Separate the Pain of Paying from Consumption

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En provenance du cours de University of Virginia

Customer Value in Pricing Strategy

104 notes

University of Virginia

Customer Value in Pricing Strategy

104 notes

Cours 2 sur 4 dans Specialization Pricing Strategy Optimization

The traditional approach to pricing based on costs works to pay the bills, but it leaves revenue on the table. You can, in fact, price your products in a way that increases sales--if you know what your customers are willing to pay and can leverage psychology to create better deal and discount plans. In this course, we'll show you how to price a product based on how your customers value it and the psychology behind their purchase decisions. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of value-based pricing and how to use it to capture more revenue. By the end of this course, you'll be able to... -- Apply knowledge of customer value to price products -- Leverage core value-based pricing techniques to inform pricing decisions -- Measure customer willingness to pay using models (surveys, conjoint analysis, other data) -- Use knowledge of consumer psychology to set prices beneficial to both consumers and sellers

À partir de la leçon

Considering the Human Nature of Customers

Last week you considered pricing using a rational utility model. But humans are not always rational beings--and your pricing strategy needs to consider other behavioral drivers. We'll look at the psychology behind consumer purchase decisions and the mental accounting that impacts those decisions. Next we'll consider consumer price perceptions and ways to frame prices and create better deals and discount plans that work for both the consumer and the seller. Then, we'll take a look at two real-world cases, the Portland Trailblazers and Fidelity Investments so that you can practice using tools from throughout the course in a real-world case. You'll finish the course with fresh insights into value-based pricing and its applications.

Considering Consumer Price Perceptions: The Framing Effect4:52

Gain and Loss Frames in Pricing2:55

The Pain of Paying3:00

Separate the Pain of Paying from Consumption6:01

Rencontrer les enseignants

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing

So what are some of the ways that can separate the pain of

paying from the consumption experience?

Before we talk about some of the mechanism here, let's do a quick mental activity.

Think about if you are about to go on your next big vacation,

how would you like to finance your vacation?

Would you rather pay before or after your next vacation?

Well it's the timing of the payment actually matters,

if you think about how much you are going to enjoy the vacation.

If you decide that you want to pay before your vacation,

the pain of paying is being separated from the consumption experience.

Because you have already paid ahead, and

you don't get to think about each single transaction during your vacation.

Now, if you would like to pay after your vacation, think about what can happen

psychologically, even though this makes perfect economic sense.

You don't pay for your vacation until you have evaluated the service you have

received until you have evaluated our own experience.

But when you pay after your vacation the actual pain of paying is going to

interfere with your enjoyment of your vacation.

Because you are going to think about each activity,

each meal in terms of how much it costs you.

It's taking the pleasure away from your next big vacation.

So the takeaway here is that you want to think about how to maximally

maximize the psychological benefit for any consumption experience.

And you want to make sure consumers can pay ahead of time, so

that they get to enjoy the experience to the maximal level.

Now, if we are going with this way,

you need to manage this sticker shock at the moment of consideration.

How do you justify consumers to pay before their consumption,

and how do you justify that big amount?

So I'm going to recommend that you can use the “pennies-

a-day” strategy prior to the purchase.

In the case of considering of the refrigerator,

on the $2,000 refrigerator may look really expensive.

But if you can break down the cost in terms of daily use,

that actually only comes to $5 a day for an entire year.

So when you can break it down in terms of more manageable terms,

consumers are going to have an easier time relay to the payment.

And it's easier for them to justify,

when they are considering making their next big purchase.

Other ways that you can separate the pain of paying from the consumption experience,

is to aggregate or to lump the payments together.

So credit card is the perfect example that aggregates payment together.

Because you're no longer thinking about each single transaction anymore,

and if we have learn anything from mental accounting.

When multiple losses are mentally coded as one single loss,

you tend to experience less negative emotion overall than if you

want to experience each of those negative episodes on its own.

So overall when you can lump all the payments together consumers are going

to feel much less of those pain of paying.

So the similar example would be to use a flat rate fee structure for

shipping so the consumers don't have to think about paying for

shipping for each of their single orders.

Other ways that you can separate the pain of paying,

including a strategy called freemium.

So freemium is really when you offer a free product to your customer

so that they get to enjoy the product to the maximum level.

So this is really going to boost their experience,

because they no longer thinking about the pain of paying.

And at a later point when they have decided that they've enjoyed using

the product enough.

They will be much more willing to upgrade to the premium product, and

they won't mind paying for the service.

Because they already have very high anticipated consumption

experience from the previous usage.

Now obviously when price hikes take place,

that is when the pain of paying can becomes all of a sudden highly salient.

What consumer typically experience in this case is that they are agonized.

The very definition of which means that they tend to experience

the pain much more acutely.

And as a result, they're likely to become angry, if they perceive

the price hike to be related to the company making greater profit.

Now, a recent case in Poland would be Uber's surge pricing.

So Uber's surge pricing charges 2 to 10 times regular fare to these customers and

consumers are now happy of surge price.

Obviously, Uber has taken noticed, and they have revised how they

present the surge pricing information to their customers.

So the consumer no longer feel that acute sense of pain of paying.

And some of the fairer ways when you have to raise price,

including providing extra service to justify the cost.

And also really work on product development so that you can develop

a new product that's not currently available in the market.

So the consumers are impossible to do price comparisons.

So these are some of the ways that can help mitigate the pain of paying.

And the key take away here is that it's such an important factor and

you really want to be mindful of when that happens.

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