Florian Bauer behavioral pricing pdf

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The Art of Pricing
Unexpected opportunities and how to exploit them
with Behavioral Pricing
Dr. Florian Bauer

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Cost-based
Gut-based
Competition-based
Customer-based
There is one way to ensure pricing excellence…
211/2/2017Behavioral Pricing and Selling

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“Customer-based Pricing”
We need to understand
the role of the price in customers’ decision making.
Assumptions will not help us here,
but empirical insights from Behavioral Economics!

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Perfect price
knowledge
Stable preferences
Maximum willingness
to pay
Purely egoistic
Hence,
we focus
on being
cheaper...
Financially
rational
Our assumptions mislead our pricing as we tend to assume that customers
decide rationally, so we too often focus on being cheaper and selling on price
11/2/2017 5
…and we
tend to sell
on price
Behavioral Pricing and Selling

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There is no absolute willingness to pay – rather, price acceptance which
depends on reference points, not absolute price or value
Choice (%)
16%
0%
84%
68%
32%
 Economist e-paper subscription $59
 Economist print subscription $125
 Economist e-paper & print subscrip. $125
“Decoy Pricing”: Economist
Source: Ariely
Av. revenue
rd. $ 114,-
+40%
Av. revenue
rd. $ 80,-
11/2/2017 6Behavioral Pricing and Selling

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Imperfect knowlegde
Decisions follow „rules
of thumb“ (= heuristics) …
Varying price motives
We thus need to gain
a better understanding
of price acceptance …
… and leverage
the predictably irrational
decisions
Relative price acceptance
Hates to decide but does not
want to be ripped off
Behavioral Economics proved people‘s predictable irrationality –Behavioral
Pricing wants to exploit that systematically
11/2/2017 7
… resulting in predictably
irrational decisions

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Behavioral Pricing
What are the key insights from
Behavioral Economics
when it comes to pricing?

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Drivers of price acceptance
When it comes to pricing, there are four main insights from Behavioral
Economics that should fundamentally change our perspective on pricing
1
Origin: Human decision making apparatus is not shaped by rationality but by evolution. In fact,
people are chronically incapable of making rational choices. Still, they do not want to be ripped
off. To solve that conflict, people follow certain heuristic that will lead to predictable biases

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Predictably irrational choices result from the conflict between the in-ability to
decide rationally and the need to limit negative outcomes
Incabability
to make rational decisions
(no matter why)
Motive
to avoid being
ripped off
Stable heuristics
that are rarely optimal but often good
enough (or at least appear so)
 „Homo Heuristicus“
11/2/2017BE@M me up!

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For example, when comparing complex price structure, the number of
relative differences is more important than the absolute difference, …
1111/2/2017Source: Bauer, 2000 Behavioral Pricing and Selling
Choice
*DKK=„Danish Crown“
Offer 1 Offer 2
Pair A (= Base Case)
• Installation DKK* 449,- DKK 449,-
• Mobile phone DKK 5.749,- DKK 9.589,-
• Monthly flat rate DKK 399,- DKK 239,-
• Contract duration 24 months 24 months
Pair B (= Experiment 1)
• Installation DKK 449,- DKK 719,-
+270
-270
Differences to Pair A (= Base Case)
x 1,6
x 1,7
x 1,7
x 1,7
x 1,6
72% 28%
51% 49%

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1
2
Sources: Heuristics and biases represent nothing less than additional sources of margins, and
prove the classic core assumption of stable preferences wrong. Hence, choice architecture is as
important as product architecture!

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Each effect proves that people systematically fail to decide rationally, and
each of them represents an additional source of margin
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 Fairness
 Need for control
 Sunk cost fallacy
 Loss & risk aversion
 Endowment effect
 …
 Anchoring
 Relativity
 Framing
 Local comparison
 Decoy effect
 …
 Mental accounting
 System 1 & 2
 Nudge
 Information integration
 Paradox of choice
 …
Motivation Cognition Behavior

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In most of these effects price acceptance depends on the context not on the
product alone
Choice (%)
16%
0%
84%
68%
32%
 Economist print subscription $125
“Decoy Pricing”: Economist
Offer 1 Offer 2
Pair A (= Base Case)
• Installation DKK* 449,- DKK 449,-
Pair B (= Experiment 1)
• Installation DKK 449,- DKK 719,-
Choice
72% 28%
51% 49%

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As straightforward this might sound – it is a perfect contradiction to the still
dominating value-based pricing approach and its classic tools
Source: Ariely 11/2/2017 15Behavioral Pricing and Selling
Stable preferences
Intrinsic value of the product
Perfect correlation
Context-dependent preferences
Intrinsic and extrinsic value
Loose correlation
Insights from
Behavioral Pricing:
Homo Heuristicus
Assumptions of
Value-based Pricing:
Homo Oeconomicus

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Take Rate
25%
Take Rate
11%
For example, people go for the price-usage ratio rather than the price-value
ratio – more features for the same price might be less attractive!
1611/2/2017Source: Vocatus
All national calls
to any network
All national calls
to any network
5MB data volume
€ 25,- / month € 25,- / month
Price plan
Customer group 1
Price plan
Customer group 2

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And that’s definitely a reason to celebrate, because each
effect bears the potential to skim additional margins!

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1
2
3
Typology: Yet, not all irrational decision strategies are the same. Going beyond the “negative”
model of Behavioral Economics is providing, we developed a positive model to guide strategic
pricing: Five differently irrational decision strategies to be distinguished!

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GRIPS condenses the effects into a general decision typology – a positive
model of human choice which Behavioral Economics yet failed to deliver
17.03.2017Business Breakfast München 19

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Depending on the product, the distribution of GRIPS types differs greatly –
thus requiring a highly differentiated approach
Insurance (MTPL)
Media
Telecommunications
Automotive 14 11 4
28 19 6
11 2 15
2051
29 19
38 34
in %
4031 14 10 7
02.11.2017 20

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Dependent on their pricing footprint different brand attract totally different
customer leading to highly different customer bases
Brand
Share in
Customer
Base
GRIPS at brand level
A B C D E F G H

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31%
15%
11%
33%
10%
Channel
Different channel have different profiles – challenges in one channel, might
be opportunities in others
Total
GRIPS at channel level
19%
14%
42%
14%
12%
60%
18%
11%
6%
5%

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4
1
2
3
Typology: Yet, not all irrational decision strategies are the same. Going beyond the “negative”
model of Behavioral Economics is providing, we developed a positive model to guide strategic
pricing: Five differently irrational decision strategies to be distinguished!
Character: As a consequence, people do not have an active “willingness to pay”, they rather
develop a reactive “price acceptance”. Price acceptance is not a finite resource but a muscle
that can be trained!

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iPad
Training the muscle of price acceptance: Steve Jobs presenting the iPad…

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While Steve Jobs intuitively realises the power of Behavioral Pricing by shifting
attention away from price, others sometimes fail to

II © Vocatus II © Vocatus I I11/2/2017 26Behavioral Pricing and Selling
Ultimately delete the concept of
„willingness to pay“
from your pricing vocabulary –
it is a misleading and margin-killing
concept! It‘s time to throw that
paper away, now!

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Implications for pricing
The insights from Behavioral Economics have four far reaching implications for
strategic pricing as well as pricing research
Leverage: From “product-centered inside-out” to “decision-centered outside-in”. Profit can be
made on two dimensions: What people want (value-based pricing) and how they decide
(behavioral pricing). Both need to be considered in pricing strategy and execution.1

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 Innovative product
About 20 USPs compared with previous product (a medical devise for hospitals)
 One size fits all
Sales approach tried to convince all customer of all the 20 USPs
 Unnecessary price focus
The low attention to customer needs and their perspectives on the medical device pushed the consulting process
very quickly to price negotiations, because this was the first topic both sides met with common attention and
knowledge.
B2B case study: A “one-size fits all” sales approach pushed sales staff directly
into pricing negotiations – most of the times without any need
Before the project, the internal conclusion was that one is forced to sell at the list price of the “old”
product. Hence, the huge investment in the new product would only be good for stabilizing the price levels.
Starting point

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Project approach: Behavioral segmentation
However, the complex innovation addressed different needs of the segments
– Focusing on the relevant features increases understanding of the value
"Efficiency”
Innovators
"Convenience"
Innovators
"Safety"
Innovators
1. Less waste
2. Longer usage
3. Reduced
replacement
costs
1. Easier set-up
2. Ergonomic design
3. Better display
with more
relevant
information
1. Multiple alarms
2. Guaranteed flow
of treatment
3. Clear indication of
maintenance
Segment-
specific
USPs

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Investigation of clients’ decision making style
In addition, the interest in different features correlated strongly with ^how
customers tend to decide (GRIPS)
"Efficiency”
Innovators
"Convenience"
Innovators
"Safety"
Innovators

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Segment-specific differences built the basis for a clearly differentiated selling
and pricing approach: Best fit for specific expectations
Type-related development of sales strategies
Price structure
Price dynamics
Price communication
Price level
"Efficiency”
Innovators
"Convenience"
Innovators
"Safety"
Innovators
Penetration
(TCO)
Skimming
(monthly lease)
Discount Leasing model
Skimming
(usage expenses)
Pay per use
Trial usage Not necessary Not necessary
costs vs. usage costs vs. time costs vs. risk

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Several sales tools increase the efficiency of sales pitches and lead to a
realized price premium of 50%
Outcome
3. Battle cards:
On which product arguments should I focus?
On which sales arguments should I focus?
2. Predictive segmentation tool:
What will most probably be their needs?
Which GRIPS type do I have to expect?
1. Checklists:
What do we know about the customer beforehand?
Achieved
Price Premium
with this tool:
+50%

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(behavioral pricing). Both need to be considered in pricing strategy and execution.
Opportunity: From one source to many and from reactive to active pricing (“train the
muscle“!). Research tools have to fundamentally evolve from measuring willingness to pay to
understanding the role of price in the decision making process
1
2

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Current
subscription price
According to PSM a price
increase to the next
threshold would imply a
cancellation rate of 12%
10%
20%
30%
40%
Higher
subscription price
According to PSM
10% of subscribers
will not pay the
current price
Lower
subscription price
According to PSM only
4% would cancel their
subscription if the price
were decreased
Cumulativeshareofrespondents
whowould‘certainlycancel’their
subscriptionatthisprice
Classic pricing tools also build on a rational reader which is why they lead to
false interpretations of the results, e.g. "price cuts will increase circulation"
Quelle: Vocatus 02.11.2017 34
Price
Classic approach (PSM)

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10%
20%
30%
40%
BP-optimized approach
Optimization of FAZ price level: Behavioral pricing perspective makes the
difference and helps to identify unexpected margins
Source: Vocatus
0%
1%
5%
Critical price knowledge
and price interest
Uncritical price knowledge
and price interest
2
0%
0%
2%
2%
1%
8%
4
8%
6%
1%
Recommended
price increase
310
11/2/2017 35
Current
subscription
price
Price
Shareof
“sure”churnrate

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Wave ROI Payback
1. 13 800% 2,3 Days
2. 30 200% 1 Day
Optimization of FAZ price level: Behavioral Pricing isn’t a gimmick, but a
substantial source of additional profits instead
Source: Vocatus 11/2/2017 36Behavioral Pricing and Selling

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Differentiation: From Homo Oeconomicus to GRIPS: If pricing wants to influence decisions, we
need to start price differentiating customers in respect to their decision making process, too.
This requires change management as the main barrier to profits is rarely the customer.
1
2
3

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Quelle: L‘TUR
Average
conversion:
+70%
B2C case study: GRIPS even helps to find pricing innovations where classic
pricing models would never expect them
Source: Vocatus Behavioral Pricing and Selling

