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Pricing and price visualisation plays a crucial role in impacting consumer choices through the intricate web of psychology. Understanding psychological pricing can give you an edge in marketing and pricing strategy. It's all about understanding consumer psychology to make your offerings irresistible, rather than just the numbers on a price tag. As we continue our series on scientifically supported principles, in this part of the series, we’ll discuss Prospect Theory and Loss Aversion.

The intersection of behavioral economics and marketing has created some of the most ingenious techniques for capturing consumer attention and inciting purchasing action. At the forefront of this technique is Prospect Theory – a concept so potent that its creators, Daniel Kahneman and Amos Tversky, altered fundamental assumptions about human decision-making and rewrote the rules for 21st-century marketers.

What is prospect theory?

Prospect theory is all about how we, as human beings, perceive value. It underscores the simple reality that people are not always rational, and economic decisions are not always made based on final outcomes of maximal utility. Instead, losses and gains are immediate, causing emotional reactions that can transform the landscape of what's considered 'valuable.'

Prospect Theory proposes that individuals tend to value losses and gains differently. This theory, also known as Loss Aversion, suggests that people tend to make decisions based on potential gains rather than potential losses. The foundation of this theory lies in two key principles: Loss Aversion (the feeling of loss being stronger than the pleasure of an equivalent gain) and the importance of Framing (the impact of how options are presented).

Understanding this theory is the first step in leveraging it to create pricing (and communication) strategies that appeal to the deeper workings of the human psyche, but it's just the beginning. As we continue our series on psychological pricing techniques, we're going to explore in-depth how you can apply Prospect Theory to revamp your pricing communication and gain a competitive edge in the market.

How to apply prospect theory when messaging your prices?

How many times have you seen a banner flash 'Only 5 left!' and it's those last few that seal the deal for you? This strategy is not just a coincidence but a clever use of scarcity to trigger loss aversion. The fear of missing out (aka FOMO) is a powerful psychological motivator, compelling consumers to act quickly lest they 'lose' an advantage.

Or let’s take a warranty as an example to make things even clearer. Money-back guarantees, free trial periods, and satisfaction assurances not only reframe the purchase as an opportunity (the possibility of extra gain) - but can also drastically reduce a potential loss (i.e. being unsatisfied with the purchased product, seen as ‘money lost’) in consumers’ mind.  

To implement the Loss Aversion principle in your pricing, consider these messaging approaches:

1. Arrange prices strategically: When you arrange your products from highest to lowest price (e.g. as standard sorting in the web shop), customers are more likely to opt for the pricier options that are presented at the start. This behavior highlights how people gravitate towards avoiding losses, considering choice as a loss, and feeling the impact of loss.  
   By showcasing the more expensive items at the top of the list, customers perceive a decline in quality as they scroll down or look further onto the shelf, ultimately choosing the initially presented, more expensive selections as the 'safe choice'. So, think twice before prioritizing your lowest-priced items by default just to create an image of being an affordable brand.

2. Strategic timing for discounts: Offering discounts towards the end of the month can significantly boost the effectiveness of marketing campaigns. Research shows that customers are more financially capable at the beginning of the month, making it an ideal time for promotional, non-discount activities. Discounts, conversely, are more positively received towards the end of the month as individuals prioritize saving money during this period. This timing aligns with the 'Bottom Dollar Effect' in behavioral economics, where expenses feel more burdensome towards the month's end.  
   So, to link this with the Loss Aversion theory: the pain of losing extra dollars at the end of the month is harder than losing them at the beginning of the month. Making price discounts many people’s best friend at the end of the month.

3. Implementing a steadily decreasing discounts (SDD) pricing strategy:  
   The steadily decreasing discounts (SDD) pricing strategy engages consumers in a psychological game. By gradually reducing discounts (instead of keeping them the same or increasing them!), customers are driven by a fear of missing out, anticipating future price increases. This fear prompts them to make purchases sooner (i.e. stimulating impulse buying) to avoid higher prices later, again leveraging the principles of loss aversion and scarcity.

In all these cases, the key is to gently guide the customer towards the feeling of 'missing out' on a product or a deal. This involves highlighting the potential 'loss' that the customer might experience by not making a purchase decision immediately.  

