In the world of commerce, the relationship between price and consumer perception is more nuanced than it appears at first glance. Beyond mere numbers, the evaluation of prices by consumers is influenced by a set of cognitive biases. While the anchoring effect often garners attention, there are several other biases that play a crucial role. This article aims to provide a clear overview of these biases and their implications for pricing strategies.

- Anchoring Effect

Anchoring refers to our tendency to rely on the first piece of information (anchor) when making decisions. This was observed by Tversky and Kahneman (1974), in an experiment where participants were first shown a random number generated by spinning a wheel. They were then asked to estimate what percentage of African countries are in the United Nations. Those exposed to higher random numbers consistently estimated higher percentages.

Retailers frequently showcase the original price slashed out with the discounted price next to it. By doing so, the original price serves as an anchor, making the discounted price seem like a better deal.

Here are a few quick ways you can incorporate this bias into your pricing strategy:
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• Set High Reference Points: When introducing a product or service, initially set a higher reference price. Later discounts or promotions will seem more valuable in comparison.
• Highlight Previous Prices: If prices have been reduced, clearly show the original price alongside the new one to emphasize the discount.
• Tiered Offerings: Offer products in a range of prices. The highest price can act as an anchor, making the other options appear more reasonable.

- Decoy Effect‍

The Decoy Effect, also known as the "asymmetric dominance effect", is a cognitive bias where consumers change their preference between two options when a third, less appealing 3^rd option is introduced.

The decoy effect has been studied extensively. In one popular experiment participants were given 3 subscription options:
1. Online subscription for $59
2. Print subscription $125
3. Print and online subscription $125

When presented with these options, 84% of the participants chose the combined print and online subscription, 0% chose the print-only option, and 16% chose the online-only subscription. The print-only option acts as a decoy since it seems like an unattractive offer. Its presence made the print + online option seem like a fantastic deal in comparison.

In real life you can see this with cinema pricing, there might be three versions of seating: standard, premium, and ultra-premium. The ultra-premium might be very pricey with only slightly more benefits than premium. While few might choose ultra-premium, its mere presence can make the premium option seem more valuable.

Try and incorporate this into your business strategy by:

• Identify Core Offerings: Understand the most popular products or services and what makes them appealing.
• Design the Decoy: Introduce a new product or service that is similar in price to the more expensive core offering but has fewer features or benefits. This product or service should not necessarily be created to sell in large quantities but to act as a reference point.
• Position the Decoy: Present all options side-by-side, ensuring the comparison is easy for consumers. The objective is to make the core offering (the one you want to sell most of) look like better value for money next to the decoy.
• Review & Adjust: As with all strategies, regularly review the performance. If the decoy isn't elevating the perceived value of the core offering, consider adjusting features, benefits, or pricing.

- Price Framing

Price framing refers to our tendency to perceive value differently depending on the way it is presented. This is evidenced in a study by Shampanier, Mazar, & Ariely (2007) where they offered two separate snack deals to participants: one option was a high-quality truffle for 26 cents, and the other was a milk chocolate kiss for 1 cent. They then reduced the price of each by just one cent. The majority chose the truffle in the first scenario but chose the now-free kiss in the second scenario, emphasizing the allure of "free”.

Companies like Spotify; Canva and Dropbox use this principle in Freemium models. They offer core features for free, betting on the allure of "free" to draw users in, with hopes of upgrading them later.

Take advantage of this bias by doing the following:

• Freemium Models: Provide basic services for free, with premium features available for a fee.
• Highlight Savings: Instead of just showing the discounted price, emphasize the amount or percentage saved.
• Bundle Offers: Combine products and showcase the total saving when items are bought together.

The interplay between behavioral biases and pricing presents businesses with valuable insights for shaping their pricing strategies. When effectively integrated, these insights can lead to more informed pricing decisions. However, it's important to approach these strategies with transparency and honesty, always prioritizing the provision of genuine value to consumers.

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References

1. ‍‍Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131.
2. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348.
3. Shampanier, K., Mazar, N., & Ariely, D. (2007). Zero as a special price: The true value of free products. Marketing Science, 26(6), 742-757.
4. Simonson, I., & Tversky, A. (1992). Choice in context: Tradeoff contrast and extremeness aversion. Journal of Marketing Research, 29(3), 281-295.
5. Thomas, M., & Morwitz, V. (2009). Heuristics in numerical cognition: Implications for pricing. Handbook of Pricing Research in Marketing, 132-149.