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Doubts that "cheaper" is always a good deal. Sees unexpected price fairness as a guarantee of
fair quality and service in case there are problems
Is willing to pay more if the agency can justify the higher price via better service or added value
(L‘TUR guides at destination)
Sees L'TUR as first choice and premium anyway. Doesn't expect it to be the cheapest provider,
and doesn't base decision on price
Doesn‘t care about price and wants to avoid additional effort if he has found something they
want
Definitely lost – but would be anyway!
...and will be back next time for sure (sooner or later we will win).
Bargain Hunter
Result A: L‘TUR is more expensive
Risk Avoider
Price Accepter
Loyal Buyer
Indifferent Buyer
Looking at price comparison from a GRIPS perspective illustrates the power of
understanding decisions beyond the "HO" assumption
Source: Vocatus Behavioral Pricing and Selling

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Result B: L‘TUR is less expensive
Looking at price comparison from a GRIPS perspective illustrates the power of
understanding decisions beyond the "HO" assumption
Source: Vocatus
The L'TUR price comparison
halts a decision process that
would otherwise have continued,
at the risk of losing
a potential customer
Bargain Hunter
Risk Avoider
Price Accepter
Loyal Buyer
Indifferent Buyer

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Differentiation: From Homo Oeconomicus to GRIPS: If pricing wants to influence decisions, we
need to start price differentiating customers in respect to their decision making process, too.
This requires change management as the main barrier to profits is rarely the customer.
Strategy: From price level to four facets: Pricing is more than writing a price list – we have to
comprehensively design price level, structure, communications and dynamics to take
advantage of the fact that $1 is not always $1 for the customer, but it is for the company.
4
1
2
3

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“Pay as you use” model
 Variable charges that depend on usage
 Transparent cost positions
 Fair: only pay for what you get
Package model
 Various packages with fixed prices
 Price is charged if service is used or not
 Expensive: implies cost for services that
were not used
Different price structures trigger different price motives – even in B2B people
to care about control more than about rationality
Source: Vocatus BE Study 2016
29
71
B2B preference
Reason for preference:
Transparency (94%)
& budget control (86%)
 „Homo Oeconomicus“?

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Price communication is an inexpensive tool to increase conversion and/or
profit
4411/2/2017Source: Vocatus
Base Improved
Activation Deactivation
Keep Get
Upgrade Upgrade
Case study: Renewal letter

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Dependent on the customer base, different price communication strategies
work differently
Source: Vocatus
Test design
Churn
Company 1
(Value Positioned)
Company 2
(Price Positioned)
Improved Base Case -5% -6%
Activation 1 +2% -11%
Deactivation 1 -4% -9%
Deactivation 2 -8% -7%

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Better understanding the psycho-logic of price dynamics and applying it more
selectively helps to improve the bottom-line in many dimensions
Source: Vocatus
€15€23Discounts
AHT 04:0507:18
46%34%Conversion

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Better understanding the psycho-logic of price dynamics and applying it more
selectively helps to improve the bottom-line in many dimensions
Achieved
sales increase:
> 75%
on average

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Behavioral Pricing allows to tap previously unknown
margin potentials
11/2/2017 49
 Behavioral Pricing: Forget the classic pricing approaches!
Start by understanding customers decision and leverage the margin potentials
it provides
 Pricing strategy: Four facets have to be considered, not just price levels
 Pricing research: Start to use more elaborated tools than
conjoint, choice modeling or PSM
 Change Management: Do not forget that the biggest hurdle
to more profits might be inside the company as Behavioral
Pricing challenges a lot of common beliefs
 Implementation: Behavioral Pricing has to be reflected
in incentive and discount management, tools, training and controlling
 Approach: Step-wise implementation is possible – starting with
the optimization of one aspect to systematic implementation and KPI monitoring

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Vocatus AG
Oppelner Straße 5
82194 Gröbenzell/München
Telefon: +49 8142 5069-0
Telefax: +49 8142 5069-299
beratung@vocatus.de
www.vocatus.de
Thank you for your kind attention!
Dr. Florian Bauer
Managing Director

Florian Bauer behavioral pricing pdf

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