Who Says You Have To Obey The Law Of Nines?

This week, a friend of mine got me to thinking about pricing strategy. In fact, as I sat down to write this, I found a second reference (once more – from her) that was freshly posted.

When I’m doing real work that isn’t as fun as this (i.e. – my day job), I spend a good portion of the day bidding tens of thousands of dollars of contract machining: Sometimes, more. And, over the years, there are two pricing strategies that I have seen employed that are sort of genius.

The first, is the commonly known ‘law of nines’. The proverbial ‘law of nines’ states that the human brain is more accommodating to a price of $299 than it is to $301. Why? For whatever subconscious reason (and no matter how ridiculous it sounds) our brains tend to ‘lessen’ the damages when faced with an amount that doesn’t break the next base-ten level of pricing. It sounds insane but I’m guessing, if you think about it, you’ve all done just this – and may still do so even to this day.

This is why many retail chains employed this strategy – and still do. Wal-Mart bucked that trend by battling K-Mart with eights in the late eighties and early nineties (when I was still a part of the red vest army at the sign of the big red “K”). They changed tactics some time later, and moved to sixes for a bit, as I recall.

Personally? I used to use the law of nines myself. I would round down on quotations to the next base-ten iteration to a nine. The problem was, most of my competition was doing so as well. After a few years, I got smart, and began asking for customer pricing feedback. And, in some cases, customers supplied copious amounts of it. As I scanned the numbers, I found three differing trains of thought:

The most prominent was the ‘law of nines’. In this way, I made the immediate decision to go with the Wal-Mart method of bumping down to eights. The results were immediate, and lasting, to this day.

The second was just random: individuals who were quoting the jobs that I was, who were literally using whatever number was spat out. This can be good for your bottom line, but seems to confuse or consternate the minds of many buyers. I immediately threw that one out.

The third was a more interesting tactic, that I had never considered a whole lot. I dubbed it the ‘loose change’ theory. Specifically, the individuals quoting would quote not only in dollars, but in random cents as well. On the surface, this seemed… well: stupid. Who cares about .32 cents in this day and age?

Yet, I took a mental step back and thought about it. After a few moments of considering it from all angles, a proverbial light bulb went off and, to this day, I still use this method ONLY on large, assembly-cluster, type quotations. Why? Because – no matter what the cents behind that decimal point – it makes it APPEAR as though you have analyzed the bid down to the penny. You’ve been meticulous, you’ve bid everything perfectly and, in doing so, you have overtly looked out for your client to the very best of your human ability. Personally, I think that’s a load of… well, anyway, suffice it to say that I don’t necessarily buy it. But what it DOES to the human mind, is it plants that very seed – subconscious, or otherwise. And, on that level, it’s a brilliant strategy.

The best advice I can offer, to wrap this all up? Find out everything that you can about how your competition is bidding or pricing, look for patterns that you can exploit, and then undermine that system. It might take dropping to rounded-down fours, but the return on awards won, or sales, should be enough for you to suck up the random loss of a few bucks and shop the value meal drive-through for lunch instead of indulging in a sit down at a four-star dive.

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~ by digitalninjasmedia on September 2, 2012.

 
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