The Big Secret: It Isn't Real Money
Saturday, August 15, 2015
As a blood donor, I receive many coupons and discounts to local establishments. In fact, I've acquired so many that I sometimes just use them to reduce the clutter in my house.
I wasn't particularly hungry yesterday, but I passed by a local restaurant that sounded familiar. Checking my wallet, I discovered that I had a gift card for this very eatery. Ever the conscious consumer, I read the fine print: This card is valid for $10 off a single order. No change will be given for any unused portion.
Why waste an opportunity? With my newly acquired discount card in hand, I walked up to the cashier and ordered the most expensive lunch item I could find. I even paid extra for some additional toppings, even though nothing looked especially appetizing. The final bill amounted to $9.64, which I paid with my card.
If I wasn't particularly hungry, and I wasn't particularly fond of the food, why did I spend so much for lunch? Why did I bother to pay extra for the upgrades to my meal?
The answer to those questions should be obvious. I wasn't paying with real money. I was paying with someone else's. I had been given funds that had to be spent for the food served by this restaurant. Because I couldn't save whatever I didn't spend, there was little reason to be frugal. The higher the price of my purchase (within the limit on the card), the happier I'd be. By spending nearly ten dollars, I felt like I was maximizing my value at zero cost (after all, I wasn't paying with my money, I was paying with a coupon).
That's when I had a revelation. Every time a businessman agrees to make a purchase, he feels the same as I do. A senior vice president at a bank doesn't open up his own wallet to pay for the company's accounting system. The director of human resources at a retail chain doesn't open up her purse to pay for a new recruiting package. Businesses allocate funds to solve their needs. Once an allocation has been made, those funds stop being real money and start acting a lot like my restaurant gift card. The funds can be spent to obtain real value, but any remaining balance simply goes back to the firm's coffers. Should this be the case, we can safely predict that most businessmen will attempt to maximize the value that they receive and will be price insensitive to fees (as long as they remain below the proscribed spending limit).
Lesson learned. Always think about offering upsells to folks who are spending other people's money. They will be some of the easiest sales (and sources of profit) that you'll ever find.
Want to learn more about how to price your next product? Read my book on software pricing or contact me for a pricing consultation.