Stop blaming price competition
The claim people buy on price is a myth, and in the latest in a series about consumer psychology Ashton Bishop and Gary Wilkinson look at how retailers can make the most of this.
Consumers don’t make rational decisions based on price and marketers need to stop pretending they do.
There is a common refrain amongst marketers in some categories that consumers buy on price. What nonsense. Price by itself is meaningless, and please slap the next marketer who trots out that excuse for why they are losing in their category.
The truth is customers make decisions on perceived value – where value equals what you get divided by what you pay. This would be true if we were all rational but of course we’re far from it. It’s in understanding how we really decide where we can win the pricing game. It’s actually the exception to the rule when we simply decide on price, and it is generally in true commodity markets. However, we can default to price when it gets too hard to compare – in this circumstance price can be equated with quality so being highly priced can work to your advantage.
But before you decide to blindly jack-up your price or embark on a price war let’s go back to the start and explore how consumers assess value and price.
Essentially humans are lazy. They don’t like to waste energy. And thinking takes a lot of energy. Trying to assess multiple products with different features, benefits and prices requires a lot of thinking – so consumers use short cuts to make it easier.
We think we’re rational around price, but truth is our initial perceptions get locked in, stick around and can cloud our judgment. The classic is a TV that ‘was’ priced at $5000 is now ‘only’ $2000 and at more than 50% off we just can’t seem to walk away.
But what’s really interesting is we think we’re immune to this type of pricing stunt, but we’re not and it’s been demonstrated in many independent experiments. A famous one is the 2006 Dan Ariely and Drazen Prelec’s MIT Auction.
Consider this. If you were asked for the last two digits of your social security number (e.g. 53), then asked whether you would pay this number in dollars (i.e. $53) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of this random initial price influence how much you would subsequently be willing to spend on the wine? Of course you’d say, ‘no’. Experiments on purchasing items from wine to computer track balls prove without a statistical doubt that in fact this initial random price would influence your willingness to pay.
In a first stage of the experiment students wrote down their social security numbers and were asked if they would buy a range of items for that price, a simple ‘yes or no’ for that price. Then the MIT class held a second price auction. And the results were simply staggering. Students with high social security numbers paid up to 346% more for items. For example, students whose two digit numbers ranged 80-99 offered $26 to buy a track ball vs $9 for students with last two digits in the 0- 19 range.
This effect is called arbitrary coherence; where a seemingly random reference point is used to subsequently rationally justify decisions as we fail to ‘adjust’. It can be seemingly random triggers that can set the range, and then related purchases are made to match-up.
So if our customers are using reference points, how can we introduce references that help them make favourable decisions? This is where the decoy effect can come into play.
Ariely asked another question. “Would you prefer a honeymoon in Paris including a full breakfast or Rome with the same deal?” Statistically it was hitting around 50/50. Then in his experiment he introduced a third option Rome but you have to pay for your own breakfast. Now the full Rome package became far more popular than Paris. It’s called the asymmetric dominance effect and it’s because there are now two very easy options to assess Rome with breakfast vs. Rome without breakfast. Which sees Paris fall early in the decision making process.
The implication is clear: You don’t ever want the first encounter your customer has with you to be a deep-dive discount. It will make it unlikely for them to pay top dollar in the future. So let’s learn from all the restaurants that Groupon, Spreets and the group deal co-ops put out of business.
The formula for smart pricing goes like this: value comes first and it’s up to you to fight for it. Then make sure you show your most expensive offering first as this will set a higher reference point. Start including an easy to compare option that’s similar, yet slightly inferior to your preferred option (see asymmetrical dominance). And before you discount first see how you could hold your price and add a bit more value.
Let’s stop pretending customers are buying on price, rather let’s focus on helping them make simpler, quicker and better buying decisions.
Ashton Bishop is the head of strategy at Step Change Marketing and Gary Wilkinson is a behavioural psychologist and founder of Blisspoint Research.
Hi Ashton and Gary, I really enjoyed this post as well as your previous ones – please keep the coming.
I have a serious question though: given that the simplest, quickest and safest choice is usually going to be “the brand I went with last time”, the game is rigged towards established brands, as long as they don’t stuff it up, right? And if you are discounting discounting as an effective strategy to lure away buyers of other brands, what strategy would you recommend for a new or small brand?
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Spot on, I think when we fall into the low pricing trap we do our customers a diservice, you give them what they want not what they need.
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The best bit of this article was; ” let’s focus on helping them make simpler, quicker and better buying decisions” – no lets sell them whatever we’ve been paid to sell to them.
I fell this article ignore capacity. If only have $5 to spend and one item costs $5 and another similar item cost $7 then I’m obviously buying based on price.
