Value Pricing vs Nickel and Diming

Friday, December 18, 2015

Many pricing pundits love to extol the virtues of value-based pricing. They see it as the universal answer to just about any pricing question. Charge for the value you provide. It sounds so obvious.

I take a much more nuanced approach. Sometimes other pricing strategies make more sense. Sometimes customers get upset when they are charged for each bit of value delivered. Have you heard the phrase nickel and diming? While many people are willing to pay for value, almost everyone hates the feeling of being nickeled and dimed.

Where is the fine line between value pricing and nickel and diming?

This very question occurred to me after a recent business transaction. I had purchased a membership to a professional organization. The very next day, I received an email asking where my membership materials should be sent. This presented a bit of a predicament, as I was in the process of moving to a new apartment and did not want my card lost in the move. As a result, I asked the representative to hold my materials until my move was complete.

Should the organization have charged me a fee for this favor? After all, I was requesting that they provide me with some additional value.

The answer is almost certainly "no."

Had the firm charged even a single penny, I would have been outraged. Even as a pricing expert, I would have felt the charge improper. There must be some criteria that we can apply to decide whether a charge is appropriate or an instance of nickel and diming.

If many of the below apply, you might be alienating your customers:

• Perceived value provided is relatively low. If you went to a mechanic for regular service and he added a charge for replacing worn brakes, you probably wouldn't mind. Brakes are important. However, if he added even a minuscule charge to organize the items in your glove compartment, you'd be more likely to be upset.
• Value delivered is outside of your core competency. If you went to a bar and asked for a drink, you'd feel OK being charged for it. After all, selling beverages is how many bars earn their income. How about if you asked your lawyer for a drink? You'd likely be quite upset to be billed for such an item.
• The charge is not customary. We become used to all sorts of charges over time. I know that every time I visit the City of West Palm, I'll have to pay to park my car. I've accepted that fact. However, I know that when I drive to my home in Delray Beach, I can park for free. Should my landlord choose to begin charging money for my parking space, I'd be quite upset.
• The value seems to involve little effort or cost on your part. Hate it all you want, the effort heuristic dictates that customers will place a higher value on products or services that seem difficult to provide. In the case of my professional membership, not sending my paperwork to my current address involved next to zero work, so I would have been very upset to have been charged an additional fee.
• A charge prior to the point at which trust (or a relationship) has been earned. Especially in the case of post-experience goods, customers will tend to view charges early in the buying process more negatively than charges at other times.

Don't just think about what you should charge. Also think about if you should charge too.

Pricing is hard. Fortunately, I can help. Not ready for a pricing consultation? Not a problem. You can learn quite a bit from my book on software pricing.