The psychology of prices

For a company, prices act as a major lever on earnings. For the custo­mer, the price list is decisive in how he makes his purchase decis­ion — or not. The price list thus beco­mes one of the most important elements in the purchase decis­ion process. Many compa­nies limit their pricing far too much to price points. A lot of effort is put into trying to answer ques­ti­ons like “Can I sell my product for 130.- or for 140.- Euro?”. Yet pricing is about much more than setting price points.

In my under­stan­ding, a price list, which includes an indi­vi­dual offer, is a commu­ni­ca­tion medium and an important link between custo­mers and suppli­ers. A good price list leads to a dialo­gue based on part­ner­ship. It gives the custo­mer an orien­ta­tion and explains the products and services offe­red in an easily under­stan­da­ble way. A good price list offers the custo­mer choices and supports him in selec­ting an offer that suits him by bund­ling the products and services. The provi­der under­stands the needs and prefe­ren­ces of its custo­mers even better through a well-cons­truc­ted price list. He can talk about his services and the crea­ted bene­fits by means of the price list. He attracts new custo­mers with an entry-level offer, and then sells them higher-value offers in a later phase. By precis­ely offe­ring opti­ons and add-ons, it gene­ra­tes attrac­tive addi­tio­nal earnings. All this shows that a price list or quota­tion is an effec­tive tool for an inten­sive exch­ange with custo­mers about the services and their benefits.

The most important thing in pricing is a good under­stan­ding of the customer’s needs and the bene­fits and value crea­ted for them. This under­stan­ding is the basis of price diffe­ren­tia­tion. Price diffe­ren­tia­tion invol­ves using product vari­ants to address diffe­rent custo­mer needs. In this way, you not only reach a broad spec­trum of custo­mer segments, but also increase their willing­ness to pay at the same time. Consider, for exam­ple, the Star­bucks offe­ring. Product vari­ants such as espresso, cappuc­cino or cara­mel frap­puc­cino address diffe­rent custo­mer segments and increase their willing­ness to pay. An espresso is sold for 2.49 euros and a cara­mel Frap­pu­cuc­cino for 6.49 euros.

Price diffe­ren­tia­tion has another major advan­tage: it enables the use of psycho­lo­gi­cal price levers. These are based on irra­tio­nal psycho­lo­gi­cal proces­ses that addi­tio­nally stimu­late custo­mers’ willing­ness to pay. These proces­ses include, for exam­ple, “anchor prices”: at the moment when the custo­mer percei­ves a high price for a high-value product vari­ant, the prices of the product vari­ants below appear lower in his percep­tion. Another exam­ple is the “compro­mise effect.” Many custo­mers perceive the product vari­ant in the middle as the best compro­mise between price and perfor­mance and ther­e­fore choose it.

We recom­mend an agile and value-based process of pricing to our clients. In the first itera­tion, you struc­ture your custo­mer segments, describe your products and services, analyze your costs, the market and compe­ti­tors, and define your pricing stra­tegy. This invol­ves conside­ring how to meaningfully bundle or unbundle your products and services and how to design possi­ble product variants.

Then you choose the best price metrics, e.g. per piece or per user. At the end of the itera­tion, one sets the price points. Here we usually recom­mend a heuristic approach to our custo­mers. This is deri­ved from the selec­ted pricing stra­tegy, is based on a struc­tu­red value analy­sis and draws on histo­ri­cal expe­ri­ence. The goal of the first itera­tion of pricing is to design a price list — a “Mini­mal Viable Pricing Model”, so to speak. This design is then conti­nuously exten­ded, refi­ned and vali­da­ted in further itera­ti­ons. At the end of the process is a go-live pricing model. But even after this pricing model has been intro­du­ced to the market, it is worth moni­to­ring and deve­lo­ping it further. Rese­arch shows that compa­nies that conti­nuously opti­mize their pricing models are more successful than those that do not do so at all or do so only irregularly.

About Chris­tian Wirth

As mana­ging direc­tor and foun­der of Opti­mal Price GmbH, Chris­tian has been support­ing compa­nies of all sizes and from all indus­tries in value-based pricing since 2014.

He specia­li­zes in pricing SaaS solu­ti­ons and inno­va­tive, tech­ni­cally advan­ced products and services. The MUTUVAL solu­tion he deve­lo­ped features a compre­hen­sive approach, a value-based metho­do­logy and an agile pricing jour­ney. He has more than 20 years of expe­ri­ence with subscrip­tion and usage-based busi­ness and pricing models. Its custo­mers include the tele­com, auto­mo­tive and finan­cial indus­tries, Swiss­com AG, Merce­des-Benz AG, MCC smart GmbH and Swiss Bankers Prepaid Services AG.

christian.wirth@optimalprice.com