This is the eighth in a 12 part blog series, where I review CXL Institute’s ‘Digital Psychology and Persuasion’ Minidegree. This week I took two new courses: i) Psychology of Communication, and ii) Psychology of Pricing. In today’s blog we will discuss how you can create a favorable context for your price and effective strategies to improve its perception.
One will easily pay $80 for 5 items at Whole Foods, but that same amount seems to be a lot when spent at a regular supermarket. The acceptable price of a beer at a local grocery store will be different than what one is willing to pay at a bar on the beach. What causes this difference in acceptable prices? The answer is in the context!
Context shapes the perception of a price. This is how the same product can have wildly different prices across different markets. Lets discuss few ways to shape the context of your price.
Create the Context of a Price
Price of a product is more than just the input cost, value of the product and its list price. It also depends on how your customer thinks about it, how much they value the product and how much they are willing to pay for it. All these factors can be shaped by creating a context. A context is essentially a scenario of the purchase. Let’s take a look at few ways we can create the context of a price.
Comparisons
A proposed price should be linked to the customer’s point of reference. Comparisons are generally made with similar goods in the market and can be done either by the customer on their own or can be stated by the marketer.
1. Implicit Comparisons
When consumers compare products themselves it is known as implicit comparison. Research and evaluate the implicit comparisons your customers could be making:
- Who are the competitors to a product? What do they charge?
- Have these customers used similar products before? What did they pay?
- What price ranges do they normally pay for services or products? Are they price sensitive (i.e. Wal-Mart shoppers) or value-sensitive (i.e. Whole Foods shoppers)?
- What type of budget do they have for products like this?
2. Explicit Comparisons
When comparison is specifically stated or brought up by the marketer or advertiser, it is known as explicit comparison. Use this to highlight the comparisons you think the consumer should be making and demonstrate why your product is of a higher value.
Research and evaluate the explicit comparisons you could make:
- What other products are consumers considering when choosing your product?
- What do they charge? How can you differentiate value?
Perceived Benefits
A product’s benefits, both conscious and subconscious, define its value to the consumer. According to Leigh Caldwell, in The Psychology of Price, there are certain drivers that helps us access the price of a product:
- Primary Drivers: A product’s features;
- Level 2 Drivers: Benefits of the feature;
- Level 3 Drivers: Emotions or goals the benefits satisfy;
- Basic Drivers: Biological drivers behind emotions or goals, they are: avoidance of pain, pleasure, time and money.
Research an evaluate the perceived benefits of your product:
- List the drives that determine the perceived benefits of your product:
- For each of those buying reasons, who are the competitors? What is their price spectrum?
Strategies to Improve Your Price’s Perception
Price perception is one of the leading variables in a consumer’s buying decision. It can either be determined by a logical assessment of the price or can be shaped by employing various psychological strategies. The essence of price perception lies in its subjectivity, that is, the customer’s perception of the price doesn’t need to match the actual price level.
A brand should aim to create a desirable price perception that brings in revenue profitably and at the same time satisfy customers with the value they receive at that price. Lets discuss a few psychological strategies that can help in improving price perception and encourage the customer to take a desirable action:
1. Decoy Effect
This is the phenomenon whereby the consumer changes their preference between two options when presented with a third one – the “decoy”. The decoy is not intended to sell but is introduced to make the other options look more attractive. It is usually used to nudge the consumer to purchase the more expensive option.
2. Centre Stage Effect
Research shows that when faced with a range of products arranged vertically or horizontally, the consumer is most drawn to the options in the middle. This effect is even more pronounced when choosing for someone else. We can use this bias to almost assure that the items placed in the middle are noticed favorably.
3. Anchoring
It is a cognitive bias which refers to the tendency to heavily rely on the first piece of information offered when making a marketing decision. Placing premium options before the standard ones will make them appear as a bargain in comparison. This can also be used in reverse. First position a lower priced option with less features followed by a slightly expensive option with more features, to nudge the customers into your preferred direction.
4. Social Proof
Using social proof is a proven strategy to increase order value and conversions. It can be used in a variety of ways: using “Recently Sold” notifications to justify prices, providing “People Also Bought” to cross sell or upsell items or tagging popular products to eliminate choice paralysis and guide the consumer to make a desirable purchase.
5. Free Trial/Freemium
It is the practice of offering a basic set of services for free and enhanced features for a fee. Suggest the plan with the least amount of friction. Get them to sign up and see how great your product is (and that it’s worth the upgrade!). This might, however, result in a large number of users using your services for free and only a small number of users upgrading to the paid offer.
Price context and perception are key factors in driving buying decisions in consumers. The above discussed biases and strategies can help in guiding the customer in a desirable direction. This can help them in crafting pricing strategies that ensure market competitiveness and also bring superior financial returns. Ultimately, always test different options. Never blindly follow any principles. It is best to research and interview your audience to understand what will work best with them.
Next week, I will further discuss my learnings and opinions from the next few courses I take in the Minidegree. To stay updated with my weekly blogs and explore the ‘Digital Psychology and Persuasion’ Minidegree with me, subscribe to my blog.
Until then, explore the various programs offered by CXL, by clicking on the link below: