- The first rule of pricing is: you do not talk about pricing
- The first rule of pricing is that you don’t talk about pricing
- The second rule of pricing is that you don’t think about pricing
- The third rule of pricing is that experiments are the only way to make sense of it all
- Multi-Level Marketing Businesses and Pyramid Schemes
- What are MLMs and How Do They Work?
- What’s a Pyramid Scheme and How Do You Spot One?
- Is an MLM Right for You?
- Ask yourself these questions:
- Do your homework:
- Talk with current and past distributors about their experience in the MLM:
The first rule of pricing is: you do not talk about pricing
Apr 18, 2016 · 9 min read
I’ve been slightly obsessed about pricing since 2010. Before joining Fluxx, I was part of the team that changed the price of The Times digital edition from this:
The Times digital price pre-2010
The Times digital price post-2010
Introducing what inevitably became know as “The Times Paywall” or “Rupert’s Pathetic Paywall” inspired a powerful reaction, with plenty of headlines this one:
Explain it again, Mike, I’m not sure how you feel. [Techdirt]
Even Gordon Brown — then Prime Minister and fighting wars in Iraq and Afghanistan — took time out to share his views on pricing strategy. “People have got used to getting content without having to pay,” he said. “There’s a whole sort of element of communication that’s got to be free.”
In the end, of course, it turned out that charging people money for a product they enjoyed wasn’t a terrible way to do business.
This happened a *long* time after I left The Times [Campaign]
Prices are interesting because they inspire such strong emotions. Responding to price is hard-wired into our brains. When we see something expensive, we know immediately — without thinking — that it isn’t for us.
That can trigger a whole range of powerful #feelings; envy, anger, admiration, disappointment, lust, disgust, hatred, excitement. It’s a potent brew.
Picture: Along the Trail
The opposite is also true. When we see a mountain of tea lights in IKEA with a sign saying “Glimma 100 pack $3.99,” only one human response is possible. “Ooh, that’s a lot of tea lights. We probably need some tea lights, don’t we? I’ll just put those in my yellow bag.”
It’s not a conscious decision, but an animal response to a pricing signal.
At other times, our response to pricing is absurdly complicated, tangled and self-obsessed.
Ordering wine is a social, psychological and economic roller coaster. In France, they draw huge excel spreadsheets onto the walls of their restaurants.
The wine list at Philou in Paris (via Not Drinking Poison)
When they’re not discussing philosophy or plotting affairs, the customers engage with these arbitrarily sorted spreadsheets to buy wine.
You can’t buy the first wine on the list, because you’ll feel an ignorant cheapskate.
So you look at the second wine. But, as a sophisticated Medium-reader, you’re well aware that the second wine on the list is the most popular, so the restaurateur will ensure it is also the most profitable.
You don’t want to be suckered into buying the most profitable wine on the list, so you trick the restaurant by actually buying a more expensive wine.
It’s a minefield.
(Here’s a great piece by Ryan Opaz about the baffling psychology of Wine.)
Prices are a shortcut to our most sensitive emotional responses.
The smirking face of price sensitivity is, of course, Martin Shkreli.
Martin pushes every pricing button.
He bought a $9,000 bottle of wine, and tweeted the label.
He bought the only copy of Wu Tang Clan’s album “Once Upon a Time in Shaolin” for $2m, then said “I’ll probably never even hear it. I just thought it would be funny to keep it from people.”
Most famously, he raised the price of a life-saving drug from $13.50 to $750 per tablet.
People had strong emotional reactions to this pricing decision.
(Interesting pieces on Martin Shkreli here and here.)
Pricing strategy is a huge part of many businesses, but — in the world of product and service design — it’s relatively rarely discussed. There was no panel at SXSW 2016 discussing pricing strategy.
Instead, we tend to admire simple, universal pricing models.
Netflix is £5.99 a month for anything you want to watch. It’s simple, clear and transparent.
Netflix doesn’t have simple pricing anymore. It has a range of prices, from £5.99 for one person to £8.99 for four people simultaneously streaming HD video.
I don’t think anyone at Netflix expects people to actually pay £8.99 for a house full of people glued to their screens. But the £8.99 price makes the £7.49 price seem more credible. With 70m subscribers, it’s worth trying.
(The full story of Netflix pricing is in this great article by Derek Thompson, which inspired this piece.)
