Practical Eloquence Blog |

Sales

Price Signals: Lover’s Glances and Placebos

By Jack Malcolm / 11.4.2016 / No Comment

As I wrote in my last blog post, an understanding of the psychology of pricing can help you earn the margins you deserve. Even the most analytical buyers are not rational calculating machines, so if you understand the psychological levers that affect their willingness to pay, you can raise your chances of getting the margins you deserve. We’ll start with the concept of signaling.

Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a display case full of slow-moving turquoise jewelry. Before leaving town, she left a note for her assistant to mark down all the prices in the case by ½. The assistant misread the note and doubled all the prices. The entire lot sold out within days.[1]

That story illustrates an important point about pricing. In a world of perfect information and completely rational buyers, classical supply and demand curves would make perfect sense. As prices for a good go up, demand will go down. But in the real world, sometimes raising prices can make demand go up. That’s because buyers rarely have perfect information, nor do they decide on pure logic.

Let’s look first at information. Like a lover’s glance, a single number can speak volumes.

Imagine that you go to a store to buy a new set of pots and pans. You like to cook, and hope to get better at it, but you’re by no means a professional chef. As you examine the three different sets on offer, you peruse the small placards that list the features of each, but they don’t mean much to you. But of course you notice the prices, and chances are very high that you will not select the lowest-priced set; or if you do, you will think hard about what you’re giving up to save a few dollars. Without realizing it, you are interpreting the signals that the price tags are sending you.

Signaling works because it can simplify your decisions and short-cut your search for information. As Daniel Kahneman, one of the founding fathers of behavioral economics, reminds us, “If a satisfactory answer to a hard question is not found quickly, System 1 will find a related question that is easier and will answer it.”[2] So, rather than trying to tackle the question “what is it worth?”, we ask instead, “what does it cost?”

Also, we implicitly assume that something is priced based on how much it cost to produce, if one set of pans costs twice as much, it must have superior materials and craftsmanship, so it’s going to cook our food more evenly, look better in our kitchen, and last longer. We draw all those conclusions

Finally, price can send a signal about relative supply and demand. If the price of something goes, up, it must mean it’s in greater demand, which can make it seem more attractive to a potential buyer. When Chivas Regal was faced with flat whiskey sales in the 1970s, they increased sales significantly by changing the label and boosting the price by 20%.[3] (There’s even a prestige factor, in which some people will pay exorbitant prices for luxury goods precisely because they prices are exorbitant, but that’s outside the scope of this book.)

Since it’s so difficult to do all the research and weigh all the different factors that affect value, we also gut feel to help us decide, and one of the most important emotions associated with buying decisions is fear/confidence dynamic. That’s why confidence is one of the greatest assets a salesperson can have. Those who act more assertively and confidently tend to be accorded higher status, and in general are perceived to be more competent than they actually are.[4] If you come to the table unapologetically with a higher price, you send a strong signal about your belief in your solution, and that confidence can be contagious. That’s why I’ve advocated before that when your buyer objects that your competitor has a lower price, instead of getting defensive, ask them to consider why they place a lower value on their product.

Prices and confidence are strongly correlated—in plain English, we all believe that we get what we pay for. While that is not always true, it’s a powerful enough belief that it can even become a self-fulfilling prophecy. Dan Ariely, relates the results of an experiment he conducted at MIT in which participants were recruited to test a new painkiller, called Veladone-Rx, which they were told sold for $2.50 a dose. They were first subjected to a series of painful electric shocks. Then fifteen minutes after taking a tablet, they were shocked again. Almost all the participants reported that the perceived intensity of the shocks was reduced the second time. Another group went through the same procedure, but they were told that the Veladone sold for 10¢. About half experienced pain relief. The punchline is that the tablets that both groups took the same tablet—of Vitamin C!

That experiment demonstrates the power of the placebo effect in medical terms. Placebos work because we think they will, and it also shows the hold that prices can have on our expectations. The idea that you get what you pay for is strongly ingrained in our minds, that, “If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item—and then in fact we will make it so.”[5]

Similar effects have been found for cold medication and energy drinks. One experiment even found that the price tag associated with a glass of wine affected the perception of taste, and even showed up in increased activity in the pleasure centers of their brains.[6]

Ariely does go on to say that in further experiments he found that consumers who were asked to think about the relationship between price and quality were less likely to be affected, so it’s important not to read too much into this, because after all we’re assuming that B2B buyers will be more thoughtful or implement more safeguards against this type of thinking. Yet I’ve long had my suspicions that the credibility of many a consultant or speaker has been affected by the fee they charge.

Prices send signals that buyers receive loud and clear. Think about this before you decide to lower your price to win the business.

[1] Robert B. Cialdini, Influence: The Psychology of Persuasion, (New York: William Morrow, 1993), p. 1.

[2] Daniel Kahneman, Thinking: Fast and Slow, p. 97.

[3] Hermann Simon, Confessions of the Pricing Man, p. 28.

