Effective pricing methods that maximise profit

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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Pricing strategies are pivotal in shaping, understanding, and predicting consumer purchasing decisions. In particular, psychological pricing communication techniques can have significant influence, tapping into the subconscious parts of consumer behaviour.  

Our previous article discussed the cognitive association technique in psychological pricing strategy. In this article, we’ll discuss the power of the attribute substitution theory in pricing.

What is attribute substitution?

Attribute substitution is a cognitive process that occurs when faced with a mentally complex decision. Instead of grappling with the complexity, our brain substitutes this decision with an easier-to-perform task. This process underlies several cognitive biases and has a significant impact on consumer behavior.

For example, when shoppers are considering a complicated purchase, they often ignore technical and mentally challenging details, such as emission figures for a car. Instead, they make their decision - usually unconsciously - based on a simpler aspect, like the color of the car.  

So, when we think about how we make a purchasing decision, attribute substitution uses intuition to influence how we perceive value and how much we're willing to pay. By understanding the power of substitution as a psychological pricing technique, we can gain profound insights into consumer decision-making processes.

How to apply attribute substitution?

As mentioned above, shoppers crave simplicity above everything when making purchasing decisions (in fact, this craving for simplicity applies to all aspects in life for most people).  
Brands, products but also prices that are easier to think about and mentally process, tend to be more appealing. So, to attract your customers, the magic formula should be to keep it as simple as possible – and this applies first and foremost to your prices.  

Here are a few examples of how you can apply attribute substitution in your pricing strategy and communication:  

1. Use rounded prices for emotional purchases: Rounded numbers are easy to process, making them ideal for emotional products like artwork or beauty products. Specific numbers, on the other hand, work better for rational purchases that appeal to the logical brain.

2. Start with a high, exact price for negotiable products: Mentioning the exact price discourages significant deviations in heavy negotiation. Why? Because it's harder for the brain to jump from an exact number to a considerably lower one. This technique appeals to our primal brain, which prefers rounded numbers. Also, an exact (high) price more strongly communicates the idea: ‘This is the price, and you have to take it or leave it’.
   
   

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3. Offer discounts on bundled products: By bundling products, customers find it difficult to associate a specific value or price with each item. They get an interesting price for two (or more) products or services combined, making it impossible to allocate a specific cost to one of the items. This reduces the perceived pain of purchasing this one exact item, so customers never know how much they exactly paid for each item. This simplifies the decision-making process and reduces the perceived pain of purchase.

4. Set small price differences between similar products: Offering the same prices for similar or identical products can make it challenging for consumers to choose between them, giving them stress of choice. Which one is the way to go if they cost the same? By setting small price differences (and one product serving as a price anchor, a reference point), consumers can compare, making the decision easier. Even if most consumers choose the cheapest option, it still generates more revenue compared to when customers can't choose and buy nothing.

5. Provide a reason for the discount: This technique is based on the scarcity principle – which we’ll cover in the following article - in behavioral economics.  
   Explaining the discount adds an extra layer of temporality and urgency. It emphasizes that the discount is temporary and encourages people to buy now to avoid missing out.  
   Showing the reason behind the discount also provides an explanation and context to the consumer. When consumers (every human being actually), receive a reasoning for something (even if the reason doesn’t make that much sense…), this is always better accepted and faster processed. It instantly makes it an ‘easy task’ in consumers’ mind’, stimulating in turn the purchase behaviour.

6. Use easy-to-process discounts: Offer discount percentages that are easy to calculate and use round numbers whenever possible. Consumers are more likely to respond positively to easy-to-process discounts because they avoid exact calculations, tapping into our primal emotion of happiness.

7. Pull the safety/security card: People have a primal need for safety, and low probabilities are weighted more heavily. Highlighting the low probability of a negative outcome can make customers more willing to pay extra for the perceived increase in safety or security. For example, when marketing a premium antivirus software feature, there are two ways to present its effectiveness:

• "This upgrade increases your device's protection against viruses from 95% to 99%."

• "This upgrade reduces your device's risk of virus infection from 5% to 1%."

While both statements describe the same 4% improvement, the second approach is often more compelling to consumers. It frames the benefit as a five-fold reduction in risk (from 5% to 1%), which creates a stronger perceived value!  
Interestingly, this perception persists even though the absolute risk was already low, and the actual impact on user experience may be minimal. This example illustrates how framing and cognitive biases can significantly influence consumer decision-making, even when the underlying facts remain the same.

Conclusion

It’s clear that well-thought pricing communication techniques that make use of the substitution theory can influence how consumers perceive the value, quality, and scarcity of products. However, as with other psychological tactics, this technique might raise ethical concerns about transparency. That is why businesses must use these techniques responsibly to ensure ethical standards and consumer interests in the marketplace.

As technology advances and consumer preferences change, the use of psychological pricing techniques will continue to take other formats and appear on other channels. In the future, researchers may explore the intersection of neuroscience, behavioural economics, and marketing to better understand how the brain responds to pricing strategies. By understanding how substitution affects consumer behaviour, industry experts can develop ethical and effective pricing strategies in the constantly changing marketplace.

To summarise, the relationship between substitution theory, intuitive brain stimulation, and psychological pricing (communication) techniques provides a fascinating perspective on consumer behaviour. If you're looking to take your business to the next level, you need to nail your pricing strategy and communication.  
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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. This drives profitability and business growth.  
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In our upcoming articles, we’ll talk about loss aversion and prospect theory, and how this pricing technique that can transform your approach to pricing strategy, so stay tuned!

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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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