Taking pricing beyond best practice

Behavioural Marketing is the new black in all 4Ps

Jane races to the airport for the jewelry fair in New York and leaves behind a note for her assistant store manager to cut the price in two for the weird looking purple necklace set, that she has tirelessly tried to get rid off for months with steeper and steeper discounts. As she returns she learns that the set has finally been sold – but at twice the original price!

What is going on? How can she keep cutting the price to no avail, but when her assistant store manager accidentally misreads her handwritten note as x2 instead of /2, it sells immediately? This is a real case and no coincidence. It turns out that when people are dealing with markets, where they have limited knowledge about the value of different products, they turn to the one indicator that they can easily assess: price. The higher the price, the more valuable the product – NOT the other way around!

Behavioural marketing is the new black was the first in a new series on how to use behavioural economics to lure in customers and persuade them to buy. While the first was very conceptual and illustrated by ecommerce, we will in the next four weeks focus on each of the 4Ps starting with our favorite: pricing. As you will see, our perception of price is actually driven by fairly simple rules:

Reference pricing

ikea vs parking

It is difficult to assess the value of single item, but it is easy in the context of a different item. Take for example the classic trick with showing the price before and after – it anchors us in the original price and we suddenly feel compelled to whip out our wallet regardless of whether we needed the item or the deal was actually that good.

This logic can be taken further, as when the New York Post advertised, that you could get the paper for the same price as the Starbucks coffee, you had no problem shelling out – or IKEA selling a coffee maker for the same price as parking as in the picture above. But count on Coca Cola to find the smartest trick: In regular vending machines, they will put large bottles at say USD 2 at the top left corner, where people start looking. Then after a few different bottles, Coca Cola comes back at the same price – but smaller bottles. People then just pick the large bottles and never mind the competition…

Transaction value

trading in car

You are about to purchase a calculator for $15, when you find out that it is on sales for $5 20 minutes away. You are about to purchase a jacket for $125, when you find out it is on sale for $115 20 min away. Which drive would you make? If you are like most people, you will take the first one but not the second. Why? Because we think in relative and not in absolute terms, when comparing options, although we should be able to assess, whether 2o minutes is worth $10 or not.

We also have a very clear idea about what is fair and what is not. For example when the price of roses rise dramatically on Valentines day, many people are agitated, because they are paying more money for the same product. Of course the flower salesman is influenced by the cost of bringing so many flowers in on a single day and simply going by supply and demand.

Conversely, when we pay full price for a new car that we should easily be able to get a discount on, that is completely acceptable, as long as the dealer paid too much for our old trade in. Of course the over payment on the trade in is never above the discount, you could have gotten on the new car.

Pain of paying

amazon

Have you ever wondered why you get chips in a casino instead of just using regular money or did you notice how helpful Disneyland has become with their payment wristbands or Amazon with their one-click-to-buy button? Spoiler alert: it is not to help you.

We have been shown to experience a very real pain, when parting with our hard earned dollar notes in a transaction. This in itself is pretty interesting, but even more so that if you are able to distance the person from the payment in time or experience, it will lessen – and then that much easier to convince to buy.

So when you can give the person a different payment device like casino chips or Disneyland wristbands, then the pain is lessened. The same goes, if you can remove the experience of the product or service in time from the actual payment like with credit cards or short term loans. Even better when you click on Amazon and you never have to worry about paying a bill, because that is all automatically taken care of. Disneyland may be the Happiest Place on Earth, but that is only for kids and the money counters.

Price-quality beliefs

price quality

As shown in the example with Janes jewelry store, we use price as an indicator of value in the absence of better information. An interesting point is that this can also work in reverse by giving people the experience of quality and they are then willing to pay for it – even if the quality is not in fact better. An example would be, when you walk into a supermarket and the first thing you see and smell, are the fresh flowers, fruits and vegetables, that immediately primes you to consider everything in the store fresh and worth paying more for.

People also have an astute sense of what belong in different brand levels in terms of pricing. Basically, the second you start setting your prices more than 25% above your competition, you are no longer considered comparable. That can sound exciting, but it just means that you are suddenly compared to the next level such as luxury items and may fall a bit short of expectations for this segment!

Mental accounting

debt vs investment

We tend to compartmentalize based on where income comes from and what it can be used for. Imagine for example that you are considering to buy a very nice shirt at USD 125. You eventually decide it is too expensive and leave it in the store. Three days later, your better half buys the shirt as a gift and you are thrilled. The money comes out of the same bank account, but it does not come out of the same mental account – your mental account for self purchased shirts was tight, but there was plenty of room in the gift account, so…

Another great example is a study showing that, if people are about to buy a theater ticket for USD 10 and right before buying it, then lose the USD 10, then only 12% will buy a new one. But if they lose their USD 10 theater ticket, then 54% will buy a new one!

A classic is when we hold on to investments with returns below the cost of the debt we are also holding. There is something to be said for liquidity and the difficulty in finding debt expensive enough these days to outweigh investments, but these are not the reasons, we are doing it. We simply want to keep our savings nice and neatly in their box regardless of the irrationality of it.

It is easy to see, how this knowledge of our irrationality can be taken advantage of – and many companies do for example when airlines start increasing prices at earliest reservation, Victorias Secret charge men more or coke vending machines charge extra, when it is hot. As always it is not the tool but the wielder. It should be used to deliver superior experiences – not merely convincing customers to buy above their means or needs.

Next week we will take another P of the 4P. If you enjoyed this post, please like, share or comment – and take a look at our other posts at www.behaviouralstrategy.com/the-inspiration/

3 thoughts on “Taking pricing beyond best practice

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