The importance of price to a company should be obvious. At The Times, we realised that converting customers who paid £8/week for the printed newspaper into customers paying £2/week for the digital edition (often after paying Apple £500 for an iPad on which to read the edition) wasn’t great business.
So — over two years — we gradually raised the price for those original customers to £6/week. At that price, we could be genuinely agnostic. We didn’t mind if a customer was digital or analogue; the contribution was the same.
Of the original core customers regularly paying £2/week, we only lost around 10% during the price rises (many other customers came and went during that time, but for loyal customers the alternative was an £8/week print habit.
The first rule of pricing is that you don’t talk about pricing
It’s tempting to talk to customers about price.
Your customers — real or potential — will certainly have views about prices that they are keen to share.
“It is not your customer’s job to set pricing. An optimal price is one that is accepted but not without some initial resistance” says Ash Mauyra explains in this great piece.
It is almost impossible to predict how a customer will react to a particular price by asking them. That’s because they don’t know how they will react.
They have no idea.
“Are you in the market for tea lights on this trip to IKEA?” you might ask. “No” They might say. Or “Yes”. Neither is a useful signal, because they don’t have a clue.
There’s one easy way to find out what customers think about prices. By selling them things.
The second rule of pricing is that you don’t think about pricing
As human beings find it almost impossible to think rationally around pricing. Because of this, as human beings, our own thoughts about pricing are ly to be almost useless.
When Turing Pharmaceutical raised the price of Daraprim from $13.50 to $750, they could have seen a 98.1% drop in sales — and still made more money.
When The Times introduced a paywall, the number of people looking at their digital service dropped by 98.7% (from 22m to around 300,000), yet the switch was a huge financial success.
Those kind of shifts are hard to make sense of rationally — so the flood of emotional reactions takes over.
The third rule of pricing is that experiments are the only way to make sense of it all
One classic pricing experiment was conducted in early ’80s by Joel Huber and Christopher Puto at Duke University in North Carolina.
Their paper, Adding Asymmetrically Dominated Alternatives, Violations of Regularity and the Similarity Hypothesis, outlines the experiments they did to understand how college kids buy beer (and televisions, cars, restaurants, lottery tickets, and film).
The results of their experiment are still obvious almost every time you buy something online.
They started with two types of beer; cheap and expensive:
70% chose the more expensive variety.
Next, they added a decoy cheap beer:
Remarkably, none of the students chose the cheap beer, but it’s presence on the shelf distorted the entire market, pulling the centre of pricing gravity downwards.
Finally, they introduced a premium beer:
Which had the opposite effect; skewing the entire market upwards, and significantly improving the revenue from the original experiment.
The lesson has been learned, and ‘Good, Better, Best’ pricing strategies are everywhere, from Slack:
To British Gas:
The lesson isn’t that you must have three prices, but that searching for one perfect price is ly to be less effective than finding a sensible range of prices.
It’s reminiscent of Malcolm Gladwell’s story of the futility of searching for the perfect spaghetti sauce — where the punchline is “Prego turned to Howard, and they said, ‘You’re telling me that one third of Americans crave extra-chunky spaghetti sauce and yet no one is servicing their needs?’ And he said ‘Yes!’” .
Apple have fully embraced Good, Better Best pricing, building layers of recursive GBB into their product line. First you chose your phone…
Then you choose your memory:
Is $1.60 a good price for an extra GB of memory on your phone? It’s hard to tell.
People can’t tell you what they think about pricing, because they don’t think about pricing. They feel it.
A couple of years ago, Fluxx had a client with a huge customer base paying relatively small recurring payments. They asked us to help them think about membership and loyalty schemes.
One idea was to create a premium loyalty scheme, where customers would pay a little extra each month for access to rewards.
This raised a few obvious questions; Would anyone pay? How much would they pay? What rewards would they pay for?
Over a few days, we rolled out a simple experiment. We sent a note this to a sample of customers:
The actual email was a split test on price, and was slightly less crappy looking.
The idea was to write an email that felt real, not one that felt a survey. We weren’t asking customers what they thought about a price, but how they’d personally react to a change that was coming. The email went down pretty well, with a 10% response rate, and the results were startling.
51% of customers who were offered rewards for £2 accepted the offer. In most cases, this would nearly double their monthly spend.
