It’s time to talk about a business concept that is literally the melding of science and art. It’s a concept that was brought to life by 19th-century physiologists and psychologists and one that you interact with on a daily basis. I’m talking about Weber’s Law. Weber’s Law, also known as Weber-Fechner Law is a law that helps us understand, or quantify rather, the perception of changes in a given stimulus. The law states that the change in a stimulus that will be just noticeable, barely perceivable, is actually a constant ratio of the original stimulus.
Expressed as a function it looks like:
ΔI/I = k
That’s the change in the stimulus over the initial stimulus and the k signifies that this proportion is a constant regardless of the size of the changes in stimulus or initial stimulus.
Woah, woah, woah here…
I promised you science and art and all I’ve done so far is geek out about a law that illustrates how people perceive changes is things and stuff. The things and stuff that I’m most interested in talking to you about today are how consumers, your customers even, perceive changes in price.
Weber’s Law is relatively easy to understand as it’s just saying that when initial values are small it’s easier to perceive small changes in them and to tell those two things apart. When things get bigger like prices, weights, numbers of things, it’s harder to perceive the same small change. So, for example, it’s easier to perceive the difference between two goods that have a $5 difference when one of the goods are $10 and the other is $15. Not hard to see that one costs over 30% more than the other. Well, what about that same $5 change when the goods are $95 and $100. It’s still a $5 change but the perception of that change can be a little harder to feel. That $5 change represents only a 5% change.
When you understand how people are likely to perceive a change in price you can better position yourself within a crowded market or better still figure out how to start thinking about how you should be pricing your products or services. For the sake of simplicity, I’m going to drop one of my favorite phrases when I teach my undergrad Econ class, all else equal. To keep this conversation easy to follow I don’t want to talk about people’s changing tastes and expectations, their propensities to consume, price elasticities of demand, etc. The only thing I want to talk about is how you can apply Weber’s Law to your business right now.
If you’ve spent any time researching how to build a business on the internet or how to market you’ve likely come across the adage that you should price based on the value you’re delivering and that you should do your best to charge a premium. The premium is a helpful consumer behavior trigger and signal because it shows that if they buy from you they’re on the hook for their experience and if you’re charging a lot it’s because you know what the heck you’re talking about. If you haven’t seen anything like that before, well, it’s pretty standard advice and it’s advice that I plan on kicking up a notch or two with the help of my friend, Weber’s Law.
Let’s start by setting some pretty common thresholds. These are price barriers or tiers that people seem to use as anchors when they’re deciding whether or not they should buy. To be clear I don’t have rigorously tested empirical data here I’m just leaning on my experiences working with hundreds of business owners of the years and the resources I have access to as a serial adjunct business professor.
The tiers are as follows:
- $20 and under
- $21 to $99
- $100 to $499
- $500 +
A relatively small change within each of these items would be almost imperceptible to people that are willing or able to consume your goods or services. For example, Hulu and Netflix have crept up in prices over the years. When the changes happen they are usually in an increment of a few dollars or so. When those price changes are coming, the media does a great job of sensationalizing those changes but when all that media fades those businesses not only retain their customers but they grow. Why?! Because of the perceived value, because of the promise of original content and because the perception of the actual price change isn’t big enough to change most people’s behavior. Wow, I (f*cking) love science!
Think about it, we chalk up price increases over time as normal. Sure, a part of that will be inflationary pressures on the standards we need and use daily but price levels overall are creeping up and the sizes of goods (bags of chips, candy bars, etc.) are going down because companies know they can change little bits over time and those changes won’t be the thing that alters consumer behavior.
So how can you apply Weber’s Law to your business? Well first off, take a look at your current pricing. There’s no reason you can’t float your way up to the top of any of the tiers I’ve outlined. Sure you might have to flex your rationalizing muscles a bit and yes you may lose a few customers but, overall your business will benefit as most people won’t have a problem with incremental increases over time.
What this also means is that you have an opportunity to segment your offerings. Creating experiences that align at the top ends of each of these tiers will communicate that your customers will expect different levels of quality, service, access, materials etc. That’s a good thing! I’m not advocating that you use this as a way to pull the wool over the eyes of the people that choose to spend their money on you. What I am saying is that you can manage expectations and create an environment where your customers know what to expect and are confident that they will get the value you promised them at each of these tiers.
As a student of the internet, I can honestly say that I’ve fallen victim to the pricing trap having spent money on courses in the $500+ tier thinking they would be the answer to all my problems only to find that in reality, I bought a bunch of poorly made slides repackaging commonly slung information. They may have got my business once but they won’t again. You don’t want to build a business like that. In fact, it’s flat out unsustainable. If you plan on sticking around in your business and are playing the long game you need to build a devoted base of loyal customers and followers. You do that by delivering value every day.
Sorry, I know I got a little ranty just now but it’s because I know that, as Spiderman’s Uncle Ben is quoted to say, with great power comes great responsibility.
Ok to sum up what we have here:
- Relative small change in small dollar good or service will be perceptible and have a chance to change buyer behavior.
- Relative small change in big dollar good or service is borderline imperceptible.
- Relative big change in small dollar good or service will most likely change buyer behavior.
- Relative big change in big dollar good or service will be perceptible.
Don’t forget that these changes can be increases or decreases. A good sale is only good if it’s enough to motivate buyers to engage which means it needs to be perceptible. Sales are great for generating revenue in the short term, turning over inventory, or just a little attention grab.
Now get out there and start charging what you're worth!
Oh and if you want to see a really awesome (nerdy) math video on Weber's Law then you should definitely check out this video from the Numberphile Channel on YouTube.