Chpt 05 psychological influences on price sensitivity

Tim J. Smith
Pricing Strategy: Setting Price Levels,
Managing Price Discounts, &
Establishing Price Structures
PowerPoint by
Tim J. Smith, PhD
Managing Principal, Wiglaf Pricing
Adjunct Professor of Marketing & Economics, DePaul University
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 5
Psychological Influences on Price
Sensitivity
The Role of Non-Physical Influences
on the Perceptions of Alternatives,
Value, and Prices

• Why do prices end in nines?
• If private transactions are just that, private, why
do customers care what others paid?
• How do customers perceive prices and offerings?
• Are their inherent biases that influence the
perception of value and price?
• Can a firm influence a customer’s perception of
the value?
• Stretch question: Is the best price always the one
that accurately reflects value?
Agenda

Quantitative Methods Alone are Insufficient for Pricing
Decisions
• Pricing a product proportional to value is fundamental principal in
strategic pricing, however value is a subjective matter
• Value Based Pricing Techniques all suffer from an inability to fully include
subjective behavior
– Exchange value models reveal the potential value within a product, yet
depend upon the benefits that are quantified within the model, and which
benefits should be quantified is a subjective decision.
– Conjoint analysis reveals the current perceived value, but not the potential to
change value perceptions
– Economic price optimization ignores the other marketing variables under
control: branding, placement, price structure,
• Convincing customers of the value shifts the pricing challenge to
marketing communication and sales professionals, who must confront
certain decision making biases of customers.
• Customer beliefs are under the influence of the firm

Influencing Price Acceptance
• There are numerous factors that influence how customers perceive value and
price.
• Many of these factors arise from deeper, psychological influences, and
perhaps even biologically evolutionary influences in their development and
expression in human behavior
• Rather than taking an approach of attempting to correct human behavior and
make people somehow more logical in our purchase decision making, it is
more usually efficient to
– Understand decision biases in purchasing behavior
– Uncover approaches to reducing psychological
dissonance,
– Understand the limitations to pricing power
– And thus facilitate customer decisions to purchase

Brain as a Predictive Machine
• Current research in neuroeconomics is revealing many intriguing insights
into how humans think
– In one model, the human brain continuously generates predictions about
what to expect in the environment.
– For example, if you see a chair that you have never seen before, you can still
determine what it is, its function, approximate weight, approximate price, and
other such characteristics.
– To derive these expectations rapidly we rely on surprisingly little information.
– Neural circuits mediate vital mental skills that translate information into
impressions, preferences, judgments, and predictions, and therefore
willingness to pay
• Consider us as COGNATIVE MISERS relying on HURISTICS to make decisions
faster

It’s your brain too.
Use yours, Don’t fix theirs.
• Some of the better understood factors that influence
price perceptions and value perceptions have been
well documented in research.
• Some decrease price sensitivity and can be influenced
by the firm’s actions and decisions, thus form an area
to improve the pricing power of the firm
• Others provide insights into the psychological
influences to a customers price sensitivity and
willingness to pay, thus providing guidance to restrain
inappropriate pricing practices

• True Economic Costs
1. Shared Cost Effect
2. Switching Costs
3. Expenditure Effect
4. Difficult Comparison Effect
• Perceptual Challenges
5. Price Endings in 9s
6. Fairness Effect
7. Overconfidence in Future Economic
Efficiency
8. Small Pie Bias
9. Promotional Influence
10. Prospect Theory
– Losses Weigh Heavier than Gains
– Inflection at the Point of Reference
– Diminishing Sensitivity
– Risk Aversion in the Positive Frame and
Risk Seeking in the Negative Frame
– Utility Function from Prospect Theory
– Prescriptions
• Effects Related to Prospect Theory
11. Reference Price Effects
12. Endowment Effect
13. Anchoring
14. Comparison Set Effect
15. Framing Effect
16. Order Bias
17. End-benefit Effect
Behavioral Effects that
Influence Price Sensitivity

Shared Cost Effect
• Price sensitivity is reduced when customers use
other people’s money to pay for a product
– For instance, business travelers often receive full
reimbursement for travel expenses.
– Airline loyalty programs enable airlines to marginally
increase prices because the price is paid by the
business but the choice of airline is influenced by the
traveler
– To a lesser degree, rebates to lower price sensitivity
due to the partial payment of the product through the
rebate.

