🔬 Apply behavioral science to pricing
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Today, we’ll dive into the best insights and ideas from Nudge Podcast.
We’re often unaware of the psychological biases that shape our decisions. This is especially true when it comes to pricing. Richard Shotton presents 3 cognitive biases that you can leverage to boost your revenue and profits.
The precise price bias
Uber ran an experiment around surge pricing. People were randomized into groups. Some people saw a 2x surge price, others saw 2.1x. Uber found that people were more likely to accept the surge price if it was a precise number, rather than a suspiciously round number.
People assume round prices have been plucked out of the air. If they see a precise price, they think the brand has put in a lot of time and effort into working out the price and it has been marked up far less.
The really simple application for your brand is to increase your price, your margin, and your perceive value. So, if you’re a consultant pitching for work, don’t ask for $1,000, ask for $1,075.
Richard Shotton
The present preference bias
If you want to raise your prices, don’t put that increase through with very short notice. We feel pain and pleasure more in the now than in the future. If I know I’m going to have to pay an extra $5 tomorrow, that’s painful. If I know I’m going to have to pay it in a months time, it’s far less painful. Give advanced warning to lessen the pain.
Richard Shotton
The extreme aversion bias
In one study, they offered people the choice of two cameras, a basic camera and a premium camera. They got a 50/50 split in choices between the two. They then added a super premium, very expensive camera.
Hardly anyone picked the super premium camera, but what’s of interest to us is that the ratio between the two original cameras radically changed. It went from 1:1 to 3:1 in the favor of the premium camera.
If you’re selling a basic and a premium package, the simplest thing you can do to increase the appeal of the premium package is introduce a super premium package.
Richard Shotton
Why it matters
These biases show how irrational we are when it comes to decision making. If you’re not already capitalizing on psychological biases in your pricing strategy, it’s a no brainier to start now.
However, not every behavioural science study is robust. Don’t let that put you off experimenting with pricing. Just be considerate in how you do so and avoid giving yourself false expectations that every bias will work for your company.
Next steps
Define your audience. Start by deciding who your pricing experiment will affect. Will it be for everyone, new customers only, all existing customers, or a subset of existing customers?
Draft your experiment. Clearly outline your pricing experiment. Remember, the goal is to increase revenue while maintaining customer satisfaction.
Communicate proactively. Develop a transparent comms strategy that explains the purpose and extent of the pricing change, along with what your customers need to do, if at all.
Pilot and evaluate. If possible, pilot the experiment with a small group of customers. This can provide valuable feedback and allow you to iron out any kinks before a wider release. Also, set clear success metrics to assess the effectiveness of the experiment.
Monitor and adjust. Keep a close eye on both quantitative data (conversion rate and churn rate) and qualitative data (customer feedback and social media sentiment). Be prepared to iterate on your pricing based on this.
Your thoughts?
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