When the first human engaged in the world’s first act of commerce, they learned the importance of pricing. Pricing has always been an essential skill for anyone participating in selling goods or services; throughout history, organisations that employ optimal pricing strategies are more likely to see growth and success than those organisations that price their products on a whim. New business leaders should consider enrolling in pricing strategy courses to gain more knowledge and skill in this field before taking risks on arbitrary prices.
In recent years, researchers have devoted ample time and energy toward understanding consumer behavior, especially as consumers respond to different pricing strategies. Here are a few insights that business leaders of all experience levels might find interesting and valuable as they develop their approaches to pricing.
The anchoring bias drives sales
Anchoring is a well-known cognitive bias that is exceedingly useful in pricing applications. Anchoring occurs because the human brain has a tendency to place greater decision-making weight on the first information it receives. For example, if a commercial states that a new truck is available for $30,000, customers will visit dealerships expecting to pay no more than $30,000.
When not leveraged consciously, the anchoring bias can be irksome to sales staff who must constantly fight against the anchored information in customers’ minds. Fortunately, businesses can take control of the anchoring bias with more effective organisation of pricing information. Most notably, businesses that offer premium goods or services next to standard options often find greater success with standard sales. This is because customers are more likely to recognise the value of the lower-tier option when anchored by the high prices of the premium products.
Weber’s law rules
Weber’s Law is a principle in psychology which states that the difference between two stimuli is directly proportional to the magnitude of the stimuli. In more comprehensible terms, the law suggests that how noticeable a change is depends on how significant the issue was to begin with. For example, students learn in health economics courses that even small increases in health costs tend to have a significant impact on patients and populations because healthcare is such an important component of modern life.
Understanding Weber’s Law can help business leaders make better decisions to prevent balking at higher prices for products, especially in today’s inflationary environment. With regular consumer products, price changes of about 10 percent or more are likely to stir a response from customers, but leaders should be guided by the magnitude of the goods or services they offer.
Consumers feel pain points acutely
Research in the fascinating field of neuroeconomics has found that the human brain is wired to continue spending until the perceived pain of spending is greater than the perceived gain of goods or services acquired. Fortunately, there are ways for business leaders to make pain points less noticeable, which increases satisfaction and promotes continued purchasing. Some strategies for reducing or eliminating pain include:
Reframe the value. Humans are better at understanding value in smaller increments. Instead of offering an annual subscription, businesses might charge customers by the month or week to help customers reframe the value of their product or service.
Bundle items. Humans don’t like making additional decisions after a big purchase. Features or items that might be purchased in tandem should be bundled together to make the buying processes smoother and more comfortable.
Appeal appropriately. Business leaders should recognise what attracts their target audience. For example, conservative spenders tend to prefer messages about a product’s utility, while liberal spenders gravitate toward products with a focus on pleasure.
Traditions are sometimes best
One of the oldest traditions in the pricing book involves ending a price with the number nine. Ending a price with a nine — like $5.99 or $39 — has long been a clever way to increase the price of a product without drawing too much attention from consumers. Though this practice has been used for decades, perhaps centuries, research shows that it still works wonders. In fact, prices ending in nine were even able to outsell identical products with lower prices.
The tradition of ending a price at nine is not foolproof. Sale prices are able to outcompete nines — unless there is a slashed sales price that also ends in nine. Though it might seem like a simple trick, ending a price in nine is remarkably effective at driving purchases.
Every business leader needs to consider pricing when developing a product or service. Fortunately, there is ample information to help leaders create effective pricing strategies that lead to business success.
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