Pricing interests me, and I have to make important pricing decisions on an almost daily basis. What works, and what doesn’t, is important to my business, and to those of my clients.
It has a huge impact on whether my professional services as a marketer will be employed. For my clients it’s the same, so I am often put in the position of having to advise them. Shamefully I often find myself advising them to be bold, whilst ignoring my own advice for my own services – cobblers shoes!
But it’s complicated – much more so than you might think, and it has a huge impact on your success or otherwise. So understanding it is critical if you are to achieve your aims: you ignore the psychology of pricing at your peril!
How do you price things?
There are several approaches to pricing: the traditional approach, and the psychological approach.
The traditional approach, as you would expect, is simply an attempt to create profit for yourself through the sale of your goods and services. You’re trying to persuade customers to buy your product, and to do so in preference to your competitors.
The psychological approach is much more nuanced and detailed, taking account of the different approaches individuals and organisations might take to your offering – the other three marketing ‘P’s of product, place and promotion.
A clear understanding of these psychological elements will make you consider your pricing strategy from all angles, enabling you to arrive at a more rational figure which is led by benefit rather than gut-instinct.
What are the models?
The traditional model approach is based on three factors that tell you that lower prices should normally result in more sales (though not necessarily more profit):
- Instrumental – a higher price might add more value to a product, and vice versa;
- Intrinsic – a higher price would impart a higher value to the end-user – eg ‘snob’ products, or ‘reassuringly expensive’ consultants (remember the old headline ‘No-one ever lost their job for buying IBM’?) – and vice versa;
- Indicator – price is an indicator of value. This is especially important where quality is hard to judge.
The psychological model which can be used to get much closer to how price affects sales, can also be divided into three categories of purchasers:
- The ‘rational’ consumers, who consider the value of each purchase according to their calculation of worth;
- The ‘heuristic’ way of thinking which uses shortcuts based on clues in our environment, guiding our decision making;
- The ‘emotionally’ led consumer, whose decisions are driven by emotion, which is often based on previous experience.
Heuristic behaviours are the most influential, because we are all lazy and don’t really like thinking. Instead we prefer to rely on a range of shortcuts, which have been developed over time, through experience.
Heuristic behaviours include ‘anchoring’ (you relate the price to other comparable product prices), ‘averaging’ (you pick the middle price) and ‘calculating’ (determining the price according to the relative importance of the purchase).
Into this mix you also have to include the timing of a purchase as well as payment terms, when it is consumed, how it is paid for etc; each purchase will have a unique range of influences which we, as marketers, will understand and need to be factored in. All of these are shortcuts that consumers use to consider the value of your offer.
The importance of brand building
Branding overlays all of these considerations: your perception of the product will be influenced by what we think of the brand, because in this situation branding is a resource of learning about the product. Branding is a way of storing all this ‘learning’ in one place so it can easily be retrieved by your mind at the point of purchase.
Of course, business purchasing is more complex, as more people are involved and the stakes are often higher. The ‘Decision Making Unit’ (DMU) can be extensive and closely supervised, requiring analysis and justification, so it is much more likely that decision making will be rational and traditional
Nevertheless, in both consumer and business pricing, the challenge is always to compete on value, not price – otherwise it just becomes a race to the bottom. The other influential area of competition is innovation, which is the only thing which can overwhelm value.
So you can see why I find pricing an interesting subject. It’s a key part of marketing. Get it wrong and all your marcoms is wasted; get it right and you are on a route to profit!
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