12 June 2012 Jay Shepherd

How to increase revenue 43%

Ron Baker, the Yoda of value pricing, spoke about the use of options in his talk at the AICPA PSTech Conference in Vegas today. He showed a terrific short Dan Ariely video, which I wrote about on The Client Revolution a couple years ago. Here is that post, along with the video.

How can you increase revenue by 43%?

Short answer: offer an additional pricing choice. Even a stupid one.

Longer answer: Check out this video. It’s almost perfect. It shows how adding a single pricing choice can add 43% to total sales revenue. It’s presented by Professor Dan Ariely, a delightful MIT economist. And it’s only 114 seconds long.

Why don’t you take the 114 seconds to watch it? I’ll wait …

Here’s the math on the different options:

With two choices:

68 x $59 = $4,012

32 x $125 = $4,000

Total: $8,012

With three choices, one of which is stupid:

16 x $59 = $ 944

84 x $125 = $10,500

Total: $11,444 (an increase of 43%)

OK. Interesting, huh? Ariely’s main point is that customers often aren’t very good at knowing their own preferences, and they take cues from outside indicators of value, such as pricing options. By offering a third choice, even a ridiculous one, customers end up perceiving more value in the more-expensive choice. That’s why Wendy’s sells a triple cheeseburger — not to sell lots of triple cheeseburgers (they don’t), but to sell more double cheeseburgers.

The moral of the story is not to offer ridiculous choices; it’s to offer choices that lead your customers to find differing amounts of value in the various options — something you can’t do if you bill by the hour.

The rest of Ariely’s TEDtalk lecture is here. It’s great, and it’s only 17 minutes long. His book, Predictably Irrational, is here.

What do you think? What kind of options can you offer to help your clients discover their preferences? Share your ideas in the comments below.

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