Chapter 7. Pricing Psychology

Customer Type: B2B/B2C | Buyer’s Journey (GTM): Sales-Led v. Self-Directed | Psychology 2Effects and Cognitive Biases

[15 min. read]

The human brain is the most complex thing in the universe.

One of its main jobs is making decisions. Research has uncovered certain norms that help predict what people are likely to choose, prefer, and do.

For six chapters we’ve looked at value, demand, and WTP as static facts in need of discovery.

But what if WTP isn’t static? What if you can change the customer’s mind?

Well, you can. Sometimes.

Knowing the research into understanding the psychology of pricing and purchase decisions gives you tools to influence WTP.

Maybe that sounds like a pile of manipulative mind-bending voodoo. But I view it as every marketer’s job to understand some basic truths about human nature, happiness, and satisfaction.

7a. Customer Types

B2B and B2C are more than just jargon.

Business-to-business (B2B) or business-to-consumer (B2C) describe distinct buyer-seller configurations with different psychology at work. Individual consumers buy differently than businesses.

Hang on, you say. There’s still a person making the decision (a business is just a bunch of people, right?). So why are they so different?

It’s the accountability. B2C purchase decisions begin and end with the buyer. As a result, B2C sales tend to be more emotional and impulse-driven.

“Peace of mind” or “getting a great deal” can be big drivers for B2C purchases.

My first sales job was selling real estate—big ticket B2C.

I was shocked that buyers often made such an expensive and important financial decision so emotionally. They didn’t do deep analysis, call everyone they knew, or come through a home dozens of times.

They used what I imagine was the same decision process as a trip to the grocery store.

B2B purchases on the other hand tend to be more “considered” and the decision process tends to be long. Sometimes this is because there is a “buying committee” of stakeholders that need to reach consensus in order to purchase. It’s also because the purchase decision can come under review.

IBM’s old slogan, “Nobody ever got fired for choosing IBM” was aimed directly at the psychology of B2B sales. Buyers needed to be able to justify and defend their decision. As a result B2B sales tend to be more technical and feature-driven.

What about more nuanced categories like B2B2C, B2SMB, DTC, C2C and so on? (Here’s a breakdown by Tradly.)

DTC and C2C represent different seller configurations, but the buyer is still a consumer, so these behave like B2C. As a rule, SMB sales also behave a lot like B2C because the company is small and usually doesn’t have the accountability infrastructure. The purchaser is often the founder or CEO who doesn’t report to anyone upstream.

On the other hand B2B2C, such as selling to a restaurant, hospital, retailer, etc. can usually be lumped in with B2B.

7b. Buyer’s Journey (GTM)

Self-directed (such as PLG) or sales-led go-to-market approaches have different implications for pricing. These are often called GTMs, but I’ve used “Buyer’s Journey” here because how you take a product to market is less important than how a customer buys.

Product-led growth (PLG) software companies drive hard toward a self-directed sale, or at least a product usage-based qualification. But PLG isn’t the only type of self-directed sale. Other examples include e-commerce, vending machines, and self-checkout.

Some products, however, require a salesperson to resolve concerns, select the right configuration, navigate internal stakeholders, or nudge buyers through the sales pipeline.

You might start down the product-led or sales-led path only to find you need to introduce the borrow from the other journey later on. Many companies that start PLG ultimately need to add a sales function to continue growing. Many early PLG companies discovered this as they matured.

Key to determining which approach fits you is your ticket size, or in the case of subscription sales the size of your annual contract value (ACV). If you need salespeople, your ACV needs to be large enough to support their commissions and compensation. If that isn’t possible, you’ll need to explore a self-directed go-to-market strategy.

Whatever the case, there’s a lot of psychology at work and you’ve got to consider how the journey impacts both your cost and the buyer’s perceptions

7c. Psychological Effects/Cognitive Biases

Research has produced an enormous list of psychological effects and cognitive biases.

When it comes to pricing, I group the most relevant ones into four groups: First, Friends, Reactions, & References.

First

The first thing we encounter or the first thing we recall has an outsized impact on how we perceive everything that follows.

Anchoring. Also known as reference prices describes how the price we know influences our perceptions of any subsequent price. Presenting a product as normally $25, but currently on sale for $12. We perceive $12 as a discount. The opposite is also true if we anchor at a lower price, we can make the same $12 price feel expensive.

Primacy Bias. Related to Anchoring this is the phenomenon that in any list, we will give more weight to the first item on the list.

Recency Bias. Our memory fades, so things we saw recently are weighted more than things we saw in the past. In his book, Thinking Fast, Thinking Slow, Psychologist Daniel Kahneman said, “We give too much weight to information we’ve seen, heard, read or experienced most recently.”

Availability Bias/Availability Heuristic. We overemphasize information that is available to us—things we know or can recall. In effect, “only” is another way to be “first.”

Frequency Bias. We learn through repetition. The decay of our memory can be mitigated by frequency. We are more likely to overemphasize things we have seen repeatedly. Being the first item someone can recall is another way to be first.

