Priced to Influence, Sell & Satisfy
lessons from behavioral economics for pricing success
Utpal Dholakia
Copyright 2019 by Utpal Dholakia.
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Utpal Dholakia
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www.utpaldholakia.com
Book cover designed by America Brink. Illustrations by Shirin Abvabi.
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Priced to Influence, Sell & Satisfy/ Utpal Dholakia. 1st ed.
ISBN 978-0-9991867-2-5
Contents
And for a price, I will pretend absolutely nothing.
Jacqueline Carey
CHAPTER 1
What is Psychological Pricing?
All that is gold does not glitter, not all those who wander are lost.
J.R.R. Tolkien, The Fellowship of the Ring.
P ricing activities hold the key to business success. Almost every business decision that managers make involves spending money, whether it is to invest in new assets, hire employees, develop and introduce new products and services, enter new markets, improve service quality, integrate vertically, or modernize the companys operations. Managers are always pulling out their checkbooks to lay out money for these and any number of other activities. The only exception is pricing decisions. Making a pricing decision is a lot like turning a spigot. A pricing decision regulates the flow of revenue and profit into the organization, instead of the other way. Smart and informed pricing decisions swiftly drive up the companys revenue and profit and strengthen its brand in the marketplace. On the other hand, just as quickly and decisively, ill-considered and hasty pricing decisions bankrupt a business.
The Significance of Pricing Activities
All things are difficult before they are easy. Thomas Fuller.
Prices are the bloodstream of a business, instrumental for its sustenance and rejuvenation. And yet, a majority of managers do not pay sufficient attention to pricing activities or consider the nuances of pricing decisions. Some managers treat pricing as an afterthought, simply as tactics to be hastily sketched out and implemented after the major strategic decisions have been made. Others are perpetually putting pricing decisions on the backburner, either because they are intimidated by the process of making them, or because they do not know which factors to consider or which pricing methods to use systematically. Still others rely on standard but simplistic pricing approaches such as cost-plus pricing or just-below competitor pricing season after season, year after year, even when these methods prove to be ineffective.
Thus, it turns out that pricing strategy, the one area of business activity that brings revenue and profit into the company, is also often the one function that has the most significant opportunity for improvement. In my book, How to Price Effectively: A Guide for Managers and Entrepreneurs , I described a comprehensive, structured, and well-tested approach for making and implementing pricing decisions called the Value Pricing Framework . The Value Pricing Framework considers the four pillars of pricing, costs, customer value, reference prices, and the value proposition, in detail, to methodically formulate pricing strategies.
Here, a brief introduction to the four pillars of the Value Pricing Framework will help set the stage for understanding how you can use the principles and research findings from psychology and behavioral economics to make effective pricing decisions. Lets briefly review these four pillars of pricing, considering their foundations in customer psychology.
Figure 1.1 The four pillars of pricing decisions.
The four pillars of pricing in the Value Pricing Framework
Costs. Every manager recognizes that costs must be factored into pricing decisions. Costs set the floor or the minimum threshold on prices. If a business cannot cover all its costs, it will eventually have to shut its doors. However, effective pricing goes beyond marking up costs. It separates costs into two types, incremental costs that are relevant and which need to be considered carefully, and non-incremental or irrelevant costs , which should be ignored in pricing decisions. Understanding which costs fall in these categories, and in particular how they will change based on the pricing decision, allows the manager to design creative pricing schemes to achieve specific goals such as utilize spare resources, grow the business, and attract customers from outside the target segments, all while contributing disproportionately more to the companys bottom line.
Where customers are concerned, a sellers costs are mostly unknown quantities. If managers fail to consider and deal with customer ignorance about costs, their pricing decisions face a higher risk of failure. This is because customers lack of knowledge of input costs and how they change and why makes prices seem high, and price increases seem unfair, exploitative, or inconsistent. Just like prices, costs have informational value for consumers, which if used judiciously, can burnish the sellers reputation and produce a sheen of high quality on the product. In this book, we will examine the symbolic meanings of price, ways to manage price and cost transparency, and how to include customers in the price determination process through participative pricing.
Customer Value . Customer value, the second pillar of pricing, brings consumer psychology into pricing decisions even more explicitly. In the Value Pricing Framework , customer value is defined purely and narrowly in dollars and cents. It is the total amount of money that the customer is willing to pay for the functional and hedonic (or emotional) benefits obtained from the product or service. For the pricing manager, customer value sets the ceiling or the highest possible price that can be charged.
Despite this seeming rigidity, the process by which consumers assign value to products and services is fluid. It is established by psychological factors. The resulting customer value is unstable, influenced dramatically by the context, and subject to influence by the seller. Variability is the most powerful characteristic of customer value for psychological pricing. Here are three examples of the power of shifting customer value that illustrate this.
Roses on Valentines Day. Every year, consumers, mostly men, looking to impress their romantic partners, value products and services like chocolates, candy, and restaurant meals at two times, three times, or even more than their regular prices on Valentines Day. A bouquet of red roses that was worth $10 in late January is suddenly, but predictably, worth $49.99 on February 13. Its value subsides to $10 on February 15, only to increase again when Easter approaches in April, and then again before Mothers Day in May, and so on. The customer value of a rose bouquet ebbs and flows.
Grocery store sale. How much faith will you have in a sign in a grocery store that says, 25% off regular price for a tube of toothpaste you usually buy? Should it matter where the sign is placed? It turns out that when the sign is displayed on a store shelf next to the toothpastes regular price, shoppers give it more credence than if it is pasted on the product package. The size of the discount matters less to customers than how the seller communicates the promotional offer.