[4] Cameron Anderson, Sebastien Brion, Don A. Moore, and Jessica A. Kennedy, A Status-Enhancement Account of Overconfidence, 2012.

[5] Dan Ariely, Predictably Irrational, (location 2556)

[6] https://www.gsb.stanford.edu/insights/baba-shiv-how-wines-price-tag-affect-its-taste

Sales - Uncategorized

High-Margin Selling: What You Must Know and How to Learn It

By Jack Malcolm / 10.25.2016 / 1 Comment

B2B selling is not getting any easier. Competitors are as aggressive as ever, customers are under pressure and are passing those pressures on to you, and your quotas are certainly not getting any lower. In this environment, the price battle is getting ever harder to win, and it’s extremely tempting to default to a lower price to win that big deal.

But if you’re armed with the right knowledge you can still win the price battle and preserve your margins. That’s because the key objective in this war is not your dumbest competitor’s pricing; it’s not some specified percentage over your costs; it’s the buyer’s willingness to pay (WTP). WTP is not a number—it’s a range, and you can strongly influence the extent of that range through your mastery of two topic areas: finance and psychology.

WTP is a function of economic utility and psychological factors.

Economic Utility: In business to business sales, utility is the unquestioned number one factor that determines willingness to pay, because it is the fundamental reason that customers spend and invest, and it is often the factor over which you have the most objective and tangible control.

In economic terms, an asset is worth the present value of its differential cash flows. In plain English, that means that business buyers pay dollars in the expectation of getting more dollars in return, or preventing a greater loss.

The expectation of future cash flows is based on how the buyer uses what you sell to either increase cash inflows or reduce outflows. In sales terms, that means that your effectiveness depends on a) an intimate knowledge of how your customer can increase revenues, cut costs, or reduce asset investment, and b) being able to quantify and gain agreement in measurable financial terms.

That in turn requires financial and business acumen, and in my wholly unbiased opinion the best source for that is my own book: Bottom-Line Selling: The Sales Professional’s Guide to Improving Customer Profits. It’s a “mini-MBA” that is specifically written for salespeople, which means there is nothing in it that does not pass the so what test.

Psychological factors: While economic utility sets the anchor from which the buyer perceives value, there is still a lot of room for perception (subjective factors), especially for products or services that the customer does not buy on a regular basis. If they’re buying supplies or raw materials, their expectation of the regular price is firmly set, but if they’re buying consulting services or a complex production system, they have very little experience with what things “should cost.”

What things “should” cost is a fascinating field in psychology. Here are just a few of the more important factors that affect the psychology of WTP:

Framing

As Amos Tversky said, we don’t choose between options, we choose between descriptions of options. For example, you probably would not consider it fair if a store told you that you had to pay a surcharge for using a credit card, but what if they offered you a discount for cash? The point of all this is that how the decision is framed has a significant—often decisive—effect on the final decision.

One of the most important frames in pricing psychology is loss aversion, where potential losses are weighed more heavily than potential gains. Highlighting the risks of buying a cheaper product through well-designed questions can shift the focus away from price during your sales conversations.

Anchoring

Psychologist Dan Ariely describes an experiment in which participants are first asked to write the last 2 digits of their social security number, and then to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent more. The simple act of thinking of the first number sets an “anchor” that strongly influences the second, even though there is no logical connection between them.

Suppose you are proposing a solution to a problem, which will require a $500k investment. In your presentation, it’s helpful to show that you looked at several options, but be sure to list the most expensive option first. $500k will seem less if you first tell them you considered an option that would cost $700k.

Signaling

Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a batch of slow-moving turquoise jewelry. Before she left town, she left a note for her assistant to mark down all the prices on it by ½. The assistant misunderstood and doubled all the prices. The entire lot sold out within days.

The old idea that you get what you pay for is so strongly ingrained in our minds, that our perceptions of value and even utility can become self-fulfilling prophecies. Studies show that the price of an aspirin can actually affect the level of reported pain relief , and even experts’ opinions of wine quality are swayed by the bottle price. Think about this before you decide to lower your price to win business. If you’re proud of having a higher price, that confidence can be contagious.

These three factors barely scratch the surface of the vast and fascinating topic of price psychology. Here are three excellent books for learning more:

Priceless: The Myth of Fair Value (And How to Take Advantage of It), by William Poundstone
Negotiating Rationally, by Max Bazerman and Margaret Neale
Predictably Irrational, by Dan Ariely

Book reviews - Sales Books

Book Recommendation: The Perfect Close

By Jack Malcolm / 10.11.2016 / No Comment

I don’t like to make predictions, especially about the future, but I predict that James Muir is a name you will be seeing more and more in the conversation about top sales experts. I’m basing that on his new book, The Perfect Close.