It also ignores the fact that price information is now easy to find. Some people will spend hours online looking for the best price. We can now compare identical or similar products incredibly easily. I think price is actually more important than ever. The studies quoted are interesting but assume a situation where people don’t really know the price of something and can’t easily access information. Ask those students how much the wine is worth when they have their smartphones with them. You can tell the consumer whatever you want but more information is only a google away.
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Great article and insight guys.
It made me analyse my own purchasing and selling behaviour…
Despite being aware of pricing strategies. I am consistently drawn to premium priced services due to my fear of missing out – am I being a fool by not just paying more for a ‘proper’ version of the service….
This is in part trust (see Al’s point above), but also because in a small amount of time I research just enough for the decision, so it’s this tiny amount of knowledge that guides my premium purchase decision.
So when I sell my service, I look to make my clients minor experts, with just enough knowledge to pay me properly for what I do and compare me favourably with the cheap competition.
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An interesting recap of Behavioural Economic theory which hopefully these guys are not claiming as original thinking. It is though a useful reminder. The perpetuation of discounting is guaranteed of course by the number of marketing and sales managers who have neither the wit or the courage to try anything more demanding………………………………
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@Groucho I don’t think there is anything in the story to suggest they’re claiming that this is new thinking. It’s a really good summary of a complex field, along with their previous story.
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Nice post guys.
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Yes, helping them. That’s what we’re doing here. “Hi, I’m in advertising and I’m here to help you make quicker and better buying decisions.”
Can we at least call it what it is: manipulation.
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I really think the thoughts and analyses in this article are fantastic, particularly for those in the services industry.
As Billy C says people will trawl the net for a particular brand of TV or car etc until they find whoever is willing to take the biggest margin hit, however, when it comes to offering services it really is a dreadful mistake to come in on a discount dive because you are immediately pigeonholed forever by that client (should you secure them) as the “El Cheapo” solution and they will use you until you just can’t keep the loss lead game going anymore.
Ask for your fair price after delivering your best and watch how quickly they drop the lines in the water for the next poor sucker.
I also thank them for mentioning those evil group deal co-op companies. They need to disappear quickly.
Great post, thanks guys.
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@ Al,
We tend not to recommend discounting as a ‘strategy’, it’s a tactic that sometimes generates short term results, but sometimes with a nasty hangover.
For small brands and challenger brands we recommend Dave Trott’s Predatory Thinking that we outline here http://www.stepchangemarketing.....esses.aspx let me know if you find it helpful or not. There’s fuller presentations on linkedin and slide share.
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@ Billy C, some good points well made. I agree that price comparisons are now easier than ever; however, I also think that products are rarely ‘identical’ and therefore the onus on marketers is now higher to communicate value clearly AND quickly.
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@Groucho Daniel Kahneman is clearly recognised the father of Behavioural Economics. I don’t know where you got we’re trying to claim credit for it as we also cite Ariely appropriately in the above. In this series of articles (this is the 3rd) Gary and I are trying to share and give practical application of some of behavioural economics research and theories specifically to marketing. I honestly believe this type of thinking can have a much bigger and broader impact for marketers and it’s an important field to distill, discuss and challenge.
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Don’t disagree with you at all Ashton.. You should read more carefully though, I did not say you were claiming credit for it. What I said was I hoped you were not claiming credit. Such a difference should be spotted by a researcher with a requisite understanding of language and meaning I would have thought.
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Excellent post guys, loving the series. It’s the practical application that challenges most product managers and marketers as they sail by these concepts on a daily basis. Of course @Groucho would never make the mistake of succumbing to the vast number of commercial, political, and organisational pressures that face professional marketers – wit and courage will get you there every time…
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Nice piece.
Wonderful to see others in the industry taking the learnings from behavioural economics seriously.
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We are rarely rational. Except when we lecture other people on how irrational they are. They don’t know they are irrational but we do, so we have to explain it to them. That’s not because we think we are the elite insiders in the know, but because we know that people are basically stupid. Yeah? We call that behavioural economics.
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Groucho is being disingenuous plain and simple. The implication of “which hopefully these guys are not claiming as original thinking’ is in the same class as ‘when did Bill stop beating his wife?”
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@Geeb : “When I use a word,” Groucho said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
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Then you need to publish a Grouchinese dictionary/phrase book so the rest of us can stop misinterpreting your wisdom. (Said Geeb with a that must have touched a nerve smirk)
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It appears you have lost touch with reality or earn way too much money. To say price has nothing to do with purchase is utter nonsense. Of course, people will pay more for a quality product. Apple is a good example. Then there’s Samsung. They sell many more units than Apple because they’re not as expensive. Then there’s every ay items. Why do cigarettes in Australia cost $20 a pack? Because price matters.
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