Compared To What? A Lesson In Price Setting And Price Comparisons

Nobody knows what anything costs. I mean, we (hopefully) know what we pay when we click “buy now,” but our conscious awareness of “good deal” and “bad deal” are, on average, abysmal. Here’s how we can use this lack of intuitive sensibility to our advantage.

Obligatory disclaimer: This knowledge, first and foremost, is to not get swindled. Secondarily, it’s to set the right prices for our products and services. What it’s not for, hopefully obviously, is to swindle others in any way, shape or form.

Let’s start with coffee. Lots of people have coffee machines with pods at home or work. They’re convenient, require minimal cleanup, and make perfectly consistent, mediocre coffee. How much does a pod cost and why?

Here’s a real conversation I’ve had with myself in the grocery store aisle: “OK, so at just under 50 cents a pod, if I made 2 for a big coffee, that’s a dollar, which is at least a dollar cheaper than what I’d otherwise get at Starbucks. This makes sense.”

Here’s my logic or what I did in my head: I compared the price per cup in pod form to the price per cup at Starbucks. Nothing wrong with that, and exactly what Keurig wants me to do. We’ll come back to this.

Here’s what I didn’t do: I didn’t compare the price to ground coffee. If I did, I’d find that the big cup I want to make really is worth about 25 cents with ground coffee.

The genius at the heart of coffee pods’ price setting is the comparison to a store purchased cup. The pod manufacturers are able to charge a healthy premium over ground coffee without making that comparison and nudging us to think about our favorite cup at our store of choice. Brilliant. So what can we do this information?

We always want to frame our price comparison in a positive light. Whatever we do is expensive compared to some alternative but cheap compared to something else. Look for the cheap compared to something else idea and explain it that way.

We don’t even need to have to stay in the same category. De Beers famously told the world a single month’s salary was the right amount to spend on a diamond. De Beers, the jeweler, told us the comparison (!). Spoiler: they’re not a charity. 50 years later they increased it to two months salary. They make no comparison to other jewelry or other precious metals, just a statement that your symbol of marriage can and should be judged relative to your salary.

In another one of my favorite examples, Durex has an ad that shows a $217 car seat next to a $2.50 box of condoms. The comparison is made clear. Here’s the key point to remember: Price can always be compared. Therefore, it’s up to us to frame the comparison the way we want it to be framed.

In order to not get swindled, we want to notice whatever our comparison is being nudged towards. It won’t always be misdirected, but good marketing is always directing our attention somewhere. Not getting swindled means noticing the comparisons and deciding if they make sense for sake of our decision. Coffee pods are still cheaper than the store and faster than brewing a pot. Know your priorities.

For our own businesses, we can apply this magic formula: We should find something aspirationally comparable, identify its perceived value, and then anchor our priced value off of it. The goal is to frame our price as a better reflection of the value. If we offer a luxury product like De Beers, aspirational probably means we look outside our perceived peers. If we offer a less than luxurious product like coffee pods, we want to look amongst the perceptions of our peers to differentiate ourselves.

Think like Keurig, De Beers, and Durex. The result will drive better results, a clearer story about the value offered, and a mental shortcut so people aren’t doing math in the aisle questioning how much they really should pay.

Want more? One great book that dives into this topic across several chapters is “The Choice Factory” by Richard Shotton. On coffee pods in particular, see the Smart Family Money post, “How Do the Cost of K-Cups REALLY Compare to Drip Coffee?