Behavioral pricing is an approach to commodity pricing that is still relatively new. The behavior of buyers is used to decide the price of a product.
Listening to this, most people think it’s extremely beneficial for businesses and destructive for buyers. Yet, a more thorough view of the subject reveals that popular stereotypes about behavioral economics are rather misleading.
Search histories, online purchase patterns, demographic data, and social network profiles may all be used to corroborate behavior. Find out in detail with examples and how to do it.
What is Behavioral Pricing?
Behavioral pricing is a method of setting prices based on the patterns of consumer behavior. Large amounts of relevant data are analyzed to uncover consumer behavior patterns. It’s also a component of the larger field of behavioral economics.
Simply expressed, in traditional pricing theory, rational variables are thought to influence buyer behavior. Customers receive complete pricing information, and all customer choices are very obvious. The consumer chooses a value (the product) and expects that by making this purchase, his advantages from that good will be maximized.
Customers don’t always react logically, and such cost-benefit models don’t account for that. They behave differently than the classical pricing theory’s assumptions; they assess a price based on a variety of criteria, such as the manufacturer’s reputation or their own money. They don’t act predictably either. They can pause their search for a product and resume it later. They have trouble remembering pricing and making precise comparisons.
As a result, pricing decisions appear to be dependent on many factors. Pricing has many facets, and rational considerations are just one of them. In classical theory, behavioral research, emotional, and especially cognitive factors have just a minor impact. This research focuses on subjective aspects to better understand how customers decide on a product’s pricing.
It’s a sort of discrimination based on pricing. Price discrimination aims to increase profits by altering the prices that various consumers pay depending on information about the client.
Examples of Behavioral Pricing
Let’s say a customer wants to buy a summer midi dress. She does research using Google and visits a variety of online retailers and merchant platforms. One store employs behavioral pricing and keeps track of its visits. The merchant may also read relevant data, such as the browser’s search history or the website’s breadcrumbs. The customer first leaves the site but returns soon afterward to look at the product page. The shop knows this customer is eager for that product since he or she has already visited the product page.
If the customer returns to this product page, the vendor may use this information to hike the cost of the summer midi dress. This does happen in practice. When customers visit certain retailers and product pages many times, the pricing of items is modified marginally-for instance, by 5%. It is a sign that the customer must act on. She anticipates that the price will grow more. She interprets the pricing information. She processes and assesses it to elicit a reaction and action. She recalls the pricing from her initial visit to the product page.
You may believe that a dessert shop only sells a few sorts of desserts. Apple sells a restricted number of things. A retailer may manage hundreds of thousands of SKUs at the same time. The challenge is, how can it be implemented in a broad retail setting?
There was a little substitute for the manual effort of a price analyst or manager suitable for evaluating various pricing techniques to determine how they related to behavioral changes in demand and business indicators twenty or even 10 years ago. This indicates that merchants would have had a difficult time scaling up effective behavioral analytics strategies to portfolio-based pricing.
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Steps to Follow
People tend to believe that only market giants such as Amazon or Apple Inc. may manage to rely on this. There are, however, several basic yet efficient strategies that all sorts of merchants may apply. Let’s take a look at some practical measures that might help you get started with price optimization:
The three-fold rule
It’s usually best to provide clients with at least three alternatives to pick from. You may call this approach “good-better-best” or anything you like, but you must ensure that your clients can make their own decisions rather than being offered a single choice with no alternatives.
Nudges by default
Giving clients a variety of choices doesn’t rule out the possibility of persuading customers to make a specific purchase. In most circumstances, it means purchasing a better or superior choice. A solid example of how default nudges may be employed in practice is presenting the price as the “best value for money,” “best offering,” and so on.
The quality of “freedom.”
You don’t need to be a behavioral psychologist to understand how the word “free” works for buyers. Give clients the option of receiving a complimentary recipe book when they purchase high-priced kitchen equipment, and sales will rise.
Threshold pricing
Pricing thresholds are defined as unseen zones where customers’ willingness to pay reaches a given degree. For example, a lot of consumers are willing to pay less than $1 for a medium-sized chocolate bar. And as soon as the price exceeds 1 euro, the desire to pay plummets. It is critical to be mindful of the pricing threshold to maximize margins while maintaining consumer loyalty.
Anchors for prices
The example of Apple Inc. launching a new phone at an unnecessarily high price that was quickly reduced is an outstanding demonstration of how price anchoring works. You may illustrate how effective price anchors are by crossing the first high price and writing down the more appealing one.
The impact of endowments
Getting something extra when you buy anything is a significant motivator for every buyer. Obtaining a loyalty card, the option to return or exchange an item, and other supplementary services provide clients with the added value that they desire.
Conclusion
This blog explains how to best use behavioral pricing in your company’s business. The behavior of buyers is used to decide the price of a product. Find out in detail with examples and how-to on how to use this approach in your business. One store employs behavioral economics and keeps track of its visits. When customers visit certain retailers and product pages many times, the pricing of items is modified marginally.
It is a sign that the customer must act on and anticipates that the price will grow more. Giving clients a variety of choices doesn’t rule out the possibility of persuading customers to make a specific purchase. Give clients the option of receiving a complimentary recipe book when they purchase high-priced kitchen equipment, and sales will rise. Price anchoring works by making the price the best value for money.
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