37% accepted at £4, and 31% accepted at £6, potentially almost tripling the amount they spent with the company.
Considering that one £6 customer would contribute the same as three £2 customers, the results were very encouraging.
With this one simple experiment, the conversation shifted from “Would anyone really pay for this?” to “I wonder what we could offer for £8/month?”
Price is the crudest, and most subtle, message you can send about your product, so it’s worth getting it right.
Running experiments is the best way to achieve that.
This story is now part of the Fluxx book Whatever happens, we don’t want people to write to the Daily Mail. You can download a copy here.
This is a version of a talk given at the first Experiments in Design Meetup in London in April 2016. Signup and come to the next one.
Tom Whitwell is Senior Consultant at Fluxx, a company that uses experiments to understand customers, helping clients to build better products. We work with organisations such as Lloyds Bank, Royal Society of Arts, the Parliamentary Digital Service and William Hill.
If you enjoyed this, you might enjoy “31 Things We Learned in March 2016”
“,”author”:”Tom Whitwell”,”date_published”:”2017-07-17T14:24:42.398Z”,”lead_image_url”:”https://miro.medium.com/max/960/1*wAPDFn8XjgFY7RQFp4d6yA.png”,”dek”:null,”next_page_url”:null,”url”:”https://medium.com/fluxx-studio-notes/the-first-rule-of-pricing-is-you-do-not-talk-about-pricing-1875caa39b89″,”domain”:”medium.com”,”excerpt”:”Iâve been slightly obsessed about pricing since 2010. Before joining Fluxx, I was part of the team that changed the price of The Timesâ¦”,”word_count”:1722,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}
Multi-Level Marketing Businesses and Pyramid Schemes
Are you considering a business opportunity that involves selling products to family and friends and recruiting other people to do the same? That kind of business is called multi-level marketing (MLM) or network marketing. Some MLMs are illegal pyramid schemes.
Most people who join legitimate MLMs make little or no money. Some of them lose money. People who become involved in an illegal pyramid scheme may not realize they’ve joined a fraudulent venture, and typically lose everything they invest. Some also end up deeply in debt. Here’s what you should know about MLMs and pyramid schemes, along with what you should do before joining an MLM program.
What are MLMs and How Do They Work?
MLM companies sell their products or services through person-to-person sales. That means you’re selling directly to other people, maybe from your home, a customer’s home, or online.
If you join an MLM program, the company may refer to you as an independent “distributor,” “participant,” or “contractor.” Most MLMs say you can make money two ways:
- by selling the MLM’s products yourself to “retail” customers who are not involved in the MLM, and
- by recruiting new distributors and earning commissions what they buy and their sales to retail customers.
Your recruits, the people they recruit, and so on, become your sales network, or “downline.” If the MLM is not a pyramid scheme, it will pay you your sales to retail customers, without having to recruit new distributors.
What’s a Pyramid Scheme and How Do You Spot One?
Pyramid schemes are scams. They can look remarkably legitimate MLM business opportunities, but if you become a distributor for a pyramid scheme, it can cost you and your recruits – often your family and friends – substantial time and money.
The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life – quit your job and even get rich – by selling the company’s products. That’s a lie.
Your income would be based mostly on how many people you recruit, not how much product you sell.
Pyramid schemes are set up to encourage recruitment to keep a constant stream of new distributors – and their money – flowing into the business.
Often in a pyramid scheme, you’ll be encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell.
You may even have to buy products before you’re eligible to be paid or get certain bonuses. You also may have to pay repeated fees for other items, training sessions or expensive marketing materials.
In addition, the company may say you can earn lavish rewards, prizes, bonuses, exotic vacations, and luxury cars.
However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of distributors ever qualify.
Eventually, most distributors find that no matter how hard they work, they can’t sell enough inventory or recruit enough people to make money.
They also can’t keep up with required fees or the inventory purchases they need to make to qualify for rewards, and they can’t earn enough money to cover their expenses.
In the end, most people run money, have to quit, and lose everything they invested.
Here are some warning signs of a pyramid scheme:
- Promoters make extravagant promises about your earning potential. Stop. Such promises are false.
- Promoters emphasize recruiting new distributors for your sales network as the real way to make money. Walk away. In a legitimate MLM program, you should be able to make money just by selling the product.
- Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company. Leave by the nearest exit. Any company that tries to pressure you to join is one to avoid.
- Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards. If you see this happening, keep your money.
Is an MLM Right for You?
If you’re considering joining an MLM, know that some MLMs – even ones that aren’t pyramid schemes – may not be a wise investment. Other MLMs may not be a good fit for your interests and lifestyle. Here are some tips to help protect yourself against a bad MLM experience:
Ask yourself these questions:
- Do you want to be a salesperson? If you join an MLM, you’ll be a salesperson. Your job will be to sell the company’s product and, in many cases, to convince other people to join, invest, and sell. If you don’t selling, or if you’re uncomfortable asking people you know to put their time and money into a business venture, joining an MLM is a bad idea.
- Do you have a solid sales plan? Consider whether you have friends and family who will buy this product from you over and over again. Think about how you would find and keep other regular customers.
Can people buy something this product elsewhere, maybe for less?
- What are your income goals? You might think that, with your smarts and hard work, you can earn substantial income through the MLM. In fact, most people who join MLMs and work hard make little or no money, and some of them lose money.
- Can you afford to risk the money and time? Every business venture has risks. MLMs are no different. Even if the start-up costs seem low, additional expenses can add up quickly. Expenses can include training and travel costs, website fees, promotional materials, costs to host parties, and costs to buy products.
If you need to borrow money or use your credit card to finance your expenses, you may face hefty interest charges too. Also, consider the time demands of the business, going to training, recruiting new distributors, managing paperwork, recording inventory, and shipping products.
Do your homework:
- Research the company. Search online for the name of the company and words review, scam, or complaint. You may also want to look for articles about the company in newspapers, magazines, or online. Does the company have a good reputation for customer satisfaction? Check with your state Attorney General for complaints.
A lack of complaints doesn’t guarantee that a company is legitimate, but complaints can tip you off to possible problems.
- Research what distributors are saying. Individual distributors often post their own training videos online to promote the MLM. Search for these materials.
Be suspicious if the trainings make earnings claims, tell you that the fastest way to make money is to “recruit, recruit, recruit,” or suggest that all you need to do to build a downline is “find two people who find two people.” Claims these are hallmarks of a pyramid scheme.
- Consider the products.
Those claims are generally false or at least unproven and, at worst, the products could be dangerous.
- Understand the costs. Many MLMs make you buy training or marketing materials, or pay for seminars on building your business. You may need to book travel and pay for hotels and meals.
Make sure you know what you must pay for, and how much it will cost over time. If the company says some of these things – periodic product purchases or training – are optional, find out if you’ll become ineligible for bonuses or rewards if you opt them.
- Ask about refunds.
In many MLMs, before you can start selling the products, you have to buy them from the company. So get the company’s refund policy in writing. Make sure it includes information about returning any unused products, including restrictions and penalties. Consider whether you’ll get a full refund or only a partial one — and how long it may take.
- Read the paperwork and have a friend or advisor review it. Read the company’s sales literature, business plan, disclosure documents, and any contracts or agreements you’ll need to sign.
Ask an accountant, a lawyer, or someone else you trust – and who is not affiliated with the company – to help you review the MLM’s materials. Ask them to look at your possible earnings and whether the company can back up its claims about how much money you can make. Ask for their honest opinion about whether they think the MLM is legitimate and a good fit for you.
Talk with current and past distributors about their experience in the MLM:
Ask tough questions and dig for details. Don’t consider it nosy or intrusive: you’re thinking about starting a small business. A good businessperson needs those answers.
Here are some questions to ask:
- How long have you been in the MLM?
- How much money did you make last year, after expenses?
- What were your expenses last year?
- Have you borrowed money or used your credit card to fund your business? How much did you borrow? How much do you owe?
- Do you need to have recruits to make money?
- How many people have you recruited? How many did you recruit last year?
- How many of your recruits have left the business?
- What percentage of the money you made came from selling the product to customers outside the MLM?
- What percentage of the money you made – income and bonuses less your expenses – came from recruiting other distributors and selling them inventory or other items to get started?
- How much time do you spend on the business?
- How much inventory did you buy from the MLM last year? Did you sell all of your inventory?
Remember, you’re on a mission to check out a potential business deal that will require your time and money. The information you learn can help you decide whether it’s really a deal, a dud, or straight up illegal.