Four Funds of Money
Funds Source
FundsPurpose
Themselves Someone Else
ThemselvesSomeoneElse
1
Moderate Price Sensitivity
High Utility Personal Sensitivity
2
Moderate Price Sensitivity
High Utility Sensitivity
of Gift Giving
3
Low Price Sensitivity
High Utility Personal Sensitivity
4
Low Price Sensitivity
Low Utility Sensitivity

Four Funds of Money
1. People spend their own money on themselves. When they do so, they
pay high attention to gaining utility from the product and getting the most
utility per dollar spent.
2. People spend their own money on someone else. When they do so, they
are seeking to maximize the utility of the gift recipient as well as maximize
their utility in giving the gift. Thus, they remain price sensitive but the
definition of utility changes.
3. People spend someone else’s money on themselves. In this case, the
customer will be very benefit oriented, but less price sensitive, than when
drawing from prior funds of money.
4. And lastly, people will spend someone else’s money on someone else,
such as in the case of buying products for a business. In the absence of
decision making oversight and proper incentives, people drawing from
this last source of funds are neither very price nor benefit sensitivity

Switching Costs
• Economic Switching costs are any costs
(opportunity and direct) related to switch
between suppliers.
• They arise from product-specific investments
buyers make, which may come derive from in
monetary or psychological factors.
• Product specific investments decrease price
sensitivity for existing customers

• Complimentary goods
– A customer purchases an iPod and later purchases an iPod
docking station to listen to their music in the home. The
docking station is a complimentary good, and purchasing the
docking station makes the customer more likely to repurchase
an iPod upon the next purchase occasion.
• Learning
– A customer purchases Dreamweaver and learns how to make
websites. Switching to Pagemaker requires relearning.
• Engineering Costs
– A customer learns how to implement a specific chip for a
specific application. Changing the chip requires re-engineering,
re-certification, and other direct costs. (Product Yields / TQM)
• Brand Loyalty
Switching Costs from
Product Specific Investments

Expenditure Effect
• The expenditure effect refers to the relationship
between the price tag and the willingness of customers
to shop around
– With large expenditure products, customers have an
incentive to search for alternatives and price compare in
order to reduce their expenditure.
– With products that are associated with smaller
expenditures, the financial incentive to price compare is
reduced while the search costs remain.
– The willingness of customers to evaluate alternatives
depends on how large the expenditure is relative to the
effort necessary to reduce it. Higher price sensitivity when
expenditure is larger portion of budget.

Difficult Comparison Influence
• By making product and price comparisons
difficult, marketers can increase search costs
and the decision making uncertainty of
customers, thus discouraging product
switching and reducing price sensitivity.

Branded Commodities
• Aspirin
– Branded pain relief medicine and unbranded generic
medicine contain the chemically identical active
ingredients.
– However consumers are reluctant to trust an
unbranded supplier and tend to have a higher
willingness to pay for pain relief medicine.
– Branding itself makes inter-product comparisons more
difficult and enables higher prices.
• Whole Foods Pricing
– Quaker Oats: $3.49
– 365 Whole Foods Store Brand: $2.99

• Vonage vs. AT&T
– Incumbents like to make the price comparison more
challenging between offers, obfuscate the benefits
and price, thus increasing the information gathering
challenge for potential switchers and discouraging
brand switching
– New Entrants / Attacker like to make the price
comparison explicit to enable decision making and
brand switching
New Entrants vs. Incumbents
Market Share Fights

Product Size
• Velký or Malý Pivo?
– At a hospoda in Prague, one can enjoy large beer for 20 CzK or small beer for
14 CzK. On the face of it, a small beer appears cheaper.
– However a large provides 0.5 liters of beer, making the unit costs of 4.0 CzK
per deciliter, while small is only 0.3 liters of beer, making the unit costs 4.7 CzK
per deciliter.
– On a per deciliter basis, large is less expensive than small.
– In this case, the difficult comparison effect enables the supplier to provide
product at a higher per unit price but at a lower perceived price.
• Hieneken 5 L Mini Keg or 24 Pack?