Mere Exposure Effect. This simply states that we prefer things with which we are familiar.

In Robert Cialdini’s 1984 classic, Influence: The Psychology of Persuasion, he tells the story of the Drubeck brothers as told by Leo Rosten.

Sid and Harry Drubeck were tailors. Sid would be helping a customer admiring a new suit in front of the mirror. Admitting to poor hearing, Sid would ask the customer to speak up as they chatted. Once the customer asked Sid for a price, he would call back to Harry and ask how much for the suit.

Harry would shout back, “That top-quality suit is $42.”

To which Sid would relay, “He says it’s $22.”

The customer would rush to pay the $22 before too much discussion between the brothers might reveal the steep discount due to Sid’s hearing problem. Of course, $22 was a high price and exactly what Sid and Harry intended to sell for, but the customer was happier to pay it when they thought they were getting a discount.

A high-tech example comes from venture capitalist Mark Suster’s interview on the SaaStr podcast. Suster talks about pricing strategy from his time at Salesforce.com and the then-novel pricing strategy of pricing at a premium and then liberally discounting.

If you can expose customers to any larger number first, it will influence their frame of reference.

The theme is that sequence matters. If you can expose customers to any larger number first, it will influence their frame of reference. To make your price appear lower, introduce a higher price first, often, and soon relative to the time you want a customer to be exposed to the price you want him or her to pay.

Friends

Humans are herd animals in many ways. We take cues from others and we care about our relationships to those around us. Others also influence our WTP.

Social Proof

Nobody wants to be the first kid in the pool. But once one kid jumps in, peer pressure takes over and everyone follows.

That’s because we are primed to see the behavior of others as a signal for what we should do and what is safe. Ratings, reviews, testimonials, and case studies all lower our guard and increase WTP.

Under the heading of Social Proof are several more nuanced effects.

The Bandwagon Effect. Also called Conformity Bias, is that we tend to adopt behaviors for no other reason than because others are doing it. We sometimes do this against our own beliefs.

The Belonging Effect. We derive emotional value from a sense of belonging to a group. Seth Godin’s book Tribes explains how deeply our relationships with brands are affected by our perceptions that a brand shares our beliefs.

Community Bias. We tend to overvalue thoughts that are popular in our communities and undervalue thoughts from outside the community.

Likability Effect. Similarly, we tend to like those who are most similar to us, whether they are similar in the food they like, the sports teams they follow, or the brands they wear.

Mimicry Bias. We not only imitate the large actions of the herd, but also small nuanced actions. We unconsciously imitate gestures, facial expressions, speech and movements of those we are with.

Authority Bias. We tend to trust figures of authority. We see this with influencers, experts, public speakers, and those with large followings.

Essentially Social Proof and its related effects show us that humans are wired to get and stay in sync with those around them.

If you can wrap your pricing in social proof, people will be more likely to buy.

More than just observable characteristics of others, sometimes we are motivated by how we perceive our relationships with others will be affected.

Gain or Loss

A number of biases are tied to our sense of investment, gain, or loss from our social relationships.

The Fear of Missing Out (FOMO). Also called the Scarcity Effect this is when we feel like others are having a positive experience, we want to have it with them. This is the psychological root behind the demand curve, where scarcity drives up prices.

Loss Aversion. Just like we fear losing opportunities, we fear other losses. This is the idea that because a loss hurts disproportionately more than the happiness we feel at a gain (losing $100 is more significant than gaining $200), we will do everything in our power to avoid it.

Reciprocity. Part of most cultures is the idea that when someone gives you something, the appropriate response is to give something in return.

Things that appear as gifts: free add-ons, free samples, generous terms, etc. all motivate a sense of reciprocity.

Endowment Effect. We tend to overvalue things we own and feel they are worth more than we would pay for them new. This impacts how customers experience free trials. As trials expire, customers feel a fear of losing something they have gotten used to possessing.

Ikea Effect. When we invest time and effort and have a hand in creating something, we value it more than if we merely purchase it. Products that we invest in setting up or where we build on it during a trial, are more likely to convert at the end of their trials.

Momentum Effect. Also called the Foot in the Door Effect, if we can get a customer to take small steps toward a purchase, they are more likely to take subsequent steps and complete the purchase. Pilots, introductory offers, and discounts followed by upsells all follow this principle.

Disposition Effect. Gains don’t have to be realized to motivate purchase behavior. We often make purchase decisions based on perceived gains. We anticipate an outcome in the future, and make decisions as if we have already received it.

Before you write this off as foolish, most investing, insurance, putting money away for retirement, etc. are trading on the Disposition Effect.
In addition to a perceived future gain is the idea that the buyer will feel smart and prepared in the future.

Direct buyers to higher priced products by loading up the features at the top tier to dial up the perceived value.

Impact Bias. The nail in the coffin of loss is Impact Bias, which is that we overestimate the intensity of the way we will feel in the future. We think the loss will feel deeper and more intense than it actually will. The same psychology that keeps us in bad jobs and bad relationships also keeps us from canceling subscriptions.

