Behavioral economics and pricing
As much as we would like to think that our decision-making process is purely rational and calculated, the reality is there are many factors which impact what we buy and how much we are willing to pay for it in the moment.
“If Content is King, then Context is God” says Gary Vaynerchuk, an entrepreneurship guru.
Ability to influence the context in which a customer is making the decision about our product, is a way to impact its perceived value and therefore the price we can charge.
James: “Believe it or not but human beings want more of what there is less of!”
Scarcity is a motivator, which can nudge a prospect to take action immediately : “The early bird offer is ending tomorrow!” and I really want to go to this conference, so I should hurry up!
James shares a fine example of how scarcity works in an online marketplace, which can be seen in searching for a room on Airnb. “Only 10% of listings are left for these dates” and we instinctively start building some assumptions about high demand, running out of options etc. which push us to make the decision quicker.
The authority in the context of behavioral economics means that someone else knows more than we do or so we assume. Booking.com is full of examples at every step of the booking process. The users are notified with e.g. “7 people are looking at the listing currently”, so it makes them to believe that this must be a good offer if there is such demand at that moment.
Another example comes from an online electrical store, Screwfix.com where the product reviews are given by experts in the field i.e. electricians, builders etc. instead of “ordinary” people.
A luxurious brand watch for just $100 would look suspicious to most of us, right? Location, location, location! Put this watch in a pawnbrokers and many will think that it’s a fake. Place the same watch in a luxurious boutique and suddenly for some it looks like a great bargain.
Another way to do this is through association our product with a higher or lower value thing in order to justify its higher price. James shares examples from the insurance sector which often positions their services together – packaging – or next to high-value goods such as real estates.
We’re surrounded by Free: premium models, free samples, free trials. Whenever we shop online or go to a supermarket in the neighborhood, the free is everywhere – and it can be a powerful bait! And while there is so much free out there, there is always paid next to it at some point.
James: “What’s the smallest commitment we can make our customer to activate on?”
As product managers we are responsible for optimizing the value proposition of our products. This value can be distributed throughout free and paid commitments. The challenge is to find out what freebie will trigger the initial engagement and what next commitment converts our prospect into a paid customer.
Seasonality affects price sensitivity and this is true for B2B and B2C products. This could be about Olympics, Christmas, economic changes or politics.
Focus on the customer LTV
Even though many prices are fixed, any price can be dynamic if we look at the pricing from a strategic angle. Pricing strategies are hard. What’s important here is to analyse the customer Lifetime Value of our product and optimise it over the years, responding to the changing context and impacting this context ourselves.
Understanding what drives people’s decision making process can be powerful. Don’t use this knowledge against your customer just to make money, it’s a short-term gain. Be ethical. Stay customer-centric and think about optimizing the product value throughout the customer life cycle.