I’ve just started reading a book about the Psychology of Pricing (The Psychology of Price: How to use price to increase demand, profit and customer satisfaction – a review to follow when I’m finished). It’s opening gambits are quite pertinant to a conversation I had yesterday about how IT now finds itself in an open market.

Pricing is as much about the psychology of perception of value as it is about understanding how to pass on costs. Let me give you an example:

To watch a match at my beloved (if ultimately never quite matching up to the heyday of the 1980s) Watford costs something in the order of £26 pounds. 90 minutes (or thereabouts) of entertainment – £26.

Decent tickets to go and watch the Marriage of Figaro at the Royal Opera House in May are in the order of £150. In that context (putting aside artistic merit and preferences), £26 for a similar volume of “entertainment” looks quite reasonable.

A ticket to see a feature film at my local cinema is in the order of £8. Again, a similar amount of “entertainment”, but in that context the £26 looks quite expensive.

Buying a copy of The Guardian on Saturday (which will keep me entertained with it’s various sections and supplements for at least 90 minutes) is £2.50. A match at Vicarage Road is looking exorbitant in comparison if we are exploring 90 minutes of keeping me occupied.

A walk in Bushy Park, the Royal Deer Park near to where I live is free. And you get to meet creatures that look like the ones on the Watford club crest.

A price is framed in the context of the things around it. Something at exactly the same price can look great or terrible value depending on context.

At a technology supplier level, this is a big problem for traditional software providers. Increasingly the perception of cost of software is set against free or a couple of quid in a App marketplace. Yesterday I took a look at the cost of buying an upgrade for my home Windows desktop PC to take it to Windows 8.1. £100.

I’m being unfair, it’s £99.99, but that old psychological trick of dropping the penny has no impact at all when the baseline now for OS upgrades on existing devices is free. iOS, Android (and Windows Phone) all upgrade themselves for nothing. £100 minus a penny looks very expensive indeed.

Of course the model now is that you get a “significant” upgrade when you buy a new device, and it’s possible that the Windows OS pricing model is using a deflection tactic to try to get me to upgrade to a new PC. With my order book as it stands at the moment, I’ll be continuing to use Windows 7 on my desktop PC for the foreseeable future.

The psychology of pricing is even more problematic when it comes to internal IT groups. I’ve been involved in internal charging models of one sort or another for 15 years, and there’s always been a challenge of convincing colleagues to pay for services on an “as consumed” basis when those charges are merely pushing money from one pot to another within an organisation. In my experience people are much less wary of real money leaving a company to a supplier than they are for the equivalent in a cross-charge.

But there’s now an even broader challenge. Perception of price for IT services is subject to the same consumerized pressures as the likes of Microsoft are facing. If I can get Outlook.com or GMail or DropBox for “free”, why are the charges from the IT department so high?

Now of course we’re not comparing apples with apples. Just in the same way that comparing a game of football in the Championship with a night out in Covent Garden isn’t comparing apples with apples. The fact that they’re not the same thing (high art versus mid-tier football; enterprise versus consumer) is irrelevant when it’s framed in a way that is comparable (90 minutes of entertainment; some email or document storage).

Moreover, the psychology of pricing is a leap away from the processes by which IT is costed within an organisation. Psychologically-attractive prices aren’t generated (other than serendipitously) by taking all of your costs and divvying them up by the number of consumers. That, however, is the basis of most internal charging mechanisms.

What to do? Well, IT needs to reframe its service, rather than merely reduce prices. That’s not to say that reduced costs aren’t important, but an internal IT group will never get to zero cost (unless it is removed entirely – which might be a longer-term option).

How to do that? Well, here’s an example. One organisation I’ve been working with started life as a branding agency. Quite an expensive branding agency, at that, in a world where marketing agencies charge a set of prices that we’ll call X. X+20% is expensive in that world.

The organisation reframed it’s service, and rather than being an expensive branding agency, it’s now selling itself as a strategic consulting company, competing with the likes of McKinsey or BCG. In this world, where the competition are charging 2X, X+20% looks very reasonable. In fact, maybe too reasonable. X+50% is still a bargain – and one that’s at a higher price point than before.

In the old world where technology was mostly about cost saving and efficiency, a cost-based approach to pricing kind of made sense. It was all rational (if not psychologically alluring). As the digital realm increasingly means technology is being used to drive revenue, so much more than just the tech itself now needs to be considered.

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