By Melina Palmer
Over the years, I’ve found that pricing is a “necessary evil” of business – something people know is important… but they absolutely hate and avoid for as long as possible.
The problem with that tactic, of course, is that it won’t make your pricing any better! In fact, it is more likely to make things worse. One reason is because confidence is key in helping people to feel good about buying whatever you are selling. If you aren’t confident in the prices, it will show up in the way you present your offer, which will nudge people away from buying. This may lead them to ask for discounts, encourage them to feel the need to have endless debate about the purchase, or simply not have enough motivation to act (we humans do have a status quo bias, after all).
So, what can you do to overcome these pricing hurdles? Let’s start by addressing the three major challenges I’ve found companies encounter when working on pricing.
Problem 1: Traditional Pricing Advice Creates Overwhelm
If you’ve ever done work on pricing, you probably googled something like “How to set my prices” or “Best pricing strategies” once or twice (or a hundred times). How did that go?
I’m guessing you were left with more questions than answers. Some articles have four main pricing strategies. Others list five, seven, ten, or even fourteen. The descriptions of each strategy are often filled with jargon and are either way too detailed or far too vague. The other problem is that they can only give you a bunch of definitions with very few practical tips and little applicable advice.
For those who are already pricing experts, a bit of information about the dozen-plus models to choose from is helpful and makes their choice easier. For those who are not pricing experts…not so much. Giving you information about fourteen options without a clear path for your business is a perfect recipe for a paradox of choice. And, because overwhelm in an unfamiliar space will increase your reliance on the status quo, this type of “advice” is more likely to keep you stuck than taking action.
Problem 2: Traditional Pricing Advice Forgets About (Or Undervalues) Psychology
The next issue with those pricing articles, books, and tips is that they absolutely underestimate the value and importance of incorporating psychology into the process. Very few of the many articles I found while researching for my book, The Truth About Pricing, even mentioned psychology. Those that did so only included it as one of the options for a model to implement and reduced its value merely to a tactic of ending your price with a 9 instead of a 0. While this is part of the value that comes from incorporating psychology into your pricing and how you position your company, brand, products, and services—it is a tiny sliver of what behavioral economics can do for your overarching strategy. (Note: this is not the best strategy for everyone, and like so many other aspects of business, shouldn’t be implemented without an understanding of your goals, the context, and more).
It is not a question of if you incorporate psychology (and behavioral economics) into your pricing strategy. It is not a question of where you place it, either. When it comes to pricing and the positioning of your products and services—psychology is everything.
To paraphrase Michael Hallsworth of the Behavioral Insights Team, behavioral economics isn’t the wrench you grab when it is time to tighten things up right before you send something out the door. It is the filter that every decision should go through.
Despite our society’s increasing reliance on AI, your business still involves human interactions. You’re selling to humans. Those humans have brains, which they use to make decisions. Understanding how those brains like to be communicated to—and making it easier for them to choose you—will always matter.
Problem 3: Your Brain is Focusing on the Wrong Things
Because of the overwhelm and uncertainty that comes with something scary (like finally going to market or raising your prices), your brain will rebel a bit and do what it can to keep things predictable. There are a few common tricks the brain will put in your way to help maintain that status quo (i.e., that hellish state where you feel paralyzed by the overwhelm of this pricing decision). These tricks boil down to four main factors:
- Optimism Bias: Among other things, this makes us believe we are less likely to experience a negative event than others and overestimate our own abilities.
- Planning Fallacy: This is essentially when we don’t plan for all the external stuff that can cause us to fail. As Daniel Kahneman says in Thinking, Fast and Slow, we continue to do this because our success is often specific and easy to imagine, and we forget to account for the seemingly endless list of ways things can go awry. Whether it is predicting how long it will take to write a thesis paper or a giant public works project, we constantly fall victim to planning fallacy.
- Time Discounting: Studies have shown that the brain often sees its future self as a completely different person. All those times you vowed to start that new exercise routine “on Monday” and then felt totally unmotivated when the alarm went off? That’s time discounting (or, as I like to call it, the “I’ll Start Monday” effect).
- Bikeshedding: This tendency got its name because a team that was tasked with designing a nuclear power plant spent an inordinate amount of time designing the bike shed. Clearly unimportant and ridiculous to an outsider, but we do it constantly in all areas of life and business – including pricing.
These four brain tactics make it so people productively procrastinate (i.e., bikeshed) because they fail to account for how long things will take them to complete and believe they will be better “tomorrow.” Then one day they realize, “Oh no! The launch is tomorrow and we haven’t finalized a price yet!”
This makes it easy to justify picking a price – any price – now (usually something just under the competition or a simple percentage above your known costs) and vow to do something better in six months once things die down (time discounting). And then, status quo bias kicks in, and it is easier to just keep things as they are.
The Better Approach to Pricing Strategy
While we are all wired for these mental traps, they don’t have to keep you stuck when it comes to pricing. The first and most important step (one that everyone else skips) is to start with…you. When it comes to your pricing success (or failure) you are your biggest ally (or foe). For example, now that you know about bikeshedding, you can reframe your brain to keep from focusing on unimportant details until it’s too late.
In the case of pricing, one of the most common bikesheds I see is a focus on the exact price. A question like, “Should we end our prices in a 5, 7, 9, or 0?” can plague you and keep you stuck, but in the grand scheme of things, it isn’t as important as it seems.
Research shows that, once you have decided if you will round down (being associated with a bargain, a tactic I recommend for what I call a “Value” business in The Truth About Pricing) or you want to stick with a whole number (what I recommend for the other type of business in the book, a “Quality” approach) – it doesn’t much matter which specific number you choose.
Spinning in circles over the exact number is a bikeshed that will keep you distracted. It is far more important to know what type of company you are, what your customers value, and how you will present the offer.
The truth about pricing is: it isn’t about the number on a tag. Everything that happens before the price – the psychology and incorporating behavioral economics into the mix – matters much more than the price itself. And, remember, that applies to both you as the person setting the price, and the customers who will ultimately buy from you.
This article was edited by Lachezar Ivanov.
