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Florian Bauer behavioral pricing pdf

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Presentación de Florian Bauer en desayuno de LEXIA, donde presentó GRIPS, herramienta de uso exclusivo en México.

Publicada em: Economia e finanças
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Florian Bauer behavioral pricing pdf

  1. 1. II © Vocatus I The Art of Pricing Unexpected opportunities and how to exploit them with Behavioral Pricing Dr. Florian Bauer
  2. 2. II © Vocatus I Cost-based Gut-based Competition-based Customer-based There is one way to ensure pricing excellence… 211/2/2017Behavioral Pricing and Selling
  3. 3. II © Vocatus II © Vocatus I I11/2/2017 4Behavioral Pricing and Selling “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!
  4. 4. II © Vocatus I 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
  5. 5. II © Vocatus I 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  Economist e-paper subscription $59  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
  6. 6. II © Vocatus I 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 Behavioral Pricing and Selling
  7. 7. II © Vocatus II © Vocatus I I Behavioral Pricing What are the key insights from Behavioral Economics when it comes to pricing? 11/2/2017 8Behavioral Pricing and Selling
  8. 8. II © Vocatus I 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 911/2/2017Behavioral Pricing and Selling 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
  9. 9. II © Vocatus I 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!
  10. 10. II © Vocatus I 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,- • Mobile phone DKK 5.749,- DKK 9.319,- • Monthly flat rate DKK 399,- DKK 239,- • Contract duration 24 months 24 months +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%
  11. 11. II © Vocatus I 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 1211/2/2017Behavioral Pricing and Selling 1 2 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 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!
  12. 12. II © Vocatus I Each effect proves that people systematically fail to decide rationally, and each of them represents an additional source of margin 1311/2/2017  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 Behavioral Pricing and Selling
  13. 13. II © Vocatus I In most of these effects price acceptance depends on the context not on the product alone Choice (%) 16% 0% 84% 68% 32%  Economist e-paper subscription $59  Economist print subscription $125  Economist e-paper & print subscrip. $125  Economist e-paper subscription $59  Economist e-paper & print subscrip. $125 “Decoy Pricing”: Economist 11/2/2017 14Behavioral Pricing and Selling 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,- • Mobile phone DKK 5.749,- DKK 9.319,- • Monthly flat rate DKK 399,- DKK 239,- • Contract duration 24 months 24 months Choice 72% 28% 51% 49%
  14. 14. II © Vocatus I 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
  15. 15. II © Vocatus I 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 Behavioral Pricing and Selling
  16. 16. II © Vocatus I And that’s definitely a reason to celebrate, because each effect bears the potential to skim additional margins! Behavioral Pricing and Selling
  17. 17. II © Vocatus I 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 1811/2/2017Behavioral Pricing and Selling 1 2 3 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 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! 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!
  18. 18. II © Vocatus I 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
  19. 19. II © Vocatus I 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
  20. 20. II © Vocatus I 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
  21. 21. II © Vocatus I 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%
  22. 22. II © Vocatus I 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 2311/2/2017Behavioral Pricing and Selling 4 1 2 3 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 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! 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!
  23. 23. II © Vocatus I iPad Training the muscle of price acceptance: Steve Jobs presenting the iPad…
  24. 24. II © Vocatus I While Steve Jobs intuitively realises the power of Behavioral Pricing by shifting attention away from price, others sometimes fail to
  25. 25. 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!
  26. 26. II © Vocatus I Implications for pricing The insights from Behavioral Economics have four far reaching implications for strategic pricing as well as pricing research 2711/2/2017Behavioral Pricing and Selling 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
  27. 27. II © Vocatus I  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
  28. 28. II © Vocatus I 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
  29. 29. II © Vocatus I 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
  30. 30. II © Vocatus I 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
  31. 31. II © Vocatus I 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%
  32. 32. II © Vocatus I Implications for pricing The insights from Behavioral Economics have four far reaching implications for strategic pricing as well as pricing research 3311/2/2017Behavioral Pricing and Selling 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. 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
  33. 33. II © Vocatus I 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)
  34. 34. II © Vocatus I 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 Behavioral Pricing and Selling
  35. 35. II © Vocatus I 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
  36. 36. II © Vocatus I Implications for pricing The insights from Behavioral Economics have four far reaching implications for strategic pricing as well as pricing research 3711/2/2017Behavioral Pricing and Selling 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. 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 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
  37. 37. II © Vocatus I 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
  38. 38. II © Vocatus I 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
  39. 39. II © Vocatus I 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 Behavioral Pricing and Selling
  40. 40. II © Vocatus I Implications for pricing The insights from Behavioral Economics have four far reaching implications for strategic pricing as well as pricing research 4111/2/2017Behavioral Pricing and Selling 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. 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 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
  41. 41. II © Vocatus I “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“? Behavioral Pricing and Selling
  42. 42. II © Vocatus I Price communication is an inexpensive tool to increase conversion and/or profit 4411/2/2017Source: Vocatus Base Improved Activation Deactivation Keep Get Upgrade Upgrade Behavioral Pricing and Selling Case study: Renewal letter
  43. 43. II © Vocatus I 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% Activation 2 +8% -6% Activation 3 +11% -7% Activation 4 +1% -4% Activation 5 +8% -2% Deactivation 1 -4% -9% Deactivation 2 -8% -7% 11/2/2017 45Behavioral Pricing and Selling
  44. 44. II © Vocatus I 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
  45. 45. II © Vocatus I 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
  46. 46. II © Vocatus I 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 Behavioral Pricing and Selling
  47. 47. II © Vocatus I 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

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