Apparently, the best way to close as sale may be to charge ten times as much as your competition. I’m not entirely certain that it would work in B2B, but there may be something here. Let’s start with some examples from real life.
There’s a story all over the newswires today about New York Gov. Eliot Spitzer admitting that he met with a prostitute. What’s interesting from a B2B perspective isn’t the scandal, but the fact that the escort agency charged as much as $5,500 a hour for the services of their “ladies.” A cursory glance at the thousands of escort websites shows that’s about ten times the going rate for similar services from other agencies. That’s a lot of extra profit margin.
Turns out that “price sensitivity” sometimes works backwards. For example, a drug testing firm recently discovered that placebos work noticeably better when the patients are told that each pill would normally cost $20 than when told each pill would normally cost ten cents.
Apparently, the mere fact that a piece of sugar candy has a high price tag confers healing value. As a result, people get better faster if they pay more for the same product, or at least know that their insurer is paying more. In fact, people may get better, quicker taking name-brand drugs rather than generics, even though the two are exactly identical.
The entire luxury goods market assumes (apparently rightly) that a high price creates its own value. Designer handbags, designer shoes, etc. costing hundreds or thousands of dollars are noticeably better made than their much cheaper counterparts, nor do they use more expensive materials. In fact, most luxury goods are mass manufactured in China, just like every other type of consumer good — and for about the same manufacturing cost. The reason that can command a greater value is simply that somebody had the “cajones” to stick a $4000 price tag on a $40 handbag.
“Insane overpricing” (to coin a phrase) works when customers believe (rightly or wrongly) that the overpriced product has some characteristic that more than justifies the extra expense.
In the case of Spitzer, he probably thought that the extra expense was buying him less of a likelihood of being outed. (Ooops.) In the case of the medicine, patients figured that pharmaceutical firms would only sell pills at $20 a pop if the pills had lots of expensive medicine in them. (Ooops.) In the case of luxury goods, the people who buy them think that they’re higher quality because they can’t believe anyone would have the chutzpah to sell a $40 handbag for $4000. (Ooops.)
It occurs to me that there may be something useful here when it comes to B2B pricing. A lot of marketeers think that pricing slightly less than the competition makes it easier to sell. And sales professionals often try to use competitive discounts to close a deal. But those strategies look pretty stupid if, in fact, people would be more likely to buy if your offering were priced at ten times what your competitors were asking.
All you’d need to do is come up with some reason why you’re charging ten times more than the competition. And evidence suggests that the “reason” doesn’t even have to make much sense, as long as the mark-up is completely outrageous. In fact, it’s probably easier to “justify” a cost difference of 10x than a cost difference of 10%.
Don’t forget there would be a major side benefit to insane overpricing — you only have to close 10 percent as much business to make the same amount of revenue. And since many sales costs are fixed, that would mean a spectacularly profitable business model.
I’m curious: does insane overpricing work in B2B? Has anyone tried it? I have a feeling that a fair amount of it goes on in the “special services to CEOs” segment. But how about elsewhere? Would it work? Are you asking way too little for your firm’s offerings?
