Price Psychology

All firms need to have an understanding of the role price psychology plays in influencing customers' buying decisions. Since people tend to buy emotionally and justify intellectually, the study of pricing psychology is a worthwhile endeavor, a field known as behavioral economics. There are two characteristics of price psychology:

1. Price leverage

2. Pricing emotions

Price leverage is not an advantage possessed by one party over the other. It is a question of who has the most (or least) price sensitivity at a given point of time during a transaction. A service needed is always worth more than a service delivered, and therefore most businesses provide a price to the customer before they buy, so they can make the all-important value versus price comparison. However, professional firms defy this psychology by pricing after the work has been done, thereby sacrificing leverage to the customer and hence pricing when they possess the least amount of leverage. This usually leads to write-downs, write-offs, and unhappy customers, not to mention that after an engagement is over is precisely the wrong time to discover the customer did not agree with your price since there is not much you can do at this point.

The second type of price psychology is pricing emotions, of which there are three that customers will experience at various times through a purchasing cycle:

1. Price resistance

2. Payment resistance

3. Price anxiety

As long as you are dealing with people, you will encounter price resistance — also known as sticker shock — usually at the beginning of the buying process, making it easy to identify. The best way to overcome it is by educating customers about the value being provided. By discussing value, rather than price, you lower a customer's price resistance. All customers have a natural incentive to lower your price but, at the same time, to maximize their value. It is far more strategic to have a discussion around what they are trying to maximize rather than what they are trying to minimize.

Price bundling is an effective way to overcome sticker shock as well, as it focuses the customer on the totality of the offering, rather than on specific components. Witness the success McDonald's has had with its Value Meals. Also product bundling increases a customer's switching costs, making it less likely they will defect to a competitor.

Prices should not be lowered for customers suffering from sticker shock, because this cheats your firm's best customers — those who value what you provide — and subsidizes your worst customers — those drawn to you by price considerations alone. These will be the first customers to defect once they find a provider with a lower price. Rather than lowering price, consider removing value from the offering, thereby forcing the customer to make a price/value trade-off. For instance, sometimes technology firms will lower prices, but only on older technology.

Payment resistance is simply the customer's unwillingness to cut the check. Who likes to pay their bills? Payment resistance is overcome by getting the customer to agree to the payment terms before the service is rendered. Lawyers can overcome this emotion by more consistently requiring retainers, as do firms that require customers to pay at an agreed-upon interval. The old axiom of business valuators applies: “I'll let you set the price if you let me set the terms.” Always make payment terms an integral part of your pricing strategies. Be sure to make paying your firm as easy as possible for the customer by accepting credit cards, electronic fund transfers, and so on.

The last pricing emotion, price anxiety, is also known as buyer's remorse. Anytime a customer spends a relatively large amount of money — for a house, automobile, expensive jewelry, and the like — it is quite natural to experience this emotion. Luxury automobile advertisements, for instance, are targeted at existing owners, rather than potential owners, to provide reassurance that they made a good and prudent decision. Price anxiety is less likely to affect repeat customers. Offering excellent customer service, and a service guarantee, are also effective methods to ameliorate buyer's remorse.

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