Business Consulting
The concept of elasticity is used to measure the degree of market response to price changes (price sensitivity).
Percentage change in sales volume divided by the percentage change in sales. [Read more…]
Pricing is extremely impactful. For many products and for many consumers price is a key feature. Price changes have immediate impact and prices are in many cases very visible. Competitors can react quickly to price changes. Price is the only element in marketing mix that has a direct impact on revenues.
R = P x Q
How do the number of purchase options affect our buying process? According to the economic theory, more choice, due to preference matching, always has a positive effect on a buyer. Psychologically however, there is a choice conflict and choice overload. Too much is demotivating. The experiment in which I participated at Imperial College London provided evidence to support the idea that rather than facilitating our decision making process, having more products to chose from actively leads to choice fatigue.
One of the most fundamental techniques for display and pricing is known as the Attraction Effect. Products subject to sale become more or less attractive in the context of other superior or inferior products. Making a choice between two similar objects is hard.
The choice is easier to make when there is another product added to the choice list. The middle option is usually the winner.
By adding an inferior product to the list of choices available to the buyer we can facilitate the choice making process. The consumer perceives the products originally listed on the choice list as superior and finds choosing the right product easier. Junk options make the alternatives look good.
Compromise Effect – a set of three choices can be stretched upwards if the entire set is compared to another similar set with a salient end option.
Downward Stretch
Upward Stretch
Written by Michael Pawlicki
The Ebbinghaus Illusion is frequently used in TV and printed media advertising. DFS, a UK furniture store, was told by the Advertising Standards Authority (ASA) to withdraw their advertisement from TV broadcast because of the false impression it gave to the viewers about the true size of a sofa. DFS, using green screen technology, manipulated the size of actors superimposed into the advertising video which made the sofas placed next to the actors look larger than they really were (BBC 2008). Interventions by ASA on the grounds of an illegitimate use of Ebbinghaus Illusion in advertising are rare. Generally, advertisers will get away with similarly blatant manipulation of product size for marketing purposes.
Which orange dot is larger?
The use of the Ebbinghaus Illusion is not limited to marketing only. The value of money is subject to it too. The perceived value of money is determined by the comparison between the subject (money) and memory (anchor) or context in which a valuation takes place. Marketers can change the perceived value of money by influencing the context in which the valuation takes place. For example: A pair of jeans priced at £75 may seem expensive if sold in suburban areas of London. The same pair of jeans might seem cheap if found in shops in London’s Kensington.
Intertemporal Choice
Intertemporal pricing is the right pricing strategy for goods and services of high monetary value. This is due to people’s diminished ability to judge the true cost to them of purchase if payments for the purchase are spread across longer period of time. By multiplying the number of payments for the product over time, companies usually benefit from people’s reduced aptitude to compare the price they pay with alternatives. The notion of Intertemporal Choice has its roots in the Affect and Cognition branch of Psychology. Human minds are basically structured on two systems:
If we are already engaged in a cognitive process (thinking) at one moment in time, our ability to engage another cognitive process dedicated to another task is diminished. In a circumstance where we have to make two important decisions at once, our mind, in order to process those two decisions, will refer one to the basic system (spontaneous and rapid) and as a result the resulting decision is likely to be less rational. Marketers take advantage of Intertemporal Choice in involvement, affective and informational advertising.
Written by Michael Pawlicki
This article concerns the underlying psychological factors business managers should consider when thinking about effective pricing. The definition of price this article will be working with is the following: Price of something is the total cost of adopting the product which includes purchase price, cost of switching, inconvenience and disposal. Each market segment can be characterised by dissimilar price sensitivity factors including: ratio between total and disposable income, level of involvement in purchase, ease of comparison, switching cost and perception of the market price of product (anchoring and heuristics).
The decision to buy, as far as the price of the product or service is concerned, depends on valuation. It is positive if the valuation a consumer makes of the good is greater than the actual price, and vice versa. Valuation is a cognitive process and consists of two underlying factors: Anchor and Insufficient Adjustment. Anchor is a piece of information (a reference price of the same or similar product) stored in person’s memory which is relevant to the item subject to valuation (a product). The process of valuation continues until adjustments fall within an implicit range of plausible values and this is an Insufficient Adjustment. (Epley and Gilovich, 2012).
Reference Pricing is a process of displaying the price of a product together with price of the same product sold elsewhere. A reference price is a kind of ‘artificial anchor’ where the seller facilitates the process of insufficient adjustment by subjecting the buyer to the anchor (in this case at the POS – point of sale). The routines in the process of buying are structured according to Heuristic. The human mind develops rules (software of the mind) which govern the processes of information processing when making decisions to buy. Marketers can blur proper functioning of Heuristics by using arbitrary and random numbers to distort valuations.
Most basic pricing methods are:
• Demand pricing – prices are altered or lowered according to the supply and demand for the product or service. The higher the demand the higher the price.
• Skimming – is the practice of starting with high price for the product than reducing it progressively as sales level off.
• Timing – is a procedure in pricing which helps managers predict repeat purchases. Marketers, mainly using CRM systems, can remind their customers about subscriptions. Here, the most obvious catch is if payments are disassociated from benefits the consumers gradually forget about them.
Written by Michael Pawlicki
Data Scientist, Business Strategist, Marketing Analytics Expert and Imperial College London alumnus. Dave Brubeck Fan and Copacabana Beach Conqueror.
