Commerce: Using psychological bias for better pricing
Imagine you are close to closing a deal that involves two distinct service projects to the same customer. The customer wants to do the projects, but you still have to agree on pricing before you can close the deal. The value proposition for the services has been accepted, the prospect is excited for the project to begin, and the only discussion item left is strictly about price.
Both services will need to be purchased for the project to begin. You are offering Service A for $80,000 and Service B for $10,000, a total asking price of $90,000 for the project. The buyer has said that she won’t accept your combined $90,000 asking price, but you think she might pay up to $85,000 for both services. What’s the best way to present your new offer to the buyer? Do you apply the discount to Service A, Service B or discount both equally to reach the $85,000 level?
Many people have a psychological bias to avoid losses. This bias affects the behavior of both buyers and sellers. Because of the common desire to avoid losses, the way you frame a discount on a service is very important. Being aware of common psychological bias can make you a better sales person if you use it properly and don’t let it affect how you view the way you discount. For example, you are about to buy a jacket for $125 and a toaster for $15 for a total cost of $140. You are told that the toaster is selling at a $5 discount at a store located 20 minutes away. Do you drive the 20 minutes to receive the discount on the toaster? Many people would because they don’t want to “lose out on the deal.”
What if the next time, the jacket sells for $15 and the toaster for $125, for the same total cost of $140? You are told this time that the toaster is selling at a $5 discount at a store located 20 minutes away. Do you drive the 20 minutes to get the discount on the toaster? Even though both situations have the same economic profit t return ($5 discount on the toaster to travel 20 minutes), they differ in that the toaster sells for $15 in Version 1 and sells for $125 in the second scenario.
On a purely economic basis, the results to the buyers (those who said that they would drive the 20 minutes for the $5 discount) should have been the same. But the actual results generally result in a very different story. Usually, a lot more people say that they would travel the 20 minutes to save the $5 when the toaster costs $15 but not when it costs $125.
Why are people willing to drive across town to save money on a small purchase but won’t drive or go out of their way for the same savings on a much larger purchase? The reason has to do with how people think about or frame their choices. On a percentage basis, five dollars is a significant savings (33 percent) on a $15 purchase, but it is not nearly as significant (4 percent) on one costing $125. In both versions the absolute discount was identical on a purely economic basis, but not based on the way people often view their purchase decisions psychologically.
So with that driving across town exercise in mind, how do you think you should discount your services to get the best chance of having the buyer accepting your proposal? Do you think the best way is to discount your services to the buyer by reducing the price of the $80,000 Service A by $5,000 (a 6.25 percent discount); discount Service B by $5,000 (a 50 percent discount) or discount them both equally? If you keep in mind the concept of psychological framing, the best choice would probably be to keep Service A priced at $80,000 and to discount Service B by the entire $5,000 amount.
Using this psychological framing approach makes the discount given appear much larger in the customer’s mind. This perceived larger discount increases your chances of getting acceptance on both deals, even though the absolute discount offered would be the same as offering $5,000 off the higher priced service, or splitting the discount across both services.
When you are pricing products or services, keep in mind that the way you present or frame your offerings can be very powerful. Rather than just automatically taking a flat amount off, the way you frame the discount can have an impact on how it is viewed and perhaps even affect the quality perception of what you are delivering. Effective pricing of your services and products should take both economic benefits and psychological framing into account.
About the author: Scott Francis is the president of Topline Development marketing consulting and co-founder of Snap Lab Media™, the marketer of SnapTRAC™ software as a service for advertising agencies and larger enterprises that rapidly builds mobile websites, generates QR codes and provides analytics without the need for programmers. Visit SnapLabmedia.com, call (920) 722-1317 or email Scott at Scott@ SnapLabMedia.com.