Behavioral Pricing in Action: The Guide to Using Consumer Psychology for Seller’s Gain
Want to reveal the true power of behavioral pricing? The phenomenon can help establish a price that will improve key metrics by 25%. Find out how to do that and use behavioral pricing in the right manner further.
The idea of behavioral pricing is linked to buyers’ behavior, not sellers. It can show why people buy particular products and not others. Rooted in psychology, behavioral pricing is a direct way into the minds of consumers. Equipped with such knowledge, businesses can set prices that will meet the demand and boost profits simultaneously.
Here, our team collected the results of extensive research and synthesized a simple piece speaking about behavioral pricing and behavioral economics in simple terms. It will help you understand behavioral pricing and how to use it with particular instruments and technological advances.
The theoretical foundation for behavioral pricing
Behavioral pricing works with insights delivered from psychology. Namely, the strategy focuses on aspects driving consumer behavior. The key emphasis is put on understanding the entire process of customers making a decision to buy a product, from an initial urge to the final action of making a buy. Essentially, the theoretical foundation fo behavioral pricing correlates to the insights received from a psychological research on consumers.
With the growing number of data produced by people, there are greater possibilities for psychologists to get a better grasp on what motivates individuals in making particular decisions. The statistics dictate people create about 2.5 quintillion bytes of data every day. Qunatillion is 1 with 18 zeroes. Without a doubt, within such a massive amount of data, and with proper tools analysts can create a psychological profile of a consumer targeted by a seller.
It shows that behavioral pricing works with data points painting a decisive picture of how people make their purchasing decisions. However, as you might have noticed, working with such a massive amount of data can be extremely challenging. That is why modern behavioral pricing uses advanced software to deal with the data effectively. Yet, along with technological tools, understanding of behavioral pricing is unimaginable without behavioral economics.
The practical applications of behavioral economics
Behavioral economics is a broad and well-research area. There are many insights offered by the discipline idnicating how and why people behave in a certain manner. When understanding the idea of behavioral economics in simple terms, one should say that it is founded on the premise that people conduct purchasing decisions based on a range of triggers, many of which are irrational one. Even if people engage in irrational purchasing behaviors, they still try to find some objective reasons for their decisions. Such aspects represent the core of behavioral economics. It helps experts in the discipline to predict how economics shifts based on consumer psychology.
The foundation for behavioral economics was laid by the father of modern economics and the author of a groundbreaking work The Wealth of Nations – Adam Smith. He was the one who argued that people are driven by certain triggers determining their purchasing decisions. Couple hundred years later, behavioral economics is still relevant. Giants like Apple Inc. and Amazon use the tenets of behavioral economics on a daily basis.
Behavioral economics have been serving behavioral pricing for several hundred years. Within that time, the people using the phenomenon has worked out several key strategies that can make beahvioral pricing effective.
Available instruments for effective behavioral pricing
As it was mentioned above, behavioral pricing works best with certain instruments. These were worked out through trial and error and proved to work in the majority of cases.
- First, there is nudging. It means behavioral pricing a great instrument for directing consumers at a particular product. By setting an appealing price on a product a company wants to sell first, it will work in that direction. Nudging is a part of behavioral pricing that helps guide customers to particular products by using price as a beacon.
- Second, there is the “free” option. You might have noticed that companies often provide some additional products of services for free. For instance, if you buy something in a bulk, you receive some product or service for free. Such a strategy used in behavioral pricing boosts customer satisfaction from the purchase and create the preconditions for further purchase within the same company.
- Third, there is an endowment effect. The phenomenon suggests that people have a higher value placed on objects they own in comparison to same objects they does not own. The effect shows that there is a particular psychological or symbolic connection between a person and a purchase one intends to buy. Using such psychological instrument, companies can create or promote such connection to sell a product.
- Fourth, there are pricing anchors that can be used. These are used by companies like Apple Inc. When a businesses introduces a product for the first time, they set a high price. Later, the company lowers the price to create the impression of a good deal.
When using the power of endowment, price anchors, the “free” option, and nudging, behavioral pricing gains practical value. You can use this simple strategies to get unique results.
Behavioral pricing meets technological advances
Apparently, behavioral pricing benefits from tools that can help better understand consumer psychology. The future of behavioral economics lies in the ability to correlate technological advances with scinetific insights on human behavior. At the current moment, the coupling of behavioral pricing with technologies occurs through algorithms and software. These use artificial intelligence and machine learning to instruct machines to how to process vast amounts of data and provide insights into pricing strategies. For instance, there is dynamic pricing software. The tool helps users get a sense of particular market situation and turn the insights into recommendations on what prices to set in this situation.
It is crucial to understand that the future of behavioral pricing and behavioral economics is inseparable from technological advancements. One can expect that the more sophisticated technology tools and software becomes will be coupled with behavioral pricing, the more accurate the outcomes will be. Essentially, it will help boost profits and increase customer satisfaction at the same time.