Psychology of Pricing

By guest blogger: Christoph Meili at Input Consulting AG

For many years pricing strategies and pricing have been based on economical thinking. In the last few years insight has gained ground that pricing is more than just facts and figures. The importance of knowing the psychologically motivated aspects of your customers’ behaviour, that make people act irrational and using this irrationality in your pricing has increased. We distinguish between two types of pricing: economical pricing – improvements on this side are usually the first step to pricing excellence – and behavioural pricing. Our experience shows that the potential in optimizing your economical pricing is about 2% of EBIT while you can gain a much stronger growth in EBIT with a behavioural pricing of about 5%.

Behavioural pricing is not about tempting your customers to buy your products for a higher price, it is about fulfilling various benefit dimensions including emotional aspects and getting better prices for that. For example: research shows that people are loss aversive. But how can that theoretical knowledge be put into practice? For example, you are selling two products within a certain category at different price levels and you want to sell more of the expensive item. You will succeed by introducing a third, even more expensive variety will reduce the loss aversion of your customers. The majority of your clients will buy the product with the medium price. Why? The cheapest one may lack quality, the most expensive product may be overpriced. In buying the medium price alternative the customer reduces his risk of making the wrong choice and therefore reduces his risk of being emotionally disappointed. You are providing your customer with additional value and getting a better price for that!

There are many such effects, which are relevant to the behavioral purchasing of your customers. Input Consulting, a Swiss based Strategy and Pricing Consultancy, described the most important effects and defined seven golden rules on how to use behavioral science in your pricing.

Read more at: http://www.input-consulting.ch/leistungen/pricing/check-up-preispsychologie/

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