We’ve spoken about pricing strategy before in these articles. For a lot of business owners, it can be a real stumbling block and there are a lot of ways to tackle it. Today, we will talk about just one way. Let me set the scene with a story…
Most of us are familiar with the problems J. K. Rowling had in securing a publisher for the first Harry Potter book. It was rejected by no fewer than twelve different publishing houses until finally, a year later, editor Barry Cunningham from Bloomsbury Publishing offered her a £1,500 advance for the manuscript.
Where Cunningham differed from the rest is that in making his decision, he received valuable advice from a unique reader – Alice Newton, the eight-year old daughter of Bloomsbury’s chairman, Nigel Newton. After reading the first chapter, Alice was enthralled and demanded more. So, why did Cunningham ignore the decision of twelve experienced editors and instead listen to the opinion of a single child?
We all have a tendency to go with the majority, even when they’re wrong. But is there a system to make more balanced decision? Turns out, there is. To demonstrate how this works and how you can apply it to your business, consider the following question.
If it takes five machines five minutes to make five widgets, how long does it take one hundred machines to make one hundred widgets?
Before I reveal the answer, you may be surprised to learn that 80% of people asked got it wrong, with only 20% coming up with the right answer. In case you’re wondering, the correct answer is five minutes (if it takes five machines five minutes to make five widgets, that means one machine can make one widget in five minutes, so one hundred machines can make one hundred widgets in the same amount of time). Most people, however, said one hundred minutes.
This is where it gets interesting. Researchers then asked participants what they predicted the rest of the group to say. Most people realised that the majority would say 100 minutes whether they themselves knew the correct answer or not. In this instance, 96% of people suggested that people would say 100 minutes and only 4% said the group would guess correctly. The researcher then identified the answer that was more popular than people expected, thus arriving at the correct answer, despite them not even knowing the question!
How Does This Apply to my Pricing Strategy?
It’s a useful technique to use when you have a decision to make such as price-setting. Ask a group of people what they think customers would be willing to pay for a product or service, then ask them what they think the most popular price would be. Then simply identify the answer that was more popular than people expected.
Pricing Strategy and Business Advice with Phebys
At Phebys Accountants, we are experts in pricing strategy and all other aspects of running a business. For advice on your business’ pricing strategy, call Phebys Accountants today on 01480 896267, or email firstname.lastname@example.org.
You can find out more on our website.