September 22, 2015
This blog is part of our “How to Be a Better Pricing Strategist” series, in which we asked top thought leaders and industry experts in the pricing field: “What is the best advice you could give a fellow pricing strategist?” Read all the responses here.
The best advice I would give a fellow pricing strategist is to always keep in mind that people are irrational. Even the rational ones. In pricing strategically, we rely heavily on data. But, what is the source of our data? Sales based on purchases by irrational people.
Different people pay wildly different prices for the same product. In fact, the same person is willing to pay wildly different prices for the same product on different days. Customers say $200 is too expensive for a product, but then happily buy it when they see the next model up costs $500. $5 is just too much, but $10 with a 50% discount is a steal. We’ve come up with terms like “anchor pricing” or “relative pricing” to explain these phenomena (and they are useful concepts), but at the end of the day, people are simply irrational.
Does this mean our data is useless? That pricing is a futile activity? Hardly. We know to ignore anecdotal pricing, but then base decisions on “averages.” We compensate sales on revenue, but measure business performance on margin. We continue to undercut our competitors to win market share, then act surprised when they do the same and the entire market plummets. In short, we price irrationally.
Instead, we need to look for patterns in the irrational. We need to segment it again, and maybe even once more. We understand “anchor pricing,” but do we use it? Do we track it? Are we segmenting the data in a meaningful way to enhance future pricing? If the answer is “no” to any of the above, are you pricing rationally?
In sum, people are irrational, but your prices don’t have to be.
To read more expert tips and advice, take a look at our Pricing Best Practices SlideBook here.