Context

What surrounds an offer impacts our perception of it. This may be physically, visually, or metaphorically in time.

Framing. When we present offers in a desirable context or show a desirable outcome as a result of a purchase, we increase the customer’s WTP.

The power of Framing is that customer behavior can change based solely on how the offer is framed. Nothing about the offer itself—terms, price, product features, etc.—needs to be different.

Products can be purchased outside the context in which they will be used. If I buy CRM software for instance, I make the purchase decision before the software is set up and long before I am extracting its full value. Putting the future benefit in context helps bridge this gap.

The downside is that this is also why we got the Marlboro Man and generations of beer commercials showing bars full of supermodels.

But there is an authentic and genuine version where we allow the customer to get a real sense of how a product solves a problem in their day to day life.

Reactions

The First and Friends categories are pretty understandable and rational.

Then there is a whole world of our psychology that is unconscious, that happens without our awareness for the most part. This type of effect, I call Reactions because they just happen.

As a general rule, we seek comfort and clarity, avoid confusion and pain.

Deeper and more evolutionarily ancient are the emotions and decision making that stem from the more primitive parts of our brains.

The amygdala, or as it has become popularly known, the lizard or crocodile brain, is where we make gut reaction decisions.

Fluency. The idea that if things feel as expected, we scan a pricing page, or a product description and it feels familiar, then we are more likely to believe we understand it and be confident in our decision to purchase. We’re familiar with Fluency in reading and likewise pricing information is most fluent when it’s organized left-to-right (for Western cultures) and top-to-bottom.

Cognitive Dissonance. People look for evidence that purchase decisions were smart or correct. We all want to believe we are internally consistent. When onboarding and customer success teams reinforce our belief that a decision was good, it can be a key satisfaction driver and influence repeat purchases, DRR/NRR, and NPS.

Buyer’s Remorse. The tendency to second-guess or doubt our purchase decisions.

Choice Supportive Bias. The opposite of Buyer’s Remorse, the tendency to retroactively assign positive aspects to past decisions.

Purchase Satisfaction. Happiness with a purchase, NPS, consistency in our decision process.

Confirmation Bias. That we seek and remember information that supports our previously held beliefs.

Irrational Escalation. This is the idea that we make decisions based on previous rational decisions even when the scale has rendered them irrational. An example is a bidding war in an auction may prompt both bidders to offer more than they would be able to rationally justify.

Status Quo Bias. This is a preference for things as they are, an avoidance of change. Oftentimes the most significant competitor a company faces is not another company or product, it’s simply making the choice to buy nothing at all.

Decoy Effect. What if you have two different products, and they aren’t very different?

You can introduce a decoy. By listing another option whose only purpose is to give context or comparative strength to one of the original choices, you can disrupt a buyer’s indecision.

For example, if the third option is priced much higher but does not include much more value the buyer will often see more value in the price/product combo we want them to select.

Paradox of Choice. Also called Analysis Paralysis, Spoiled by Choice and an Embarrassment of Riches. The Paradox of Choice is that more choices seems to paradoxically increase our anxiety and confusion and decrease our ability to make a choice.

This is the principle behind presenting product tiers as good, better, and best. In a 2016 study, this method was used by nearly 70% of the SaaS companies surveyed. Three levels is enough to compare, but not so much that the customer is flooded and overwhelmed.

More choices, more options configurations, or possibilities just makes choosing more difficult. (See Leader, Filler, Killer in Chapter 5 for more on this.)

This seems to contradict the Decoy Effect, but seems to be related more to clarity than the precise number of choices.

Put simply, confused customers don’t buy.

References

The fourth bucket of psychology is called References because our perception of these things refers to objects and attributes in the real world. Numbers are abstract and hard for the brain to accurately understand. Visual and linguistic cues can influence perception of numerical values and our brains will pick up on hints at relative scale.

Nick Kolenda is the best in-depth resource on this, but I’ll include a digest.

Size. Generally speaking size is about things we want to appear bigger and more prominent and those we want to appear smaller.

The demand curve tells us that smaller prices will increase demand. So we want to present our price in a way that makes it appear smaller. You may want to use smaller fonts for prices.

Amount. Our perceptions of amounts affect our perceptions of price. Typically we want to show a high amount of value for a low amount of price.

Weight. Heavier things may appear more substantial. Conversely, cookies placed high on a package may look lighter and imply that they will not increase the weight of the person who consumes them.

Placing prices higher on the page can make them appear “lighter.”

Proximity. We tend to group things together. You may want to associate discounts, social proof, or payment security information with prices by making them closer on the page.

If you need to place words near the price, use words that indicate smallness.

Language. Removing commas from numbers and using fewer syllables may make them appear simpler and less confusing.

Use alliteration, such as, “two T-shirts for $25.”

Activations. Related to the First effects, seeing something activates that thing in our brain and primes us to think about it. Showing an apple, might create an association with the design and tech-forwardness of Apple Computers, for example.