• Four funds of money implies industrial purchases involve
several decision makers and decision criteria
2. Switching Costs
• Product specific investments, whether real or psychological,
increase switching costs and decrease price sensitivity for
existing customers
• In industrial markets, increases in the absolute size or strategic
importance of the purchase drive increases in the incentives to
search for alternatives, and therefore price sensitivity
• Making comparisons difficult between offers increases search
costs and therefore decreases price sensitivity.
True Economic Costs

Price Ending in Nines
• One of the most studied
psychological influences is one that
drives prices to end in nines
– If there weren’t psychological
factors driving the tendency to end
prices in nines, we should expect a
random distribution, meaning that
each digit would end the price
about 10% of the time.
– Frequency analysis of price endings
from zero to nine reveal that prices
tend to end in nines, and less so in
fives and zeros
0% 10% 20% 30% 40% 50% 60% 70%
0
1
2
3
4
5
6
7
8
9
PricesEndingintheDigit
Occurance Frequency

Debunking Hearsay on 9 endings
• A common hearsay reason for ending prices in nines is due to historical
artifact relating odd pricing and shrinkage at the cash register
• This theory is WRONG
– The theory went as follows: Even-priced merchandise would often be paid in
cash with the exact amount allowing clerks to pocket the cash. By using odd
amounts, clerks would have to use the cash register to make change, thus
making the pocketing of the customer cash by clerks obvious to shoppers as
well as book keepers who would later review the cash register tally.
– Yet if it was only a theft prevention measure, then all odd prices would be
more common than those ending in zero.
– We see from the data that clearly there is more going on in price setting than
would arise from a historical artifact.
– In fact, ending a price in nines can increase the sales of an item over other
prices.

• The effect of ending a price in nines
also extends beyond the last,
rightmost digit.
– Informal research has examined
selling behavior and odd price points
such as $24.99, $29.99 or $28.53,
– While the lowest price tends to sell
more than either of the higher prices
as predicted by a downward sloping
demand curve, an odd observation is
associated with the price points of
$28.53 versus $29.99
– The product sells better when priced
at $29.99 over $28.53, a direct
contradiction of economic theory.
Quantity
Price
QH
PH
QM
PM
QL
PL
Economically
Predicted
Quantity
Price QH
PH
QM
PM
QL
PL
Observed
Ending in Nines Does Have Economic
Impact

• Meaning
– Prices ending in nines tends to imply discounts.
– Prices ending in zeros are suspected to imply quality
– Poster shops vs. art galleries
• Cognitive Accessibility.
– Round numbers such as zero and five are easily perceived, remembered, and
compared.
– Thus, zeros and fives may facilitate price comparison and lead to increased
price sensitivity
• Underestimation effect by Left Right encoding
– With the Arabic numeral system, consumers encode numbers from left to
right. Furthermore, the most important digits are always on the left.
– Time pressed and cognitively busy consumers attempting to make decisions
regarding value, alternatives, and tradeoffs, and are encouraged to read only
the leftmost digit and discard the remaining digits as a means to save on
mental energy and time.
– The result is an illusion is created which makes the $9.99 product appear
much cheaper than $10,00
Measured Behavioral Effects of Nine
Endings

Measured Behavioral Effects of Nine
Endings
• Framing effect.
– Pricing just below the round ending price can be framed as a round number
with a small gain
– The small gain may mildly encourages a purchase on a psychological basis
– It invokes “wins” in a mental bargaining with the vendor
• Pricing endings effects are culturally dependent.
– Price endings in fives were observed to be over represented in Poland shortly
after perestroika liberalized much of the soviet block countries. The Polish
tendency for fives has been attributed to the confrontational bargaining
position of an ex-soviet Poland that led Polish consumers to perceive the 9-
ending prices as a loss above the lower round number rather than as a gain
from a higher round number
– In contrast, price endings in eights were found over represented in Asian and
Japanese countries, where the number eight represents luck and prosperity

Fairness Effect
• Marshall’s and Smith’s microeconomic theory is
structured on the assumption of a self-interest as the
sole primary motive.
– If prices are perceived as too high for the benefits
delivered, customers are free not to purchase.
– Likewise, if prices are too low for a business to persist, they
are free not to produce.
– However such a cursory examination of fairness issues in
trading does a pricing, sales, and marketing professional
disservice.
• In trading, the concept of fairness is persistently
present.