But first, let me say that the book’s title is a bait-and-switch, albeit a positive one. That’s because the two closing questions that Muir recommends are only introduced in Chapter 12, almost at the end of the book. The first eleven chapters are all about the approach that you should take before and during the sales call to put yourself into the best position for the close. But I think that’s the best way for presenting the material in this book. Muir tells you right up front that you can skip right to the Chapter 12 if you like, but that would be like going to a five-star restaurant and only ordering dessert. You’ll get instant gratification but miss a tremendous amount of nutrition and flavor.

The “nutrition” you will glean from reading the entire book is a complete course in planning and executing an effective sales conversation. The big picture is that you must think deeply about the what and why of every customer call and communication: what is your purpose, and why should the customer meet with you? It’s an idea that I cover in Lean Communication for Sales, but The Perfect Close goes into far more detail and provides many more examples.

The “flavor” comes from the tons of examples of examples of what you could and should say, and what you should avoid saying. In fact, if I had to point out one improvement opportunity, there are almost too many examples but then you can simply skim over areas where you already get the point.

The “perfect close” itself consists of two simple questions and I like them because they are natural and non-manipulative, which makes them effective and low-risk. The questions are low-risk because they don’t force the buyer into a corner where the default answer is “no”; instead, they let you know what their attitude is and where they are in their decision process. But the crucial point is that the perfect close works only if you’ve done all the things that Muir recommends before you get to that point: having the right mindset, preparing effectively, and planning your sales call.

Overall, The Perfect Close is an excellent book, based on a good blend of research and personal experience, both with successes and failures. I highly recommend it.

There are several points in the books where Muir hints at upcoming work, and that’s why I predict he will become well known, and I look forward to reading even more from this promising first-time author.

Expression - Lean Communication

Lean Communication Applied to Writing

By Jack Malcolm / 9.21.2016 / No Comment

Your time is more valuable than mine, so I’ll get right to the point: I recommend that you read Writing Without Bullshit, by Josh Bernoff.

Because so much of your business communication consists of words on screen or paper, you have to be able to write lean if you want to be a complete lean communicator. That’s because even though lean thinking applies equally to spoken or written communication, writing poses its own challenges that require specialized approaches.

How is writing different?

The principal difference between writing and speaking is that written communication is asynchronous, which is a fancy way of saying that production and delivery of the message don’t happen at the same time. That can help or hurt your communication.

It can help because usually the first time you say something, you don’t say it as well as you could. Writing is like a ballistic missile: you can choose your target and take pains to aim properly. You can take time to think carefully about what you want to say and choose your words, and you can edit and polish as much as you want. On the receiving end, the reader can absorb your message at their own pace, re-reading if they have trouble understanding or skimming over parts that they already know.

It can hurt because if you’re off target, you don’t have the feedback loop of real-time dialogue which allows you to adjust, clarify and take in the listener’s viewpoint to improve your original message. Plus, if you write the way you were taught in school, you’re almost guaranteed to produce crappy writing. That’s because the sole purpose of writing in school is to make yourself look smart, not to help the reader improve their outcomes.

That presents a great opportunity for a good writer. Since most business writing is bland, boring or baffling, you can easily stand out and make a reputation for yourself by just being a little better than everyone else. Unfortunately most people throw away the advantages of writing by not taking the time to carefully craft and edit their message, so the bulk of business writing is full of waste, or to use the more colorful term: bullshit.

So what?

Fortunately, Writing Without Bullshit supplies the antidote. If I were to write a book on Lean Communication as applied to writing (and if I were a better writer), this is the book I would have tried to write.

So much of what Bernoff writes aligns closely with LC principles. That’s no coincidence, because a lot of my LC ideas have come from studying and trying to apply ideas from books on writing. Lean keys such as outside-in thinking, Bottom Line Up Front, and Transparent Structure all apply as well to writing as they do to speaking. But this book brings a writer’s perspective to the principles.

Let’s just focus on one his Iron Imperative, which you see reflected in the picture above this post:

Treat the reader’s time as more valuable than your own.

That’s Outside-In Thinking, applied to writing. It’s powerful because it focuses your mind on adding value to the reader without wasting their time. If you stick a post-it note with it on the top of your computer screen, it will remind you to take the time and make the effort so that your reader won’t have to, and it will hugely improve your writing[1].

Actually, that’s not exactly true. You will throw away the advantage you have as a writer if you don’t take the time and make the effort to carefully craft your message and choose your words. That’s why the second half of the book is so valuable. It’s about the project management aspect of writing, and it will teach you how to be productively paranoid, find your flow, and edit your own and others’ work effectively.

The nice thing about becoming a better writer is that it will make you a better speaker as well. So if you truly want to add value with less waste no matter what medium you use, you must learn to get rid of the bullshit. You—and the rest of the world—will be better off.

[1] I would be guilty of peddling bullshit myself if I didn’t disclose some disagreements I have with Bernoff. While I agree with his Iron Imperative, I don’t believe it says enough about understanding the reader’s perspective and their needs. If the purpose of business writing is to change the reader, as he says, then one should think more deeply about the WIFM when writing.