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The Irrational Truth About Raising Prices

Everybody knows that as the price goes up, demand goes down. The logic is simple – jack up your prices by 10%, and 10% of your clients walk out the door. This proportional relationship is called “normal price elasticity”. And, like many other things that “everybody knows”, that’s a half-truth at best.

You see, although there are many things that get bought and sold that really do work like that, those commodities have virtually nothing in common with what you or I will ever sell. 

In the context of expertise-based services, for example, infrequent moderate price hikes are typically ignored – you raise prices, and nobody leaves.

And people<

This happens because, unlike the rational, smooth-curved economic models most actual business decisions are driven by human, meaning very messy, psychologyCognitive biases and heuristics beat up rationality and steal its proverbial lunch money so often, it rarely dares to show its face in everyday decision-making.

Don’t assume you’ll lose business with infrequent small price bumps simply because that would be a rational response. People theoretically can act rationally, and maybe they should, and most of the time they even would like to act rationally, but that doesn’t mean that they normally will.

Test your pricing carefully and it’s likely you will find more elasticity, and more room to grow prices, than economic theory or even “common sense” suggests.

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