The pitfall of overusing loss aversion strategies

The strategic use of loss aversion can be a powerful tool for marketers, but relying too heavily on playing up potential losses can diverge into manipulative territory, reducing trust in your brand and sacrificing long-term customer loyalty.

The ultimate goal shouldn’t be manipulation of your customers’ emotions but aligning with their needs and expectations in a way that builds trust and nurtures meaningful relationships.  

In conclusion, tapping into loss aversion through the lens of prospect theory is a potent method on its own, however by combining this approach with a focus on building strong customer relationships, businesses can create a winning strategy that drives long-term success.

Using psychological communication techniques to maximize your sales is one thing, but setting the right price at the base, considering your brand strength and customer expectations, is something entirely different. Both are important.  

If you're looking to take your business to the next level, you need to nail your pricing strategy. At boobook, we understand this and are committed to helping you navigate the complexities of pricing. Our approach combines robust consumer-based data analysis topped with insights from behavioural economics to create pricing strategies that align with your customers' decision-making processes.

Don’t miss our upcoming final article in this series on psychological pricing techniques, delving into cognitive biases and decoy methods with explanatory examples.

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Our Insights Director, Eva Vandenberge recently attended the annual ESOMAR Congress and in this interview, she shares her insights.

This annual event by the global association for market research and insights offers researchers and consultants from all over the world the chance to connect and discover the latest trends and innovations in their industry. More than 1,000 people from 78 countries attended this year’s congress in Athens and boobook’s Insights Director, Eva Vandenberge, was one of them. With over 135 speakers, choosing which sessions to attend was a daunting task, but judging by the insights and reflections she shares with you today, she mastered it gracefully.

It was not the first time you attended the congress. What keeps you coming back?

“Nowhere else do you get such a comprehensive image of the current state of affairs in market research and a glimpse into its future. The presentations from the industry's top minds are inspiring, and the informal conversations with researchers from all over the world are fascinating. While listening to their insights, success stories and challenges I get so many new ideas to help our clients even better with their business questions. The industry has been rapidly evolving since the arrival of AI. It is important to keep track of the developments and discover whether new technologies and tools can help us gain better and more reliable customer insights.”

Before we dive deeper into the AI topic: were there any activities you particularly enjoyed?

“I appreciated that ESOMAR organised the YES Awards: a global competition that allows young research professionals to share their - often refreshing - ideas with the public. From all the pitches submitted, a jury selected ten who got to share their 60-second pitch at the congress. Via live voting, the audience selected three finalists who could give their full presentation. The winning presentations were on cultural bias, regression analysis using AI and data collection via WhatsApp in emerging countries. As a young researcher, it is quite an honour to get the chance to share your findings with such an audience.”

“There were no Belgian candidates this year, unfortunately, but I am also a board member of the Belgian Research Federation CUBE, and at the CUBExEsomar event that will take place on 24 October, several young researchers will share their take on the future of research and insights. Hopefully, this will lead to some interesting pitches by young Belgian research talent next year.”  

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Did you discover ideas that you would like to implement yourself?

“Absolutely. One of the YES award winners talked about cultural response bias, something we also struggle with. Certain cultures have difficulty sharing negative feedback and judge everything so positively that we barely detect differences between groups and brands in our analyses, while in reality, of course, there are. In one of our studies, ran in India, we corrected for this during the data analyses, but we are now inspired to tackle this issue by asking different questions. Questions about behaviour instead of attitudes, for example, or questions with neutral rather than numerical scales, so there is no longer a better or worse option. I had a couple of interesting discussions about the topic and will certainly put the new insights to the test.”

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AI was undoubtedly an important topic in Athens. Is it already reshaping the industry?

“AI was a hot topic indeed. Many AI developments and solutions were showcased. And several speakers discussed the potential, but also possible pitfalls of synthetic data, meaning data that has been artificially created as opposed to collected from humans. This could be used in analysis in the same way human data is used. Filling in missing data is nothing new; statisticians have been maximising samples via imputations for a long time. It might be as simple as filling in the occasional empty response with ‘don't know’ or mean scores based on the rest of the sample. Other times more complex models are used to predict those missing values, based on respondents' other answers, and what the rest of the sample says. Using AI, we can now do much more than fill in the occasional missing value.”

What is already possible with synthetic data today?

