Learn psychological pricing in 24 minutes

If you ever have the opportunity to price a product or a service, you'll have to answer a lot of questions. Questions like, should you use a premium price? Should you undercut competitors? Should you offer a discount code or a loyalty scheme? Should our price end in a nine or a zero? We've covered that one on that before. There is kind of no end to the amount of questions around pricing. You can infinitely tweak and tailor your price to optimize it. But that's not possible for most of us. Most of us don't have time to endlessly test our prices. So today, I'll help you answer eight questions. Questions like, should I position my product next to a higher priced alternative? Should I bundle multiple products? Should I compare my price to my competitors? And how can I make my discount seem better value? Today, with pricing expert Dr. Marcus Huzam and Karpeski, we'll answer eight pricing questions so you can either improve your price or at the very least. Identify the tactics, retailers and sellers use on you. All of that coming up. Many of you in marketing will know that moment when the strategy is sorted, the brief is done, everyone's nodding along, and then you realise someone actually has to make all of the content you've agreed on. And usually that someone is you, and usually it is needed by tomorrow. Now fortunately, there is software to help. Breeze Assistant lives inside HubSpot. It drafts campaign copy, blog post emails, all in your brand's tone of voice, and it's all grounded in actual customer data. With Breeze Assistant, you don't just create content, you create content that converts. Check out HubSpot.com, the agentic customer platform for growing businesses. Hello, and welcome to Nudge with me Phil Agnium. My guest today should be familiar to loyal listeners of the show. My name is Markus Wuzumann-Kopetski. I'm an expert in pricing a guest researcher at Fri University in Berlin. And the founder of the Price Management Institute. In his great book, The Handbook on the Psychology of Pricing, Markus answers some of the important questions behind pricing. Questions like, when showing your product to a customer, should you put a higher priced unrelated product nearby? Let me explain what I mean. Let's say you're a cafe and you're selling a cake for £3. Should you also, somewhere in the cafe, show that the art on the wall is priced at £50. For example, should you put a higher unrelated price somewhere near the cost of the cake? Yes, they should. And two reasons. First, they anchor a reasonable higher price. And they serve as a reference price for your current product. And the study that I always refer to is the one that gives me goose bumps. I get goose bumps for many studies, but this is in particular. And it was crazy. It was in the field, so to say. The researcher set up a booth by the sold CD. It was these days when they're still sold CDs. And some complicated auction and mechanism customers would reveal their true willingness to pay for the CD. However, next to this booth was another booth. And there was just a random, presumably random person selling t-shirts. And they priced t-shirt either at $20 or at $80. And they flipped it regularly. And whenever on this other booth was the $80 shirt, the villain is to pay for the CD increased. And vice versa. It was 20, it was lower. And this is a completely crazy, it was just a random number that does not make any difference but it still works. NUNES and Boatwright in this 2004 study found that when the nearby stand advertised the t-shirt for $80, people exhibited a higher willingness to pay for the CD. Marcus in his book writes how this experiment showed that incidental prices affect consumer price perception, even if those incidental prices are for unrelated products that customers unintentionally encounter. And I could imagine that something like this also happens in e-commerce. When you see the number of reviews, of course they have the connotation of many people buy it or they have a good average rating. But if you control for this, the pure high number of ratings might still influence the villainous to pay because it's just a high number. But why does all this work? Well, it's due to a very well documented psychological principle, the anchoring effect. Many of you will have heard about this before on the show, I'll give a recap for those who have heard about it before and a walkthrough for those who haven't. It's best to look at one of the original studies on this phenomenon and that study is from the 1970s by Tvertzky and Kahneman. They ran a really simple experiment. They got participants in a room and they asked them what percentage of African countries are in the UN. Nobody would really be able to know this off by heart, which is why it made a good question. Just before answering, participants had to spin a wheel and the wheel had numbers from 0 to 100. However, as always is the case in these experiments, the wheel was rigged and the wheel was rigged to land on either 10, so very low number or 65, quite a high number. Right after they span the wheel, they asked the important question, is the actual percentage of African countries in the UN higher or lower than the number you've just spun? After that, participants gave their best estimate and here's what happened. People who span a 10, well they guessed that just 25% of African countries were in the UN. Whereas those who span a 65, they guessed that 45% of African countries were in the UN. So 25% to 45%, with the exact same question but a dramatically different answer based on the anchor, the number from the wheel