Fairness & The Brain
• Findings in brain physiology, especially evolutionary
neuroscience, show that the transactional commercial
market evolved from the interplay of our self-
preservational (egoistic) and affectional (empathetic)
neural circuitries.
– Thus, sharing within families, gift giving, and commercial
activities are all reliant upon an overlapping set of cognitive
functions.
– The presence of sharing motives in commercial transactions
drives expectations with respect to price and benefits.
– Consumers expect that the price represents a sharing of the
surplus benefits between the company and the customer.
– When prices are out of line with these expectations, customers
can call foul and the fairness effect will dampen consumer
willingness to pay.

Fairness Perceptions
• Customers perceive prices as fair when they are within
expectations based on past interaction with the
category
– Large price increases can be misperceived as “profit
taking” on behalf of suppliers and producers, or as taking
advantage of less powerful customers.
• Customers perceive prices as unfair when they vary
randomly between customers
– This latter effect plagued Amazon in 2005 when customers
uncovered price experimentation and discrimination at
their website.
• The issue of fairness is not spread equally among all
products. It has a larger role in necessity goods than
those related to discretionary purchase.

Overconfidence in Future Economic
Efficiency
• With some products, customers purchase them with an expectation of
performing in some specific behavioral pattern in the future, however
people are systematically poor in their ability to predict their own future
behavior
• Example: Customers selected from a contract of menus from three U.S.
health clubs.
– Members who choose a monthly subscription over priced at $70 attended the
gym on average 4.3 times per month, making a per-visit price of more than
$17. These same members could have selected to pay $10 per visit using a 10-
vist pass.
– Furthermore, customers who chose the monthly subscription were 17% more
likely to stay enrolled past the first year than annual members, which is
surprising due to the fact that monthly members pay a higher fee for the
privilege of cancelling their contract at will.
– The inability of expressed behavior to match expected behavior was attributed
to overconfidence by the customers with respect to their future self-control
and future economic efficiency.

Small Pie Bias
• The Small pie bias is found from
research on negotiations
– Negotiators consistently
underestimate the size of the
bargaining zone, or in other
words, believe they are
negotiating over a smaller pie
than truly exists.
– By implication, they over
estimate the share of the surplus
they capture in the negotiation.
– In other words, the small pie bias
leads sellers to settle for too little
of a price.

Overcoming the Small Pie Bias
• To overcome the small pie bias, it is suggested that sellers
make price expectations of the buyers reservation price,
and use the negotiation to seek disconfirming information
that updates their beliefs of the buyer’s reservation price.
– The disconfirming information is elicited from buyers by sellers
when sellers make initial offers that are outside of their
expected buyer reservation price.
– In the negotiation, they can use buyer reactions to update their
expectations of they buyers reservation price, and thus price the
transaction closer to the buyers reservation price.

Promotional Sensitivity
• Promotions influence price optimization
through two key paths:
1. The message communicated affects price
sensitivity.
2. The market attracted through promotions
holds a different price sensitivity than the
market overall

What You Say Influences their
Willingness to Pay
• Price oriented promotions leads towards both lower prices and increased
consumer price sensitivity.
– One form of price oriented promotions are those that focus on the brand and
the price alone.
– Such promotions are commonly found in local circulars prepared with
distributors to highlight the availability of a well known brand at a local outlet.
• Value oriented promotions, tend to lead to lower price sensitivity of
consumers.
– Value oriented promotions are those which focus on the brand and the
features or benefits of the product.
– They are commonly found in national advertising efforts which are driven by
the original producing firm.
• The effect of promotional messages has also been found in negotiations
research.
– Using key selling points enables sellers to achieve a higher final transaction
prices in a negotiation.

Who You Talk to Influences Willingness
to Pay
• The secondary effect of promotions on price
sensitivity arises from the ability of advertising to
increase the size of the addressable market.
– Advertising sensitive consumers tend to be more price
sensitive consumers.
– By bringing new customer into the market that are
more price sensitive than the market overall,
advertising has an indirect effect of overall increasing
the price sensitivity of the market.

