In this article I’m going to talk about why you should qualify your customers. I’m also going to share how to price products to attract customers who complain less and make returns less than other customers. Then we’ll look at how your customers affect the quality of your products. Learn how to raise your prices and have happier customers.
Full disclosure: This concept was first introduced to me by Ramit Sethi, he has mentioned this idea in several posts on his blog and in podcast interviews. This article is an expansion on this idea from my perspective. Ramit’s blog is a great resource for personal finance and marketing psychology that I recommend checking out.
Psychology of High Prices
High prices attract better customers.
A person is more invested in a product, emotionally and monetarily, when they give more money for it. There are several reasons for this:
- Consumers associate price with quality
- Consumers believe in higher products more so they can justify their purchase
- Consumers put more thought into big purchases
This summarizes the placebo effect of pricing.
Quality is almost always associated with price. We’ve all been trained to think this way. Obviously there are many examples of overpriced products, but they exist because there are some consumers who will always buy the most expensive option in any given scenario.
Knowing that consumers associate price with quality is a powerful tool. You don’t want to under-price your product and devalue your brand. Just look at Japanese automaker Hyundai for example. Hyundai started as an economical car brand, which copied and combined features of Toyota and Honda at a lower price. At first they weren’t that nice, but they attracted the group of consumers that are always going to buy the cheapest option in any scenario and they continued to sell.
Then over time they actually improved their quality significantly and have raised their price. Now, feature-for-feature they are one of the nicest brands for the price in their segment of the auto industry. However, many consumers still don’t want to be seen in one because of the cheap reputation they’ve had for years. Despite their struggles to change their reputation, they have built up a new loyal fan base that are willing to pay their new higher prices.
What transpired is simple. They haven’t changed much, they are still a brand that copies and combines features of other car brands at a lower price. The difference is that now they copy luxury brands like Mercedes and attract luxury brand consumers who want value for their dollar.
They could have avoided the whole problem of having a bad reputation by just starting out in the luxury market from the beginning.
When people pay more, they want to believe in your product more.
Let’s say you wanted to learn about investing in the stock market. The first thing you do is go over to Amazon and do a quick search then buy the best book reviewed for $15. Then let’s say your buddy, who also wants to learn about stocks, pays $500 for a weekend seminar on investing in the stock market for the first time. Who do you think will believe in their learning material more?
You might finish the book quickly and start applying the tips right away. However, you don’t expect to learn everything there is to learn from one book. You might skim through parts that don’t interest you as much and focus on parts you like.
Your friend will EXPECT to learn a lot at this seminar, and rightfully so because he did have to pay $500. So he’s going to be paying attention to all the details. He knows that not many people are willing to pay that much for this knowledge, so he is getting to learn something that others potentially won’t. That might not be true necessarily, but he will think that.
When we pay more we always try to “get our money’s worth” out of that product.
This would explain why people get good results with expensive workout programs that are not any better at all than free programs that are available.
This also explains the cult-like mentality of customers of Crossfit, it costs about 3-4x as much to join their gyms as regular gyms. Nothing makes you feel better about flailing around like a fucking idiot than knowing that you’re not the only one paying $150 a month to do so.
“If other people are paying this much, it must be worth it.”
Higher Price Requires Higher Quality
If you’re going to charge a higher price you need to offer a high quality product or service. Yes there are always those people who will buy your product because of the high price, but realistically that model doesn’t last long.
This is how your customers can help you. Consumers that pay higher prices expect higher quality. This should motivate you to give your best.
Would you rather be a Steve Jobs or a Bill Gates? Yes Bill Gates is a very inspiring person who has accomplished a lot, but he is not respected like Steve Jobs. Microsoft products are cheaper and less reliable than Apple products.
When Steve Jobs passed he was praised as one of the great artists and leaders who impacted the world. He did this by qualifying his customers.
From the very beginning Apple made it clear that their products were for artists and people who “think different”. Which basically means, if you don’t appreciate how are products are crafted then look elsewhere. Jobs only wanted customers who would appreciate his work.
Then he delivered on the part that most companies fall short on. He demanded the best of his engineers and put out the best products of their kind. Those products also came with a significantly higher price tag.
This worked because he targeted consumers who want the highest quality products. He made them feel like there was a relationship between the customer and the company. The “think different” campaign gave creative types what they wanted – a feeling of appreciation for being different. They were willing to pay more for products that they connected with.
Apple is the perfect example of how to leverage high prices into building a great company. The amount of pressure on Jobs to keep coming up with new ideas led him to permanently change the course of several industries. This only worked because they actually backed their price with quality.
How Having Less Customers is Better
Higher Prices = Less Customers = More Time
I watched a documentary recently that demonstrated this principle, called Jiro Dreams of Sushi. If you haven’t seen it I highly recommend it, you can watch it on Netflix as of this article being written.
Jiro owns a small sushi restaurant that only seats a handful of people. Over the years he has absolutely mastered his craft and his restaurant has grown immensely in popularity. However, despite the demand he refuses to open more locations or to expand his current location to a bigger size.
Instead, what he has done is up the price. It costs about the equivalent of $300 to get in the door and then the price varies up or down depending on what you order. That price sounds a little steep for sushi, but a reservation is required and when the film was shot he had a 1 month waiting list. I can’t imagine how long you have to wait now.
Jiro refuses to serve more customers at a time because he has extremely high standards of quality for his customers. The size of sushi he serves is based on whether the customer is male, female, big, small and how much of an appetite they display. He and his staff memorize where each customer is sitting and provide a completely personalized meal to every customer based on how they react to the previous dishes.
Since he has limited hours and limited customers, Jiro has plenty of time to focus on preparing food and experimenting with new recipes. In fact, the entire sushi industry relies on him to come up with the best dishes to copy.
In general, higher prices result in less returns and complaints from customers.
You want consumers who are looking to invest their money, not spend it. People with more money tend to think of their purchases as investment, even if it’s investment in fun. They are less likely to return or complain about a product because:
- They can afford to spend more money
- They have done their research before investing and have an idea of what to expect
Jiro’s customers don’t complain about a 1 month wait for reservations or paying such a high price for their meal. They are looking to get the best sushi experience available in the world and they are well aware of what they have to pay.
Cheap customers looking to complain and get a refund will be turned off from the beginning by your high prices. The customers willing to pay more money are looking to invest in your product or service, not just make a quick purchase. They want to get the most out of it. These are the customers you want.
Let me make a quick example:
Say you have a product that you sell for $20 and you sell 100 of these a month. That’s $2,000 a month.
Now let’s say you raise the price to $60 and lose half your customers. That would actually come out to $3,000 a month in revenues.
In addition, you have half the amount of customer service and can focus on giving better service to those 50 customers a month. Not only that, you have more time to work on new products that those customers would want.
Sure, you could just take that extra time to relax and work less. But you see how this could help you grow your business if you invested that extra time back into your business?
Qualify your customers to build a better business. Happy customers are repeat customers. Don’t get caught in the Dollar Store crowd and start high-end from the beginning. Quality products deserve higher prices which attract customers that are more invested. If you hold up your end of the bargain it’s a win-win situation for everyone.
What do you think, do you agree or disagree with this concept? Let me know in the comments.
Until Next Time,
What do you think? Do you agree, disagree or have any thoughts to add? Let me know in the comments below.
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