which as a reminder was totally random, pulled their answer in its direction. In 2012, Lich and Stein applied this finding to bar menus. He even listed the bar menu in alphabetical order, so listing the beers in alphabetical order, or started the menu with the highest priced item first, that would set an anchor. When the menu started with the most expensive item, so they saw that item first, revenue increased by 4%. So anchor your price with a high priced alternative. It doesn't even have to be a related product. Let's stick on the subject of anchoring. If I'm negotiating on a price, should my starting offer, my anchor, so to speak, should it be precise or should it be rounded? Pre-size numbers also carry a connotation. Our brains try to make sense of the world and try to disentangle what this might mean. And if you have a very precise price, the other person might think, hey, this must be calculated very precisely, and this must be just the right price. And the study that I refer to is in the real estate business. When they compare precise prices of houses versus wrong prices, and they compare the initial listing price to the finally paid price. And those houses that start with a precise price had a statistically significant higher selling price at the end. And I follow up study a couple of years ago, confirmed this. And that's really interesting. So if you make an offer, that is precise, the counter offer will deviate less from this initial offer compared to a round offer at the very beginning. So it makes a difference if somebody says, it's 10,000 and you probably go down to eight. No, I say eight. Or if you said 9,000, not a 37, you might not go drop down to eight, probably just died or something. This finding is from a 2008 paper titled, "Precision of the Anker Influences the amount of adjustment." They found that when negotiating over a house sale, buyers who saw a rounded price of say £800,000 would haggle more on average. They would get around 6% off the asking price in total. But if the seller asked for a precise price, if they listed it at say £799,800, the buyers would haggle far less. On average, they would haggle just 1.9% off the asking price. But there's a trade-off. The trade-off is that round prices or round offers, in this case, increase the likelihood of acceptance because they carry the connotation of "become to an end," something is closing. So in the first round, you have to make a pre-south counter offer. But if you feel like I was the right time to close it, you might have the final round counter offer to close the whole deal. So if you're keen to close the deal, use a rounded price. But if you're happy to negotiate and you have the time to negotiate, go precise. Marcus had one last anchoring study. It's another about selling a house, which is clearly a popular topic amongst researchers. Marcus. The house's anchoring effect is also really, really strong. So there are also countless studies on this. And they all refer to the following point. If you have a listing price, which is pretty much the dream price of the seller, and you create this documentation report about this house, and you keep all these objective information in there. But you just change the listing price from the appraisal value to a higher price or to lower price or keep it at the appraisal value, you give it to amateurs, but more interestingly also to experts. And if you give it to experts like reset brokers, and you ask them, "Hey, what is the really appraisal value?" And what you think is the final round counter offer. the friend price being paid, the initial listing price has statistically significant effect on what even experts say. So even when you sell houses start with a very high anchor. The anchoring effect doesn't just work on amateurs, it works on experts as well. All right, let's cover a different question. Say I work at a travel agents, I sell inclusive holidays and I know that my holidays are better value than my closest competitor. I know that my price is a cheaper for the same holiday. Should I tell my customers this? Should I say that we're cheaper than competitors? And if so, how do I do? Well, Marcus says I should compare my price to the competitors, but I should make the comparison as concrete as possible. The concept of concrete is when comparing your own prices to competitor prices refers to the concept of believability. For example, if you're having your advertisement, by the way, the advertisement works best if your customer is early in the customer journey and still decides to which store she or he goes instead of being already within a store, within a store, comparison to previous prices more effective. But if you compare to other retailers prices, you should not say, hey, this reading machine costs 40 with us, but 60 euro with any other G.I.Y. company. And any other G.I.Y. company doesn't have so much. So you need to be very concrete. And in this case, you name the concrete competitor where you found this price. And ideally, your price information is up to date with dynamic pricing. It could hurt your credibility. But if they have a price that is higher and probably they are locked in for this week because they have priced the promotional price and they advertise this price for this week, you're on the safe side. And in the study that I refer to, the retail and it was named was concretely spelled out, this helps to build the reference point of your competitor's prices if you back it up with a concrete name. Okay, let me explain. In this 2006 paper, three researchers in the Journal of Retailing asked subjects to imagine they were at home and evaluating