Grow Your Business

Charge more for less: How to leverage pricing psychology all the way to the bank

Con Dowler is an entrepreneurial nomad. He travels often, launching businesses wherever he lands. He and his business partner have opened bars, restaurants, and hostels in Spain, Argentina, and Guatemala — always on a shoestring budget so they can recoup their investments quickly.

His typical approach is to spend a couple years luring in crowds, and once he has customers lining up outside the door, he sells the business and plots his next move. “Once it’s a success, it’s just work from there on,” he says. “That’s the part that I find boring.”

There’s a lot to be learned from a brand builder like Dowler, even if you don’t work in hospitality like he does.

After launching a new venture, he begins making systematic adjustments to the business formula, testing his original assumptions until he’s profitable.

“I’ve got three bars in Barcelona right now, and we’re always playing around with the rules, seeing what gets people to spend more,” he says. “The psychology of customers is just amazing.”

Con Dowler used red in a few of his bars to test pricing psychology lessonsThe Mint, one of Dowler’s “red bars” in Barcelona, Spain

To help decode his scientific approach to business, we asked Dowler to lay out three of his most successful pricing psychology experiments. Then we asked Wayne Hoyer, Ph.D., a consumer behavior professor at the University of Texas at Austin, to help us understand why they were so successful.

Experiment #1: Add a fresh coat of paint

Back in 2003, Dowler launched a bar in Barcelona. It did decently enough, and the crowds were on par with what he saw at his competitor’s bars. But Dowler and his partner, Matt, were convinced they could do better.

One weekend Dowler left town, and when he returned, Matt had turned the bar red. He’d sponge-painted the walls and replaced the lighting with red bulbs. He even bought cheap red pillows for the benches. And business just exploded.

“We went from doing 200 Euros a night to over a thousand,” says Dowler. “We had to go use the toilet in the bar across the street, because the line was too long at ours.”

Lesson: People are driven by unconscious environmental factors

Dowler has a theory about why the change worked: “People look better in red light. If you look better, you’re more likely to get laid.”

Well, yeah. That’s the simple answer. But science offers a more complex explanation:

“Red is a lively, stimulating color,” says Hoyer. “We’re highly influenced by non-conscious effects, and color has a big impact on how we behave. If you’re trying to energize people, red will do it.”

Red helped create a lively crowd — a boon for a late-night bar. But not every brand would benefit from an energized clientele. A coffee shop or a smartphone app designed for meditation might want to promote a more relaxed vibe. The colors that do that well? Light blue or aqua, says Hoyer.

If you run a business, the deliberate use of color can help you shape the experience of your customers. A study published by researchers in Malaysia found that warm colors — yellow, red, and orange — tend to be more exciting, while cool colors (green, blue, and purple) tend to be soothing.

And unless you’re trying to appeal to a goth crowd, avoid too much black. The researchers noted that it’s associated with sadness, anger, and fear.

Infographic on color and pricing psychologyThis infographic from KISSmetrics explores how color affects purchasing behavior

Experiment #2: Raise prices by 20 percent

One of Dowler’s biggest lessons came from a 63-bed hostel that he opened in Antigua, Guatemala. All the area’s established hostels offered free breakfast, but the food was pitiful.

“They’d give people a piece of toast and plastic jam, and they’d only serve it between 8 and 9 o’clock,” says Dowler. That’s when everybody on the gringo trail was sleeping off their hangovers.

So to give his hostel an edge, he promised a legit breakfast — pancakes, eggs, breakfast burritos, and the like, served late into the day. He’d keep his prices lower than every other outfit in town, but to juice his profits, he’d sell lunch and dinner, run a full-time bar, and put a travel booking service in the lobby.

It didn’t work out as planned. The rooms filled up, but the incremental revenue didn’t follow. “The people just weren’t spending any money,” says Dowler. “No food, no tours, no drinks.” He could have saved some cash by scrapping the amenities, but instead, he and his partner decided to raise the room prices by about 20 percent. They expected a proportional return, but instead they landed explosive growth.

Their revenues jumped by 200 percent.

“Suddenly our clients would stay in and eat dinner and drink beers,” says Dowler. “They were buying coffees, lunches, waters, bus trips and tours, and everything else we offered.”

The cheap people found other hotels, and Dowler made his initial investment back within three months.

Related: Learn how to create a luxury product people will desire

Lesson: Low prices send the wrong message

Wine is the classic example of how consumers equate price with quality. “There are a few wine experts who can really taste quality, but the majority of us cannot,” Hoyer says. So instead, we look at price. “The more expensive bottle, the better,” he says.

When Dowler promoted cheap room rates, he was accidentally telling people with money that they wouldn’t be comfortable. So they went elsewhere. “It’s not always true that people want the lowest price,” Hoyer says.

If you sell a product or service, what would happen if you raised your rates right now? The answer generally depends on what your competitors are doing and how consumers perceive your brand, Hoyer says.

As an exercise, consider two things:

First, how visible is your brand?

If you’re selling something your customers will use or wear in front of other people — think cars, handbags, power lunches in a busy business district — then you have more pricing leverage than if you’re selling something largely invisible, like laundry detergent or computer software.

Second, how unique is your product?

“If people can see a big, obvious difference among brands, then price becomes less important,” says Hoyer. This applies to products, and if you’re a creative type, your talent. If it’s remarkable, it’s probably worth more than you think.

Experiment #3: Gather a crowd before asking for money

The nightlife begins late in Barcelona, a fact that Dowler found to be frustrating when he opened a bar there a few years back. “We had nobody coming in until 11 o’clock,” he says. “From 8 to 11, we’d just sit there by ourselves.”

Since he wasn’t making money anyway, he decided to lure in customers by pricing cocktails as cheaply as possible: $1.50 each for the first half of the night.

It’s a classic happy-hour setup, definitely not something Dowler invented. But his version was extreme; none of the other bars were selling drinks remotely close to that price. It was insanely low.

“We didn’t make any money on those, but it got the place packed,” he says. By the time the usual 11 o’clock nightlife crowd came around, his bar was already a scene. And that’s when happy hour ended.

Lesson: Crowds make products attractive

The herd effect is real, says Hoyer. Lemmings, er, people often make decisions based on the decisions of others.

According to a study published in the Journal of Consumer Research, consumers are particularly prone to social mimicry when they lack sufficient information to make an otherwise informed choice. The researchers told non-Korean speaking people to choose between two types of tea, both labeled in Korean.

Unable to read the labels, the subjects simply picked the tea they’d seen someone else choose. But when the tea labels were in English, the results were less predictable.

The effect applies broadly to all sorts of products and services — especially with things like sneakers, restaurants, social networking sites, or anything else where we have multiple options.

The more we see people using something, the more we trust that we’d enjoy using it, too. If everybody seems to be crowding into the same bar, we can’t help but wonder what we’re missing.

How do you create the illusion of popularity with a web-based business? Comments, shares, likes, ratings, and social following to name a few. And don’t be afraid to give your product away while you build your audience. If it’s truly exceptional, customers will keep coming back for more.

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