Perceptual Challenges
• Price Endings in 9s
– Meaning, Accessibility, Encoding, Framing all imply price endings influence
price acceptance
• Fairness Effect
– The expectation of fairness increases with economic sophistication, and
influences price changes, differentials, and discrimination
• Overconfidence in Future Economic Efficiency
– People believe are overconfident in their ability to change outcomes and
behave in an economically efficient manner
• Small Pie Bias
– Negotiators routinely believe the range of acceptable prices is smaller than it
is, and moreover anchor their expectation price around their walk-away price
• Promotional Influence
– What you say and who you say it to influences the ability to capture a good
price

Behavioral Effects that
Influence Price Sensitivity
2. Switching Costs
6. Fairness Effect
Efficiency
8. Small Pie Bias
10. Prospect Theory
– Prescriptions
13. Anchoring
15. Framing Effect
16. Order Bias

Prospect Theory
• The research question asked: How are people
systematically non-utility maximizing?
– Basic tenet of economics is that people seek to
maximize their utility in a transaction
– Numerous studies have found aberrations to this basic
tenet, ways in which humans are predictably irrational
– Prospect Theory attempts to define fundamental
heuristics to predict how humans are predictably
irrational
– It does so by asking: How do people choose among
risky prospects

NON-Utility Maximizing
Which offer would you accept
50% Chance at € 10,000 € 4,500 with certainty
50% Chance of Loosing
€ 10,000
Loosing € 4,500
with certainty

Prospect Theory
• Prospect Theory examines predictable manners in
which human beings (customers) reliably make choices
which fail to maximize their utility, all else held equal
• Prospect Theory explains many consumer behavioral
effects, and therefore, strategic pricing opportunities
• More recent research is uncovering neural links which
explain prospect theory with respect to evolutionary
pressures

Losses loom larger than gains
• The aggravation that one experiences in losing
a sum of money appears to be greater than
the pleasure associated with gaining the same
amount.
• Utility functions for losses are considerably
steeper than those for gains.

Shift of Reference
• Imagine a person who is involved in a business venture, has already lost
$2000, and is now facing a choice between a sure gain of $1000 and a 50%
chance to win $2000 or nothing
• If he has not yet adapted to his losses, he is likely to code the problem as a
choice between -$2000 @ 50% and -$1000 rather than a choice between
$2000 @ 50% and $1000
• He is more likely to take the risky choice when he views the prospective
outcomes from the first frame than the second
• The fact that the tendency to bet on long-shots increases in the course of
the betting day provides support for the hypothesis that a failure to adapt
to losses induces risk taking

Diminishing Sensitivity
• Our perceptual apparatus is attuned to the evaluation of changes or
differences rather than to the evaluation of absolute magnitude.
• It is easier to discriminate between a change of 3° and a change of 6° in
room temperature than it is to discriminate between a change of 13° and
change of 16°.
• Thus, the difference in value between the gain of 100 and the gain of 200
appears to be greater than the difference between a gain of 1100 and a
gain of 1200.
• Similarly, the difference between a loss of 100 and a loss of 200 appears to
be greater than the difference between a loss of 1100 and a loss of 1200.
• The marginal value of both losses and gains decreases with their
magnitude.

Reflection Effect
• Choices made in the negative frame are the mirror of
those made in the positive frame
• Risk aversion in the positive domain is accompanied by
risk seeking in the negative domain
– People eschew risks when the risks reduce the chance that
something very pleasurable will happen
– People seek risks when the risks reduce the chance that
something very painful will happen
• Certainty increases aversion to losses as well as
desirability of gains

More Loss Averse than Gain Seeking
• A $10 loss causes more pain
than a $10 gain causes pleasure
Losses
B
Value –
(Pain)
Value +
(Pleasure)
Gains
A
Perceived
Real
Highlight GainMinimize Pain

Declining Sensitivity
• Two $5 losses cause more pain than
one $10 loss
• Two $5 gains cause more pleasure
than one $10 gain
• Both losses and gains suffer from
declining perceived impact
Unbundle GainBundle Pain
Losses
B
Value -
Value +
Gains
A
Value Function
Perceived
Real

Certainty and Pricing
• Price Guarantees
• Guarantees to match or better the lowest price accelerate customer
purchases
– Consumers are uncertain of their ability to attain the lowest price at any
particular retail outlet
– Promises to ensure the lowest price or reimbursing with a check for the
difference enables customers to purchase with greater confidence
• Uses
– Infrequently purchased consumer goods
– Matches lowest price in the market (Orbitz), matches lowest advertised price
(electronics), or redeems competitors coupons (grocers)
• Result
– Higher volumes
– Potential to reduce competitive price pressure and shift the pressure to other
dimensions of competition (costs, customer experience, distribution,
promotion, etc.)