an advertisement. The ads were identical in each scenario except for how they compared the price with the competitors. Some were shown a concrete comparison. So they would say our competitor, Circuit City, has a price of $349, whereas our price is $299. Circuit City was the name of the competitor in this scenario. So they were clearly pointing that competitor out. Whereas others saw a far less concrete variant in this ad it would just say, CNLs were for $349, our price $299. The research revealed that ads performed best if the queue is concrete. So for my imaginary travel agent, I shouldn't say CNLs were for £1,800, our price $1,600. I should say trailfinders all inclusive Norwegian cruise price is $1,800. Our price for the same thing is $1,600. Now let's move on to product bundles. Say I sell a bundle of services like all inclusive Norwegian cruise. For example, should I bundle everything together? Should I put a luggage entertainment food and drinks together? Or should I unbundle some elements? I asked Marcus. If you have two components that you put together, let's say you fly an airplane and you have this ticket and you have this entertainment package. And this entertainment package is in one case, it's just refreshments and sitcom and the other one would be six movie channels and a full service menu. So it's a really good second component. If you split it out, you make customers evaluate each of these components more closely. And if you outperform relative to the alternative offer, you draw more attention to this outstanding attribute. And if you debundle it, it becomes more salient. Although the total price remains the same. This example is from a real 2008 study in marketing science. The researchers ran an experiment and asked subjects to choose between the two options Marcus described. Results from this experiment showed that customers were more likely to choose the airline with the great entertainment package if it was split out from the product bundle rather than included. So if you have the same price for the bundle and for the split out components, splitting out the components in case one of these components is much, much better than an alternative offer, you should do it because for the same price they pay, they perceive a higher value. Let's do one more tip before the break. Imagine I sell soft drinks in multipax of six. How should I frame my promotions? Should I say on sale for 50 pence per can, so talking about the cost of the individual cans, or should I say on sale six for three pounds? It is more effective to give this discount on the bundle, like on the multipack to be more concrete. In a 1998 study in the Journal of Marketing Research, the three researchers found that when prices were expressed as multi-unit prices, so six soft drinks for three pounds, sales went up by 32% on average compared with the single unit prices. This is a bit surprising I've spoken in the past about how breaking down your price can make it more persuasive. So why is this the case? Custs don't go into the store and they just don't know how many to buy. And for example, instead of 50 cents for one unit, it's three euros or pounds or dollars for six units, the six units serve as an anchor for the quantity of units customers buy. And they anchor their buying decision on the six units to buy and that's why they buy more. We've covered a lot so far. Incidental high prices raise willingness to pay. Anchors shift perception even when the anchor is completely irrelevant. Start menus with expensive items to increase revenue. Precise prices reduce negotiation more than rounded numbers and framing promotions as multi-unit bundles will boost sales. But that is not all. Consider the break Marcus will explain why you should use a novel number for your discounts and how to increase your price without annoying all your customers. The podcast I'd like to recommend to you today after listening to today's episode of Nudge is success story hosted by Scott D. Clarion. It is brought to you by the HubSpot podcast network, the audio destination for business professionals. Success story features Q&A sessions with successful business leaders in marketing sales and it covers everything from big businesses to start-ups and entrepreneurship. His recent episode with Mark Manson is fantastic. Do not miss it. So go and listen to success story wherever you get your podcasts. Hello and welcome back. You are listening to Nudge with me Phil Agnew. Today we're covering psychological pricing tips. Now, say I've got a discount price. Should I present it in a textbook way, for example, save 40%. Or should I come up with a novel way to present that discount? I ask Marcus. The question is what is the novel discount in this study in this book? There are two frames of reference. In our Western forping experience, the frame is usually, hey, save 40%. But in other areas on this planet, for example, in Hong Kong, the normal reference would be pay 60% of the regular price. And if they switch the frame, like say 40% and they present it in Hong Kong and in the study, I think it's in the US, it's pay 60% of the regular price. It would be novel in the respective region. And what happens? This normal discount draws attention and makes us human beings think a bit more about this discount. As soon as we put more thoughts and attention on a deal, it increases in attractiveness and perceived savings and the intention to buy. And that actually was what happens. So novel discounts increased like the other two buy and people perceived the value they receive as much better. This is a 2006 study from Kim and Kramer. They ran the