The three mental models you didn't know you needed until you read about them here

Philip Morgan

(Readin' time: 3m 8s)

Shane Parrish over at the Farnam Street blog/community is big on mental models.

That's cool. Here are three mental models that might be useful to you.

BMWs and Kias

This one is relevant if you sell packaged and pre-priced services, otherwise known as productized services.

As part of describing those services, you will send signals about who those services are for. Some of those signals will be explicit, like copy on your website that says something like this: "This service is ideal for logistics companies managing between 100 and 500 trucks/drivers". And some of those signals will be implicit, like:

  • The look and feel of your website
  • The tone of your writing on your website
  • The price of your services, or the price range they span

That last one is what this mental model is focusing on: what implicit signal is sent by your pricing?

BTW, I'm not a pricing expert. For deep pricing expertise, check out Blair Enns and Jonathan Stark (listed in alphabetical order because I love both those guys and they're both my favorite pricing consultant/teacher).

There are certain markets--mine is one of them--where the line between selling to individuals and companies is sometimes a blurry one. If something is priced at, let's say $15,000, then that's accessible to both the upper end of the individual buyer segment of the market and accessible to most of the multi-person company segment of the market.

We see this same kind of pricing overlap in the car world. I'm not a big car guy, but because cars are so ubiquitous, they make for convenient examples, as they do here.

So if you were--as a client of mine recently was--pondering how to price a new set of services, you can think about BMWs and Kias.

Kia has a reputation as a budget car brand. A quick glance at their website shows starting prices for their cars ranging from $15,390 to $59,900.

That $59k price, though, is an outlier. It's for their K900 car, which just from looking at it and the price, I'm going to guess that at least one TV commercial for the car has used the words "affordable luxury" or "accessible luxury" or the like. In other words, it's a luxury car from a budget brand.

BMW has a reputation as a luxury car brand. A quick glance at some random internet site (the BWM site doesn't make it easy to see the price range at a glance) shows prices ranging from $34,950 to $147,500.

Quick aside: this could be a fluke, and it's certainly not a large sample size, but I noticed that between BWM and Kia, one of them appeared to not be doing paid search advertising. Wanna guess which brand? Hint: it's not the budget one. :)

Anyway, these two brands, which occupy different poles of a spectrum, do have something in common. On the budget end of the spectrum, the majority of Kia's cars are priced below $30k. On the luxury end of the spectrum, the majority of BWM's cars are priced well above $30k. But there is some overlap at the individual car level.

BMW has their 2-series, which starts at about $35k, and Kia has their K900, which costs more like what a fully-loaded BMW 3-series costs. So that's the overlap.

If your market has a similar overlap between what the top end of the more budget-conscious segment can pay and what you might charge a less budget-conscious client, then you have a choice to make.

Do you want to be BWM or Kia to that market?

Do you want to send an implicit signal that who your services are for is:

  • Wealthy clients who can afford the ultimate?
  • Wealthy clients who are being a bit frugal with this purchase?
  • Scrappy, frugal clients who are scrappy and frugal with all of their spending decisions?
  • Scrappy, frugal clients who want to splurge this one time?
  • Something else?

Both BMW and Kia are good businesses. This is not a "choose a good vs. bad pricing model" situation. It's much more nuanced than that.

I will note, however, that BMW is 483% more profitable than Kia by some measures, according to this and this.

Food for thought. :)

This email is long enough. I'll get to those other two mental models tomorrow and--if need be--Monday.