Behavioral pricing foundations in retail

Behavioral pricing

Consumers make decisions based on several key factors. Interestingly, people are not always proven to be rational agents regarding purchasing behaviors. Retailers found a way to predict that and turn the phenomenon into pricing. Further, we present insights into behavioral pricing and the role of consumers’ psychology in it.

The idea of standing behind behavioral pricing is self-evident. It is all about using the notion of behavior in pricing. Notably, the phenomenon is directed at consumers’ behaviors when it comes to the perception of a product’s price and value. Here, we explore the idea of behavioral economics and its role in behavioral pricing. In addition, we will show how the concept can be applied in retail and how advanced software makes the approach even more effective.

The role of psychology in economics and pricing

At this point, you know that behavioral pricing sets a price for a product depending on how customers’ perception of a product changes. Essentially, it means that analysts need to have enough determinants on consumer behavior to input the insights into the strategy and receive some pricing recommendations. For instance, analysts get info on demand, supply, purchasing history, demographics, culture, and customer satisfaction. Behavioral pricing is equipped enough to translate raw data into a usable pricing strategy based on these elements.

Behavioral pricing is founded on the premises of behavioral economics. The concept is about getting in-depth insights into customer psychology. Importantly, behavioral economics is mostly interested in what motivates customers to make particular purchasing decisions. Currently, people generate a vast amount of data. Besides, because of the digital developments, such data is broadly available. Behavioral economics help collect the data and analyze it through particular instruments. Advanced software plays an integral role in helping behavioral economics make sense of consumer psychology. Respectively, with all the elements combined, one can get effective behavioral pricing applicable in many industries, including retail.

How can behavioral economics be applied in retail?

One of the most interesting aspects of behavioral economics is grounded in the fact that customers do not always make rational purchasing decisions. When people want to buy something, they might appeal to some irrational motivators. That is one of the primary drivers of consumerism. Yet, even if consumers make irrational choices, individuals always want to justify their decisions with rational appeals.

How can such insights be applied in retail? Here is a simple example. When a consumer is exposed to several cheaper and more expensive products, there is a great chance that a person will choose the more affordable option. There is a gap between cheap and costly that is hard for consumers to pass. This approach is practical and appears to be grounded in a reasonable approach. However, something interesting happens if a seller introduces a third option with a price tag in the middle. More consumers start to purchase a more expensive option, namely because it no more appears as expensive in the context of the middle option. At the same time, there is no rational motivation to change the decision. Still, consumers switch their purchasing behavior.

Tips for effective behavioral pricing

The scenario mentioned above represents one of the ways of using behavioral pricing in retail. As it might be understandable at the moment, the key to using the strategy in retail is about finding how to use irrational factors influencing decisions to direct consumers’ purchasing behaviors toward the ones beneficial for a seller. However, it is crucial to remember the ethics and manipulation. The ideal variant is to use behavioral pricing to create a win-win situation that benefits both sellers and buyers.

Respectively, achieving a win-win situation in retail depends on several strategies one can use:

  1. Introduction of the middle pricing options as illustrated in the example above.
  2. Creating the environment in which a consumer is directed at a particular choice. A seller can reduce the price for a product the business prioritizes in terms of selling. Consumers are always driven to discounts and lowered prices.
  3. Adding a free option to attract attention. When customers receive something for free, they are more likely to make an additional purchasing decision.
  4. Think about the price points that determine a person’s willingness to pay. These are called purchasing thresholds. It means that the price should not be too low to change the perception of a product’s quality or too high to make the product not worth it.
  5. When introducing the product for the first prime, consider skimming. The new product attracts more attention and has more demand. You need to set a higher price first and gradually lower the price as the demand falls. For instance, Apple always uses skimming with its new products.

Use the tips mentioned earlier to create effective behavioral pricing strategies. Remember to make the pricing appealing to people so that consumers receive satisfaction when making a purchasing decision. Such an approach will increase your revenue and grant a good buying experience for customers.

Behavioral pricing meets advanced solutions

Behavioral pricing depends on many factors. These elements are often introduced in the form of data. However, it can be extremely challenging to process a massive among of information produced by consumers. Luckily, there are advanced solutions available. How do they work? For instance, there is dynamic pricing software. The instrument relies on particular variables as input. When presented with specific determinants, the software accesses the existing library of pricing strategies and determines the one fitting the prerequisites offered.

Current technological capabilities allow using instruments like artificial intelligence and machine learning to engage in effective behavioral pricing. These tools work a million times faster than analysts making manual calculations. Besides, they are less time and resource-consuming. The more companies use advanced pricing software, the greater the library within the system allowing the software to make more accurate pricing predictions fitting any given case in retail.

Behavioral pricing takes the insights from behavioral economics and turns them into effective pricing strategies. Equipped with the tips mentioned above and having a chance to get your hands on pricing software, you will receive a viable pricing strategy in no time.

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