“As described, synthetic data might be used to complete missing answers, but you can also generate additional cases. If, for example, your study lacks young men from a specific region, you can generate more of them to boost your sample. You could even generate synthetic respondents; virtual participants that provide answers to a survey just like human participants would, and whose answers you can analyse as you normally would. It sounds futuristic, but companies are already experimenting with it, although there is still a lack of trust. Based on what we have seen and tested ourselves, we believe this distrust is justified and we would not recommend making business decisions based on synthetic data at this point.”

It doesn’t look like human respondents will be obsolete any time soon?

“The future will tell. The presented cases show that synthetic respondents can generate reliable results if closed behavioural questions are used. But virtual respondents can’t tell you how they feel, and they can’t answer open-ended questions well. We are curious to see if and how this will evolve.”

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What are some of your own experiences with using AI?

“At boobook, we have done several test on how AI would handle a segmentation study, for instance. When comparing the segments AI came up with the ones we determined, some overlapped but others didn’t. As long as results remain unreliable, real data, captured from real people, remains a must. But, of course, we keep track of the new developments and will continue running tests.”

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What would you like to put to the test in the short term?

“There is quite some enthusiasm about using synthetic cases to map hard-to-reach groups, such as B2B audiences. Synthetic boosters in under-sampled groups would increase the reliability of the study. We have our doubts because it seems unlikely that this data would indeed be reliable. How can it be, when your research pool is small to begin with? But the proof of the pudding is in the eating, so we plan to run a test and find out for ourselves if it could be useful.”

“What was also discussed at the congress, and I very much agree with, is that you should mainly use AI when a human being can’t add value. If using AI to script and translate questionnaires means resources are freed to generate better insights, we can only encourage it. But in terms of data collection and insight generation, we still need actual respondents and human researchers to bring brands closer to their consumers.”

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Which speaker left a lasting impression?

“It is not easy to choose just one, but I will not soon forget the closing keynote by Vivienne Ming, an incredibly intelligent woman who has travelled an unlikely path and achieved so much. She has founded several start-ups and solving seemingly unsolvable problems is her life's goal. She believes AI can be truly transformational and has developed several AI tools, but she is most passionate about maximising our human potential. To do so we need to create open cultures and safe spaces where people dare to experiment. Most of our initial ideas are wrong she claimed, so it is only through failing that we will stumble upon the great ones that can potentially change the world. It left me inspired and proud to be part of the boobook family, where we are all encouraged to share our ideas and get the chance to pursue them.”

“Especially now that there are so many new developments, companies must give their employees room to try new things. If you want to grow you need to accept that you will also fail sometimes. Sharing experiences and ideas is more important than ever, so I would leave you with a warm invitation to connect with us if you want to explore the possibilities of AI together!”

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How can businesses achieve unparalleled growth and maximise profitability in today's competitive landscape? At boobook, the answer lies in our data-powered strategic consulting, anchored firmly on four interconnected pillars: brand, product, pricing, and customer/consumer. By understanding and leveraging these fundamental elements, we guide businesses toward excellence and sustainable growth.

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In the previous weeks, we discussed the connection between brand, product and pricing strategy. As we close our "Pricing 360" series, we still have one crucial topic to cover: customers/consumers. When it comes to price, product or brand decisions, it's essential to focus on the individuals or companies who buy your products or services – your customers. Your targeted customers are a crucial aspect of your strategy because they influence how you market your product and are excellent guides when determining which products to put on the market and at what price.  

To truly cater to your customers and attract new ones, you need to understand who they are, how they behave, how they feel about certain things, what motivates them, their sensitivity to price (changes), and their purchasing habits.  

There are three approaches to get these insights: customer segmentation, path to purchase analysis (P2P), and price sensitivity measurement.  At boobook, these approaches are not exclusive but rather interconnected, each informing and shaping the other to optimise the product and pricing strategy. In this last article of our 360-pricing series, we'll explore these three methods to help you learn how to listen and understand your customers better so you can craft more effective pricing strategies.  

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Understanding your target audience and navigating the customer journey  

Customer segmentation is a powerful tool for businesses that want to identify and understand customer groups with diverse preferences and purchasing behaviours.    

