.
Dunkin’ Donuts and Starbucks are a great example. Their pricing is completely different yet people know what to expect when they order a coffee or latte and are willing to pay more/less depending on where they’re getting it from. For Starbucks to be able to charge more, they focused on making the experience feel as different as possible to avoid having people refer to an anchor set by another coffee shop.
Everything about the Sarbucks environment is a deliberate attempt to create this different experience. Everything from furniture to the lighting, sounds, and smells was designed with this in mind. And let’s not forget the sizes; it’s short, tall, grande, and venti when you order at Starbucks.
So what’s the lesson here? Craft a different experience for your users if you want to avoid having them refer to someone else’s pricing as an anchor. Pay attention to the message your website is sending potential clients. More importantly, pay attention to the way these low end design shops look and feel and do everything in your power to be different while staying true to your core values.
This isn’t limited to your sales website. Make sure you’re mindful about the experience you’re crafting for your clients any time they interact with you. This means phone calls, contact forms, emails, proposals, and invoices shouldn’t be overlooked.
I suspect this will be a good thing. In most cases it means the more reflective of your personality these elements are, the less you’ll have to worry about. Differentiating yourself isn’t simply about cutting through all the noise; we now understand that it also directly affects how much people are willing to pay for your work.