A lot has been written and discussed about pricing strategy, yet we often repeat the same mistakes and overlook a critical factor: we're dealing with people! Pricing strategies are deeply entrenched in psychology. Next time you review your SaaS options, consider employing decoy, contrast, and other strategies influenced by behavioral economics.

Sears and the Toaster’s story: Decoy and Asymmetric Dominance Effect

In the 90s, Sears put in its stores an expensive toaster for something like $95 that was not selling well at all. Customers found it difficult to assess the value of the toaster in isolation and were hesitant to purchase it due to its high price.

To address this, Sears introduced a second, less expensive toaster to the lineup for about $85. However, they remove key features that were only available with the more expensive one. This new toaster wasn't necessarily expected to sell in large volumes; its purpose was to make the original expensive toaster seem to be a better option: for only $10 more, customers could get the “better” toaster and all the full gizmos. With the addition of the less expensive option, customers could now make a comparison between the two, and guess what? The more expensive toaster started to sell a lot more than the new less expensive one.

This strategy leverages the way consumers perceive value and make decisions based on comparative analysis. When given multiple options, people tend to choose the one that seems to offer more value in relation to the others, rather than making an absolute judgment on value. This tactic is today widely used in various industries to influence consumer choices, from consumer electronics to subscription services.

Pricing Misconceptions

This story illustrates a study published in the Journal of Marketing[1], which highlights common misconceptions consumers have about deals and discounts. "You walk into a Starbucks and see two deals for a cup of coffee. The first deal offers 33% extra coffee. The second takes 33% off the regular price. What's the better deal? "They're about equal!" you'd say, if you're like the students who participated in the study. And you'd be wrong. The deals appear to be equivalent, but in fact, a 33% discount is same as a 50 percent increase in quantity. Math time: Let's say the standard coffee is $1 for 3 quarts ($0.33 per quart). The first deal gets you 4 quarts for $1 ($0.25 per quart) and the second gets you 3 quarts for 66 cents ($.22 per quart).

This example underscores the broader point that consumers often rely on non-quantitative reasoning and are influenced by the way offers are framed rather than their actual value. Basically, getting something extra "for free" feels better than getting the same for less.

Actionable Insights

 1. Perceived Value Over Actual Value: Consumers are more attracted to getting more for "free" than paying less for the same amount, highlighting the importance of how deals are presented.

2. Anchoring Effect: The first price consumers see sets a reference point for subsequent prices, making relatively cheaper items appear more attractive, regardless of their actual value. The best way to sell a $350 watch is to put a $30,000 one in front of it.

3. Avoidance of Extremes and the theory of 3 packages: Consumers tend to avoid products priced at either extreme, favoring moderation and perceived fairness in pricing. In this well-known study, people were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer. Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

Third time around, they removed the $1.60 beer and replaced with a super-premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

4. Narrative Influence: People are more likely to justify a purchase based on comparative stories or narratives, such as getting a "better deal" compared to a more expensive option. This story is the reverse of the Sears and toaster one. In his book Priceless, William Poundstone explains what happened when Williams-Sonoma added a $429 bread maker next to their $279 model: Sales of the cheaper model doubled. Why? It makes the cheaper product look like a good bargain. Price differences give us a story and a motive: The $279 bread maker was, like, 40 percent cheaper than the other model – you’ve got a great deal!

5. Behavioral Cues: Simple changes in environment and presentation can significantly influence consumer choices. Savvy restaurants, for example, design their menus to draw our eyes to the most profitable items by things as simple as pictures and boxes. If you see a course on the menu that's highlighted, boxed, illustrated, or paired with a really expensive item, it's probably a high-margin product that the restaurant hopes you'll see and consider.

6. Emotional Decision-Making: Emotional reactions to perceived unfairness or bargains can override rational assessment of value. In the experiment mentioned by William Poundstone in his book Priceless: The Myth of Fair Value (and How to Take Advantage of It)[2], participants were offered a portion of $10 in a way that some offers were seen as unfair. The brain's response to these "unfair" offers, such as being offered only $1, was significant. It activated areas of the brain associated with pain and negative emotions, demonstrating how perceived unfairness in financial dealings can lead to strong emotional reactions. The flip-side is that bargains literally make us feel good about ourselves. Even the most useless junk in the world is appealing if the price feels like a steal.

7. Impaired Judgment Under Stress: Consumers are more prone to simpler decision-making and impulsive purchases when stressed, tired, or under the influence of alcohol.

8. Dislike for Transaction Costs: Consumers prefer subscriptions or bundles to avoid the pain of repeated payments, despite potential overall higher costs.

9. Attraction to Rebates and Warranties: These offer perceived added value, even when they may not be economically rational.

10. Fairness and Value Perception: Consumers are driven by a strong sense of fairness and comparative value, often based on limited information or cues rather than the intrinsic worth of a product or service.

Example with a combination of decoy and contrast

Let’s you want to sell the option 2 in the middle at $69. Option 1 is your decoy and option 3 your contrast.

These insights reveal the complex interplay between cognitive biases, emotional responses, and contextual cues in shaping consumer behavior, highlighting the importance of understanding the psychological underpinnings of purchasing decisions.

Need help to improve your negotiation skills and ability to influence? Schedule a call or Contact me at lvanhuffel@croforscale.com

#pricing #pricingstrategies #negotiation #influence

[1] https://www.theatlantic.com/business/archive/2012/07/the-11-ways-that-consumers-are-hopeless-at-math/259479/

[2] https://cxl.com/blog/product-pricing-strategies-and-techniques/