Reference Point Sensitivity
• People are more averse to a 5%
chance of not receiving $50
than a 95% chance of gaining
$50
Losses
B
Value -
Value +
Gains
A
Value Function
Reframe Pains as Gains

Reference Point Management and
Sales
• Placing the product in customers’ hands at
bazaars
– Increases the “instant endowment effect”, thus
increasing their willingness to pay
• Asking customers to imagine the positive
implications of using the product
– If you had $5,000 more to invest in your company,
what would you do with it?
– Our offer will save you that $5,000 in the next 12
months so you can achieve your goal.

Overarching Insights from Prospect
Theory
• Organisms habituate
to steady states
• The marginal
response to changes
is diminishing
• Pain is more urgent
than pleasure
Losses
B
Value -
Value +
Gains
A
Value Function

Prospect Theory
It’s Real. It’s Human. It’s Usable.
• Utility theory in economics assumes humans are “rational”.
• We aren’t, or at least not rational in the sense that utility
theory predicts.
• Behavioral economics, from evolutionary, neural activity,
and experimental studies, better describes how customers
make purchasing decisions.
• Sales and Marketing Executives can use these insights to
influence price acceptance and deal flow.

2. Switching Costs
6. Fairness Effect
Efficiency
8. Small Pie Bias
10. Prospect Theory
– Prescriptions
13. Anchoring
15. Framing Effect
16. Order Bias
Behavioral Effects that Influence Price
Sensitivity

Reference Price Effect
• The reference price effect refers to the influence
that past prices observed by customers within a
category have on the expectation prices they hold
– Buyers often are not able to remember the prices of
items they had recently purchased.
– Even though consumers don’t have perfect recall of
past observed prices, what recall they do hold
influences their willingness to pay, or reference price.
– The reference price effect has been studied largely in
frequently purchased consumer goods markets and
can be expected to hold in other markets as well.

Reference Price Challenges
• Consumer price expectations can
be modeled as an exponential
smoothing of current and last
observed prices
– RPt = aPt-1 + (1-a)Pt
• Promotional discounts reset price
expectations to a lower level,
dampening demand in future
periods when the product is
offered at full price
• Full price periods will increase
price expectations, increasing
demand during promotional
periods
Time
Price
Reference
Price
Observed
Price

Reference Price Effect and Promotions
• Firms cycling between periods of sales promotions and
regular price periods are therefore exasperating the sharp
increase in demand during the sales promotion and sharp
decline in demand following the sales promotion.
– If that firm is using a profit sensitivity analysis alone to guide
their use of sales promotions, they may be misled into
constantly holding sales promotion, and furthermore increasing
the size of the discount, in order to continue stimulating
demand.
– The result would be a disastrous implosion of price and
destruction of profits.
– To prevent this, the reference price effect is one of many
reasons pricing professionals must go beyond purely
quantitative analysis in managing price promotions.

Endowment Effect
• According to the endowment effect, people
place more value in something once they
possess it than they otherwise would.
• The endowment effect was observed from
experiments in which students were given
items and then allowed to make trades in
order to optimize their gift.
• The trades didn’t occur.

Mug Valuations
• Decorated mugs (retail value of about $5) were placed in front of one-
third of a group of students
• To recipients of the mug - You now own the object in your possession. You
have the option of selling it if a price, which will be determined later, is
acceptable to you. What is your minimum asking price?
• To students without a mug - You have the option to either receive a mug
or a sum of money to be determined later. What is the minimum amount
of cash you would accept instead of receiving the mug?
• Average Asking Price from Mug Holders $7.12
• Average Bid Price from Non-Mug Holders $3.12
• Possessing the mug instantly increased the value

Anchoring
• People anchor price expectations based upon
information gathered early in the decision making
process.
• Once they have anchored on the initial information,
changing expectations can be difficult as it involves
relearning or uncovering new evidence that
demonstrates the fallacy of applying earlier formed
expectations in the current situation.
• Anchoring strongly sets consumer reservation prices.

