When was the last time you visited Starbucks? Chances are you did not opt for the small coffee, but rather bought a medium or large coffee. What did you buy at McDonalds last time you went through the McDrive? Did you choose the entire burger menu or only a single burger? Your choices may have been influenced by what we call ‘behavioral pricing tactics’.
The use of behavioral pricing tactics to influence customer buying behavior is not a new phenomenon but we see it being used increasingly by traditional B2C and B2B companies as well. We identify three specific opportunities in behavioural pricing tactics to be considered:
- Maximize willingness-to-pay by differentiating pricing based on customer value perception
- Simplify portfolios and use price laddering to guide customers to more valuable products
- Understand what combination of products are bought and use bundling to increase cross-sell
1. Maximize willingness-to-pay by differentiating pricing based on customer value perception
In a rapidly digitalizing world the amount of customer and transaction data available is growing. There is potential to know so much about our customers, but to unlock the insights can be a challenge due the sheer amount of data and data quality. Based on the data-derived customer insights, companies can determine what the demand is for certain products variations and use it as input for pricing tactics. For example, Kindle’s e-reader covers were differentiated in price by color; a black cover is more expensive than a pink cover, since customers were willing to pay more.
However, it is important to ensure that price differences between product variations are explainable and that pricing tactics do not lead to unacceptable price discrimination. When a ticket agency showed higher prices to consumers who were using a Mac versus consumers who were using a PC (and when this became known), there was significant backlash from the public.
2. Simplify portfolios and use price laddering to guide customers to more valuable products
In a world where information is just one mouse-click away, it is easy for customers to be overloaded by options leading to choice paralysis. Whereas Dell revolutionised the PC market through mass customisation in the 90s by providing a myriad of ‘build-your-own’ options, today laptop brands offer more simplified product line ups which are much easier to comprehend with limited customizable options. This enables more effective influencing of the customer through the choice process.
To stay with the PC example, by charging only a slightly higher price for, for example, a 13-inch laptop with 12 hour battery life over a 13-inch laptop with 8 hour battery life (with other features the same), the consumer is enticed to buy the 12 hour battery laptop. By then including a laptop with 12 hours battery life and 17-inch screen, customers can feel that they are getting even more value-for-money. To emphasize, this optimally works with a limited range of pre-defined product configurations and customizability.
3. Understand what combination of products are bought and use bundling to increase cross-sell
Traditionally bundling was used in the food industry to create meals, e.g. fast food chains combining a burger, a portion of fries and a soda in a burger menu. Whereas the stand-alone prices for the products could be respectively €3, €2 and €1, the price of the menu (bundle) would be only €5. This nudges customers towards to a higher price point (€5 < €6). Bundling, long used in the B2C industry, is increasingly being used in the B2B environment as well.
General Electrics (GE) is a good example. GE converted its business model from selling individual pieces of medical equipment (e.g. X-rays, Electrocardiographs and MRIs) to selling entire floor ‘bundles’. A floor ‘bundle’ contains all equipment a floor or division in a hospital needs. This means that, for instance, for the radiological division all equipment (equivalent of the burger, fries and soda in example above) is offered in 1 offering with 1 price. On the one hand, this business model provides a clear proposition towards hospitals. On the other hand, GE can exploit willingness to pay and increase cross selling.
How will you take advantage of the opportunities that behavioral pricing tactics provide? Will you use your customer and market data to assess and evaluate your strategy for version pricing? Or will you try to influence customers by using price laddering or bundling?
Simon-Kucher & Partners has identified seven pricing trends:
Trend 2: Behavioral Pricing: Instrument for revenue growth