Holden Advisors consulting projects generally focus on the core competency of understanding, communicating, and mutually sharing in created value. Value is the central pillar of all best practices we recommend and implement for our customers.
But what if we’ve done that (or haven’t), and are still looking for additional methods to improve price realization?
One option is to look at the field of behavioral economics to understand how inherent human decision-making shortcuts (heuristics) present opportunities for certain sales and pricing “tricks” that can take advantage of these biases to improve sales results. Let’s look at a handful of examples that are applicable to both B2B and B2C environments:
- Anchoring. Communicating a number that far exceeds your target selling price to your buyers has been shown to increase their acceptance of higher prices. This works even if the reference number has nothing to do with price. One example of anchoring could be discussing your proverbial "thousands of customers" before attempting to close a deal with a $100 average selling price or discussing high list prices of hardware products before presenting a discounted price.
- Price as value signal. In the absence of complete information, price often serves as an indicator of value. The lesson here is to align price carefully with value, and if you have a premium product, be confident in setting higher prices to effectively communicate that message. Discounting can erode the buyers' perceptions of your market position.
- Halo effect. This one is simple: Be likeable. Trust can build organically when buyers like you, and this is true for professional networks, B2B selling, and B2C buying decisions. Buyers are less likely to judge product attributes critically when they like and trust an individual seller or brand. While obvious, this is why individuals and organizations invest in relationship development through social situations, meals, golf games, and branding.
- Loss aversion. Have you ever been wary to implement a price increase because you’re afraid of losing current customers? You’re not alone. We tend to place a higher value on things we have today (customers, objects), and feel the pain of losing them more acutely than is warranted. Therefore, we are likely to weight the pain of lost sales more heavily than the benefit of net new revenue when considering a price increase. When you sell a valuable product, don’t shy away from asking for its true worth.
- Decoy pricing. Buyer price acceptance is often judged in comparison to other alternatives, not just in absolutes. Dan Ariely, a renowned behavioral economist, describes the real-life example of consumer product selection for news subscriptions based on different offering structures. In a typical A/B test, The Economist  found that when they offered two products (a low-value/low-price e-subscription and high-value/high-price bundled subscription), only 32% of buyers chose the high-value/high-price option. However, when a third low-value/high-price option was added to the product menu, over 83% of buyers chose the same high-price/high-value option. Even if nobody purchases your “throwaway” option, it may improve the purchase rate of your high-value products.
These biases may seem obvious or have been discussed in business literature to the point that they’ve become common knowledge. However, the remarkable truth is that this doesn’t change their effectiveness. Even when buyers are aware of these biases, their behavior is still affected! This is known as the G.I. Joe Fallacy, because in this case, knowing is not half the battle .
Let's not forget, we all want to avoid inadvertently setting ourselves up for failure by planting the availability heuristic in our buyers. This is the tendency to overestimate the likelihood of an event (i.e., a discount) that has greater availability, or recency, in memory. If we give our buyers a discount once, or even twice, that has greater weight in their memory because of this availability heuristic. Read our whitepaper to learn how to kick the discounting habit and avoid heartache over heuristics and biases.