Comparison Set Influence
• Customer’s price expectations are influenced by the alternatives
under consideration when making a purchase decision
– When lower priced goods are in the comparison set, customers tend
to have lower price expectations.
– When higher priced goods are in the comparison set, customers tend
to have higher price expectations.
• Adjust the comparison set towards a more favorable group.
– For instance, comparing a the price of a small car to that of a larger,
more expensive car rather than the price of a motorcycle or
alternative means of transportation.
• Include other factors
– For instance, consider a product that has a lower overall cost of
ownership than its next nearest competitor, but a higher upfront cost.
– Sellers can expand the price comparison to include total lifetime costs
rather than simply purchase price.

Framing Effect
• Research into the framing effect shows that
how a transaction is framed can affect the
customers willingness to pay.

Order Bias
• Order Bias, an effect related to anchoring, is
found in the selection of acceptable prices and
products.
– The order of presentation of prices effects the
selection of customers of products and acceptable
prices.
– With fast moving consumer good, the highest average
price was obtained when prices were presented in
descending order.
– The order bias was not statistically observed for
household appliances in some studies, yet it is still
suspected to hold outside of the FMCG market.

Loss Aversion and Order Bias
NIS at $69
NAV at $39
N360 at $79
NIS at $69
NAV at $39
N360 at $79
DescendingAscending
• Loss aversion: In comparison to a reference point, consumers are
more averse to losses than they are seeking of gains to that
reference point.
• On average, consumers tend to select a higher priced product when
presented in descending order rather than ascending order.

Offer Order
• Supports common practice for sales and marketing
communications to present a range of optional
products within the same category by starting at the
highest price product first and moving down.
– The belief is that many consumers will rest upon a higher
priced good rather than continue to exhaust all the
purchasing possibilities by moving throughout the price
points from highest to lowest.
– Thus, in sales of automobiles, mattresses, and other
consumer durables, it is common practice to show models
starting from the most expensive item and moving
downward from there.
– Also works in business markets

End-Benefit Influence
• Price sensitivity is influenced by the amount the product contributes to
the end benefits sought by a customer
– Products that contribute a high portion of the end-benefit sought by a
customer are associated with lower price sensitivity than those which are
ancillary to the end-benefit sought.
• The end-benefit effect has implications for promotional messages.
– In promoting a product, marketers are wise to stress relation of product to
goal attainment rather than simply focus on its features and attributes.
– For instance, Nutrisystem promotes its diet not on the basis of providing
packaged food products and only partially on the ability of the Nutrisystem
diet to encourage weight loss. The focal message of Nutrisystem is that their
diet enables customers to look better, be healthier, and command a positive
impression at special occasions.
– Position offerings as tightly related to the full end-benefit can make customers
less cost sensitive.

• Past prices observed by customers influence expected prices to pay.
• The moment someone has an item, they place greater value on it than they otherwise would.
13. Anchoring
• People anchor price expectations based upon information gathered early in the decision making
process.
• Customer’s price expectations are influenced by the alternatives under consideration when making
a purchase decision. Lower priced alternatives decrease price expectations. Higher priced
alternatives increase price expectations.
15. Framing Effect
• The frame through which a customer perceives an offer influences their willingness to pay.
16. Order Bias
• Present any range of optional products within the same category by starting at the highest price
product first and moving down.
• Position offerings as tightly related to the full end-benefit can make customers less cost sensitive.
Perceptual Challenges

Summary
• Price cannot be quantitative optimized in the
absence of considering qualitative influences.
• There are many psychological, decision bias,
neurological, and behavioral effects that
influence how customers perceive prices, make
evaluations, and select between competing
offers.
• Sales and marketing executives can use the
effects to influence price acceptance and improve
profit capture.

Chpt 05 psychological influences on price sensitivity

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Chpt 05 psychological influences on price sensitivity