study in the US and in Hong Kong and they found that novel discount presentations attract customers and increase likelihood of purchase. For January sales, Western brands should say, "Page is 60%. For subscription products, Western brands shouldn't say get 30% off, they should say, pay only 70% for your first three months." Now this leads me onto the last tip of the day. Say you run a grocery store and you need to raise prices due to inflation. It's a problem that many brands are dealing with today. To increase your prices fairly, just enough to cover the higher supply costs and transport costs. But there's a problem. Customers don't naturally attribute these price rises to inflation. They attribute the price rises to you. In one study in 2003 in the Journal of Consumer Research, when a retailer raised prices purely in line with inflation, 30% of people still said the new price was too high. On average, they thought a fair price would be 18% lower than it actually needed to be. So what should the retailer do here? Well the researchers suggested that the retailer needed to be explicit. They said, "Don't just change the shelf label. They should add an additional bit of copy." They should say, "Due to increase supply and transport costs, we've had to adjust our prices." Here's Marcus explaining how this works. If subscription companies raise prices, they have actually two levers to pull first. please explain. the nation actually justification of the price increase. Like, cross increases are always other reasons that are perceived as the fairest across all customers. So if it costs increase, if you increase the price, everybody believes it's fair because the margin remains the same. Nobody takes advantage of you, vice versa. Second, what they could also do is they can make the link between the service and the price less salient. So they can actually break it. For example, if you have just to product attributes, like with ads and without ads and high definition and 4K. And now you introduce something in between like exclusive channels or you move to 8K or something different. And then with introducing new configurations, you change the prices a little bit. And ideally, you have prices that go up and prices that go down, for example, introducing ads or having like 10 minutes ads versus 1 minute ads or something like this. And then it's not so easy to discover whether the average price actually increased. Netflix did this, of course, as they increased the price of their base subscription. They also made a cheaper subscription that included ads. Why did they do this? Well, because it created a comparison point when Netflix introduced the cheaper ad tier, it changed how customers evaluated price increases. Instead of thinking Netflix have got more expensive, customers thought, or at least Netflix hoped they would think, well, there's a premium version and I'm choosing the cheap one. Now, I'm not sure customers actually feel this way. I don't think Netflix has done their price rises very well, but that was what they were aiming with with that change. Gosh, we've covered a lot today. We've covered studies that suggest you should anchor against a higher price alternative that you should use precise numbers when negotiating, that you should make your competitor comparisons as concrete as possible. You should unbundle stand out features in your product bundles. You should frame your discounts in novel ways and explain unavoidable price increases clearly and early. But Marcus actually wasn't done. He went on to give me three more really good bits of advice. He explained how to name your product in order to increase sales, how to describe your product to make it more alluring and a study that changed one word and made customers willing to pay 81% more for a glass of lemonade. Marcus and I have made all of those bonus tips available in today's bonus episode. To listen to the bonus episode and as always, our bonus episodes are completely free. All you have to do is click the link in the show notes of today's episode, enter your email address and you'll be taken straight to that bonus show. If you are already a nudging newsletter subscriber, then you already have the link to the bonus episode. Click on the email that I sent you today or whenever this episode went live and click the link in the PS. This bonus episode is produced just like a normal episode. It is fully sighted, I think it's pretty good. So please do go and access it, click the link in the show notes and you can listen to it right after this. That is all for today folks. Thank you so much for listening. I'm fairly certain that if you would like today's episode, you will love Marcus's book. There is a link to the book in the show notes. If you would like a copy, it is a cracking book. It has helped me with my own pricing. And if this has sparked a few ideas for you, you might be wondering how you can apply all of this to your own pricing. And that is where the Nudge Vaults comes in. The Nudge Vaults is my collection of over 484 behavioral sites inside drawn from hundreds of research papers all focused on practical business applications. And inside you will find at the time of recording this, at least, 79 separate insights dedicated purely to pricing. So instead of guessing how to use all of the ideas we've spoken about today, you can systematically apply them to your own product, offer or negotiation. To access your first 50 insights for free, just go to nudgepodcast.com and click vaults in the menu. That is all for this week, folks. Thank you for listening. I'll be back next Monday with another episode of Nudge. Cheers.