By Victor Antonio, BSEE, MBA

Finding the right price point to sell your item at can be a tricky thing.  You first have to make sure the price is competitive.  Second, you need to make sure you don’t cut your pricing too deep and end up losing money in the deal.  And lastly, you know the buyer is going to want to negotiate your price down in order to feel as though they’ve gotten a great deal.  The latter issue is one that we most often find ourselves in.  Everyone wants to negotiate better price. The question is, 'How do we stop price point erosion?'  

When selling a product or service, salespeople have a sliding scale that runs from the ideal sale price to the point-of-no-return (PONR) price.  As salespeople, what you need to do is slow price point erosion during the negotiation process so you end up closer to the ideal sale price and stay as far away as possible from the PONR price.  How do you do that?

I came across a study done by University of Florida professor Chris Janiszewski and Dan Uy that might help.

In the past, studies have shown that the first price you hear or are exposed to becomes an anchor or point of reference in deciding what you are willing to pay for an item.  Janiszewski and Uy took a closer look at this exposure to initial pricing and asked themselves how this initial price point influenced bidding behavior.  More specifically, they wanted to know whether a round number versus a non-round number was more susceptible to price point erosion.

In one particular test, the students were given the retail price of HD Plasma TV and then asked to guess the wholesale price of the item.  One group was told the retail price was $5,000 and another group was given a retail price of $4,988.  After tallying the results, the group with the $5,000 price tag guessed much lower wholesale prices then the group at the $4,998 price.  

Another study done over a five year period found that houses listed at $500,000 got lower closing prices than those listed at $494,500.

Further studies confirmed Janiszewski and Uy’s suspicion.  Prices with round numbers produce lower bids.  People have a tendency to discount an item more if the number is round.  Simply put, people will round down (i.e., negotiate down) farther when the product is priced with a round number.

How can this help you?

In sales, when submitting a Request for Proposal (RFP) or presenting the client with a price, it may be wise to keep this study in mind.  For example, instead of submitting a starting price of $50,000, you may want to price your product or service at $49,900.  Instead of a starting price of $200, you may want to price it at $197.  This way the client's counter price will be higher than if you had used a round number.  Get the idea? 

The rule-of-thumb here is to stay away from pricing an item, your anchor price, with a round number if you want to avoid price point erosion. For those of you living on the razor’s edge of slim margins, this study is welcomed news that I thought you might find useful.

Remember, upgrade your training, or downgrade your expectations!   Take care.