Following her incredibly popular sold-out Consumer Psychology Workshops at the 2018 Spektrix Conference, Debbie Richards, Director of Baker Richards, shares some of her experience for using insights from the field of behavioural economics to inform your sales strategy.
It was great to share some of Baker Richards’ thinking around consumer psychology and pricing with those of you at Spektrix Conference. Here are some key takeaways from my session for those who weren’t able to make it - and some reminders for those who did!
1. Price doesn’t operate in isolation.
For someone to buy a ticket, the price being charged must be balanced by the value being offered. If a customer believes something is ‘not worth’ the price being charged then they won’t purchase. But most of us spend much more time thinking about price than we do thinking about value. For example, when something’s not selling there is often pressure to start discounting (i.e. to change the price). Instead, think about how the value of what is on offer could be changed or increased.
2. Perceptions of price are unique to each person for each event.
Perceptions of price are affected by many factors. These include someone’s frequency of attendance and motivation for attending a particular event such as whether it is a special occasion. However, you can influence these perceptions (see “Never forget the importance of comparison” below).
3. Price is often used as a ‘proxy’ for value.
Price can be particularly important for new customers who have little other information to guide their purchase decision. But perhaps not in the way you might think! People assume that a higher price is justified by higher corresponding value. They also assume that cheap or low-priced products are inferior. This means that price choice is often counter-intuitive. Many people think the answer to getting new customers is to use cheap prices to reduce the risk of the purchase. However, in our work we typically find cheap prices are disproportionately purchased by frequent attenders. New or infrequent attenders are more likely to opt for expensive tickets to be sure of having a good experience. (Note that this is a different issue from having accessible prices for people with low disposable income).
4. Price differentiation is the key to an effective pricing strategy.
Offering a range of prices (and getting this right) generates extra income and sales. A higher price maximises income from those willing and able to pay more. Cheaper prices mean there is no loss of volume from those who place a lower value on the event. There are many different ways to justify differences in price - the key is to find the right pricing strategy for you in the context of your objectives.
5. To round or not to round?
How do your prices relate to price ‘thresholds’ (the round numbers like £20)? Everyone knows instinctively that £20.01 is not a ‘good’ price. However, a range of factors including your business model, brand and patterns of demand may affect how you should price against thresholds. Should you price under a threshold? Psychologically starting a price with £19 feels less expensive than £20. At discount retailers like Aldi and Lidl you’ll find bottles of gin priced at £19.99. What about pricing on a threshold? For branded gins at Marks & Spencer or Waitrose, you’re more likely to see a rounded price. And, in some cases, you might choose to price just over a threshold. For example, this can encourage customers to make a ‘round-up’ donation.
6. Beware of indiscriminate discounting.
If your customers hold off booking because they have learned there are often last-minute discounts, then you have an indiscriminate discounting problem that needs to be fixed! However, when used strategically, discounting is a powerful pricing tool. This is because it implies you get more for less. A £20 ticket for £10 is ‘better’ than a £10 ticket because the customer assumes the ticket is ‘worth’ £20. The key is making sure that your discounting strategy is working for you in helping you achieve your objectives. For a great example of strategic discounting see English National Opera's Secret Seats.
7. How you present prices matters.
As a general rule (there are exceptions), prices should be presented top-down (i.e. £40-£10), not bottom-up (£10-£40). This is because customers place undue weight on the first information they receive. By starting with the highest price, you communicate the value of the experience. Cheaper prices are then compared against this higher price (known as an ‘anchor price’ which establishes the value of the event). As a result, the cheaper price comparatively seems like a better deal.
8. Remember the importance of comparison.
In consumer psychology, offering customers the ability to make comparisons is important. People find it hard to judge things in isolation - we make decisions by comparing relative differences. For example, we might find it hard to decide if £60 for a flight on a Thursday evening is good value. But when we see that the same flight on Friday morning is £125, this influences our perception that £60 is a ‘good’ price. For this reason, revenue management is especially effective when price/value trade-offs are made explicit to the customer. In other words, in the same way that airlines enable you to compare different prices for different flights, make it clear to customers what they have to do to get a deal.
Debbie Richards is Director of Baker Richards - www.baker-richards.com