Deal after deal, B2B companies like yours leave money on the table because you haven’t harnessed the power of behavioral economics to set your price.
Anchoring, social proof, framing, decoys, scarcity and loss aversion — these irrational quirks reflect how your customers’ brains make decisions. Behavioral pricing leverages these biases to boost profits.
Traditional pricing is rational – your customers, not so much
A cost plus pricing model comes straight out of a spreadsheet. The thing is, your customers couldn’t care less about your costs of production, or your margin aspirations. They care about their problems, how much pain they’re experiencing, and what their options are to make them go away.
Value-based pricing recognizes this, and starts from the value of the problem for your customers. Working backwards, value-based pricing rationalizes the value that customers are willing to pay to solve their problem.
Behavioral pricing accounts for customer irrationality
Behavioral pricing provides a framework to shape your customers’ perceptions of value, by applying behavioral economics heuristics that influence decision-making. We will go into six heuristics. The first four are used to set prices; the last two to discount.
1. Anchoring: Set the Reference Point for Value
Anchoring is a bias where people rely too heavily on the first piece of information they receive (the “anchor”) when making decisions or judgments, even if that information is arbitrary or irrelevant.
When a customer sees your price for the first time, they anchor their perception of value to that number. Even if they think your price is too expensive, many will negotiate from your anchor price rather than from their evaluation of a fair price.
We use anchors all the time in our pricing practice. We use high price anchors in industries where price is negotiated, or where a high, credible reference price signals quality, e.g., enterprise software. We use low price anchors as a headline in commoditized, price sensitive industries e.g., mobile and broadband plans, and work our way up from there once we have the customer’s attention.
2. Framing: Price the Problem, Not the Product
Framing is a bias where a person’s choice is influenced by the way information is presented, or “framed,” rather than by the facts themselves. Framing is a powerful way to anchor a price. We use it all the time in our pricing practice.
One approach is to price the problem, not the solution. For a logistics IT integrator, we framed the cost of projects as “less than X% of your annual transportation spend.” For a software vendor serving 3PL companies, we framed the price of the software as “only X% of your site’s productivity gains.”
Another approach is to present the price as an investment (“$100/day to reduce defects”) or as a cost-saving (“Cut scrap costs by $500,000 with a $50,000 project”).
A third approach is to sell a monthly subscription rather than an annual fee, which makes the price appear more affordable.
3. Social Proof: Reinforce Perceived Value
Social proof is the phenomenon where individuals copy the actions and beliefs of others to determine the correct way to behave.
You harness social proof by showing that other companies like your target customers have adopted your product. Social proof helps anchor your price. Customer testimonials, user reviews and sector-specific case studies all help to create social proof. So does indicating that a product is the “most popular” on your website.
4. The Decoy Effect: Structure Choices, Steer Decisions
The Decoy Effect is a bias where a person’s preference between two options shifts when a third option is introduced. For example, by structuring a tiered offer where the entry-level tier is unattractive, customers are nudged to consider the more expensive second and third tiers. We often use the Decoy Effect to price software and machinery.
Closely related to the Decoy Effect is the Goldilocks Effect, where tiered offers are structured so the option you most want customers to pick is “sandwiched” between unattractive alternatives. This makes your preferred package look like a value compromise. For example, a cloud software platform offers three packages—Basic ($79), Pro ($249), and Enterprise ($1,199). The Pro tier sees the highest uptake because it sits between “too small” and “too expensive to justify.”
5. Scarcity: Create FOMO and Drive Urgency
Scarcity is a bias which leads people to place higher value on items that are harder to obtain, such as limited-time or limited-quantity opportunities. Luxury goods companies use this to great effect.
Companies are rarely keen to create scarcity by restricting their products and services’ availability. Instead, you can use scarcity to create urgency and FOMO, and encourage customers to take action now, with limited slots, early access, or time-bound incentives. e.g. “only while stocks last”.
6. Loss Aversion: Highlight Potential Losses and Pain
Loss Aversion is a bias where the pain of experiencing a loss is psychologically more powerful than the pleasure of gaining an equivalent amount. Simply put, people hate losing more than they love winning.
There are many ways to harness Loss Aversion in pricing. One way is to frame outcomes in terms of what customers will lose if they don’t act, rather than what they’ll gain if they do. Another way is to set your anchor price at a level that makes the pain of not buying greater than the pain of paying,
We used Loss Aversion to great effect with a healthcare claims management software client that sold modular software, with each module priced individually. We changed their licensing model, and gave away the whole platform for free – every single module was free. In reality, we were not giving anything away, because each module required months of configuration and that’s where the real money was made. But clients found the idea of getting all the software for free incredibly compelling, and this set our client apart in their industry.
So there you have it. The cutting edge of pricing belongs to those who understand that price is not just economics, but psychology.
Are you using any behavioral economic heuristics in your pricing? Where has it driven breakthrough wins or unexpected results?
Do you need help to build a prosperous financial research and data vendor?
Book a call with Asteri
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