Ten behavioural science hacks for smarter pricing

An understanding of behavioural science can unlock additional pricing power – a new report from price intelligence firm Acuity Pricing shows how. 

Written in partnership with behavioural scientist Richard Shotton, The Hidden Mind on Pricing consolidates a variety of research carried out in Europe, Canada and North America over the past ten years and offers easy-to-apply tactics for enhancing pricing power and profitability. 

Setting prices 

• Present bias: Shoppers are less price-sensitive if payments are pushed into the future (e.g payment in installments or a lower initial payment followed by higher payments).
• Charm pricing: Prices ending in nine are perceived as significantly better value, leading to higher purchase intentions and, importantly, had no effect on perceived product quality (research by Leuphana University of Lüneburg, Germany); 51% more sales converted when the price ended in .99 rather than a round figure (research by by US e-commerce platform Gumroad). 
• Precise pricing: Related to charm pricing, specific prices (e.g. $20.12 rather than $20) are perceived as more trustworthy and less inflated than rounded ones, allowing for higher charges without dampening demand.

Reducing price sensitivity

• Price relativity: People judge prices relative to those of similar products, rather than in absolute terms, so controlling the comparison set can give brands an opportunity to shape the context in which prices are viewed. 
• Extremeness aversion: When given three differently priced options, people tend to choose the middle one, assuming the cheapest will be of less quality and the more expensive overpriced. If brands offer a two-tier pricing option, consider introducing a third to drive sales up and increase profit margins.
• The ‘order effect’: The first price people see is disproportionately influential, so placing higher-priced items first on lists makes subsequent prices seem more reasonable. When selling items on a shop floor, placing high-ticket items prominently, near the door for example, means other items will seem cheaper.
• Decoy effect: Choosing between two products can be tricky for people if the options vary on attribute, such as price and size. Introducing a third, less appealing option (the decoy) can make a target offering seem more attractive and simplify decision-making.
• Unit reframing: People focus on the size of the number. Expressing prices in the smallest possible unit (e.g. per serving or daily cost) makes them appear more appealing.
• Differential price framing: Price framing is another way to ensure the number shown is the smallest possible. Showing the additional cost for an upgrade rather than the total new price increases adoption of higher-priced offerings.
• Price as a badge for quality: Price influences the perceived and actual experience of a product. Frequent or steep discounts may be a tempting way to boost sales in the short run, but can damage quality perceptions over time.

Why the behavioural science approach matters

“It’s tempting to base pricing on the assumption that we, people, are rational calculators who calmly weigh cost and value,” explains Richard Shotton. “But the reality is, humans don’t shop with spreadsheets – we shop with shortcuts and subconscious biases.”

Source: warc.com