We all know that the average customer does not exist. There are different types of customers in terms of age/gender, size of business, type of business, purchasing behaviour, as well as what drives their purchase behaviour, i.e. the why behind the behaviour. The latter is key to optimising the product offer and its pricing, as willingness to pay is very much linked to the type of customer you are.  

Tailoring your pricing strategy to segments can boost customer satisfaction, brand loyalty, acquisition, and, hence, business performance. A segmentation analysis also encompasses the evaluation of market segment size, providing a solid foundation for your upcoming business cases when introducing new products or potentially even sub-brands. This approach not only aids in understanding the potential reach of your offerings but also offers valuable insights into the most effective strategies for their promotion.  

There are several methods to identify customer segments. Most of them are related to analysing market research data, which collects data around the who, what and why of the (prospect) customer.  

You might have heard of methodologies such as k-means, hierarchical clustering, latent class and cluster ensemble. Each aims to find segments of people that differ in key characteristics. The most suitable methodology depends on the data as well as on the outcome. At boobook, we use the method that results in segments that are most actionable for the business question.

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Discover how Pernod Ricard decoded the travellers’ buying behaviour  

‍The path to purchase analysis covers the entire customer journey, from the moment a need is recognised to the point of product usage. The way we shop and buy today has become non-linear and is changing into omnichannel buying retail. As a result, throughout the customer journey, we now have various ways of shopping, which significantly impacts our decision-making process.    

Analysing this path is crucial to impact customer decisions and perceptions. By identifying different triggers and touchpoints along the journey, you can pinpoint the "moments of truth" most influential in leading to conversions. It's important to note that different customer segments may have distinct behaviours and are influenced by different touchpoints – and this is precisely where segmentation becomes valuable.  

Conducting a comprehensive study on the path-to-purchase can bring key insights, such as understanding the factors that trigger a customer's need, the specific channels and stores they prefer for buying, the duration of their decision-making process, and how to optimise in-store displays and online activations.    

Additionally, this approach can also shed light on how to create the most suitable pricing strategies. However, pricing may not always be the most critical element. It is crucial to understand what customers prioritise before price. Could it be recommendations from peers, friends and family? Perhaps it's catching the brand's advertisement while surfing online? By exploring these factors, you can tailor your approach, so your brand resonates with customers before they even consider the price.  

Want to learn more about the path to purchase? Learn more about how we helped Pernod Ricard UK understand their customers' path to purchase.  

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Analysing consumer behaviour through willingness to pay and price sensitivity  

Willingness to pay refers to how attractive a product or brand is at a specific price level. In other words, how many customers will consider your product given a certain price?  Price sensitivity goes one step further. It refers to how changes in prices impact consumer buying behaviour. So, how much will a price increase or decrease impact customer choice? The more price-sensitive your brand is, the more careful you have to be with price increases. Conversely, dropping the price of highly price-sensitive brands would be the way to go if you are after boosting volume. Though also realise that increasing again afterwards might not be easy. Temporary promotions could be a solution to this.  

Factors like brand image, brand equity, economic conditions, competition, brand loyalty, and ability to pay can affect consumers' price sensitivity. Researching and tracking price sensitivity, together with understanding brand image, helps businesses understand buying behaviour, adapt to market trends, optimise the price strategy and maintain a competitive edge.    

To measure price sensitivity, businesses can use quantitative consumer-research-based pricing methods like the Van Westendorf Price Sensitivity Meter, the Gabor-Granger Method, or a Conjoint Analysis. These methods provide insights into customer (pricing) preferences and help determine optimal pricing.  

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Discover how Center Parcs Europe optimised revenue management and increased profits

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Closing the loop  

Pricing is more than numbers; it's a language that communicates brand equity, product proposition value, quality, features, key customer groups, exclusivity, etc.  

Setting the right price for your product or service demands a strategic interplay of customer needs, perception and psychology, market dynamics and data analytics. By doing so, you can position yourself as a leader in your industry, resonate with customers, and drive sustainable growth.  

As we move away from traditional price-setting models, such as solely relying on cost-plus methods, embracing the dynamic realm of modern economics is essential. Your pricing strategy should be a continuous conversation with customers, exchanging value and expectations. Learning, adapting, and refining your pricing strategy through data-driven insights will help you stay ahead and build a thriving customer ecosystem.  

If you want to learn more about optimising your pricing, contact us at info@boobook.world!