Why care about behavioral pricing?
Behavioral effects are crucial in optimizing your pricing. However, how can you best leverage these behavioral pricing effects? We have put together a selection of the most important behavioral pricing effects.
The following overview shows a selection of the most important behavioral pricing effects which make up over 95% of effects we have seen in the market in over 20 years of pricing experience.
But be aware: you should not combine all of these effects at once - consumers are only able to digest a finite amount of information when purchasing your products. Thus the marginal effect of using behavioral techniques deteriorates at a certain point. In our experience, this should be limited to between 3-4 effects in grocery retail and 4-6 in online offerings on your website (e.g. in telco or consumer software) where there is less additional information (e.g. competitor offerings) to influence the purchasing decision. To make sure they are optimized for you, A/B-test these effects with machine learning software.
The top behavioral pricing effects at a glance
Behavioral pricing effects in detail
These are the definitions of the behavioral pricing effects seen above:
- Default pricing nudges: Nudging describes the predictable altering of shopper behavior through positive reinforcement. When you create a default nudge you are suggesting, for instance, that the default option is the most commonly chosen one. This tends to make more of your customers choose this product and can include highlighting a product on your website as a "preferred option" or naming conventions like "standard product" vs. "plus product".
- Power of free: The zero price effect describes the phenomenon that consumers tend to choose a free product much more often than its inherent utility would suggest. The phenomenon was described by Dan Ariely in his book "Predictably Irrational" and is leveraged by sellers who throw in free goodies with the standard product option. buynomics recently ran a study showing that this effect could actually be limited in applicability.
- Price anchor: A price anchor sets buyer expectation at a certain price level. This is often used to make the list price look comparatively cheaper. This can be included in discounting but also when referencing a hypothetical price recommendation. We recommend only using this when you actually discounted a product - consumer trust is lost much more quickly than it is gained!
- Price thresholds: One of the most commonly known behavioral pricing effects is the price threshold, also known as the odd price effect. Buyers tend to behave irrationally when they see e.g. "€9.99" instead of "€10". This is especially true where a threshold moves by a decimal i. e. €0.99 vs. 1€ or €9.99 vs. €10. However, recently companies have started to adopt more rounded prices e.g. €10, €20, or €30 to suggest high quality or value. Is this based on an erosion of the price threshold effect in certain industries? Maybe - the science is not yet in.
- Dislike for extremes: The dislike for extremes effect describes buyers' tendency to choose a middle product more often than their inherent utility would suggest. This is important in portfolio building as the dislike for extremes effect implies that it can be beneficial to include additional products in your offering to nudge buyers to a certain offering.
- Reference price: Reference pricing is the act of pricing products in reference to one another. As buyers decide between different products it is highly important to have the right reference price for each product in the portfolio both within your own portfolio but also compared to competition. By looking more or less valuable compared to other product offerings you can influence buyers' propensity to buy your product.
- Endowment effect: The endowment effect describes buyers' tendency to value a good higher once they own it. In pricing a free subscription period or trial can take advantage of that effect as buyers are more willing to pay for something they already "owned" in the past.
- Behavioral effects have a large impact on buying decisions, but you need to leverage them carefully
- Your specific buying context makes a big difference - test behavioral effects using software for maximum results
- There are seven major behavioral pricing effects: default price nudges, power of free, price anchors, price thresholds, dislikes for extremes, reference prices, and the endowment effect
- Not all are equally relevant to your buyers' context - carefully select and leverage them to assure maximum value outcome
Do you agree with our list? What would you add?
Did you know?: We have implemented these effects in the buynomics software, so you can optimize your offer against realistic customer behavior. It is our mission to move behavioral pricing beyond the anecdote to actionable insights.
By the way: If you liked this article you will enjoy our webinar on behavioral pricing. You can find the recording here.
Want to move from anecdote to actionable insight in behavioral pricing? Then get a demo!