Using Behavioural Economics To Improve Your Pricing Strategy

Using Behavioral Economics To Improve Your Pricing Strategy by Manuel Watjen

Manuel Watjen is an executive board member at Vocitas, a behavioral science-powered pricing and selling consultancy. With over 13 years of experience, he offers insights into applying behavioral economics to pricing strategies.

Key Behavioral Economics Concepts in Pricing

1. Relativity Principle

• People evaluate information relative to other information, not in absolute terms.
• Context matters for how prices are perceived as high or low
• Actively manage the context to influence price perception

2. Less is More

• More features or information can make a product less attractive overall
• Value is a function of average rather than sum of features
• Focus on a concise, compelling story rather than feature lists

3. Product of Choice

• More options don't always lead to better outcomes
• Too many similar options can make decisions harder
• Carefully consider the number and differentiation of options offered

4. IKEA Effect

• The more effort customers put in, the more valuable a product becomes
• Involve customers in the solution-finding process
• Some friction in the sales process can increase perceived value

5. Price Optics

• Small differences in pricing can significantly impact the perception
• Precise prices (e.g., $100.50) can seem more fairly calculated than round numbers

Buyer Decision-Making Strategies

1. Bargain Hunter

• Seeks transactional value and the feeling of getting a good deal
• Make discounts hard to get to increase perceived value

2. Risk Avoider

• Wants to avoid making wrong decisions
• Needs price transparency and explanation, not necessarily discounts

3. Price Acceptor

• Believes higher price equals higher quality
• Requires convincing on product value, not just price

4. Routine Buyer

• Values convenience and past positive experiences
• Focus on making the choice easy and reinforcing loyalty

5. Indifferent Buyer

• Driven by urgent needs, less price or feature-sensitive
• Emphasize quick solutions and availability

Discount Strategies

• Discounts should reward good customer behavior, not just be given freely.
• Use quid pro quo - get something in return for discounts (e.g., higher volume, testimonials).
• Be selective and differentiate discount strategies based on buyer type.
• Start negotiations with higher anchor prices for bargain hunters.
• Consider a "cold turkey" approach to break discount cycles if possible.

Key Takeaways

• There's no intrinsic willingness to pay - it depends on context and framing.
• Customize pricing approaches based on buyer decision-making strategies.
• Use behavioral economics principles to increase price acceptance.
• Be strategic with discounts to avoid training customers to expect them.
• Focus on communicating value rather than just competing on price.