Vocatus is a consulting firm based in Munich that helps companies factor in the behavior and desires of their consumers, however irrational they may seem, into their product design, price strategy, and communication with their customers. Gaby Wiegran, one of the founders of the firm, explains that their strategic management services are based on Behavioral Economics, a discipline popularized by Daniel Kahneman, Nobel Prize in Economic Sciences, with his book Thinking Fast and Slow.
The approach of Dr. Wiegran and her team at Vocatus is guided by empirical research. The assumption is that we generally make irrational buying decisions. Yet irrational behavior is still systematic and predictable.
In a personal conversation with this Verb correspondent that later continued via electronic messaging, Dr. Wiegran provided insights into our purchasing choices and why price may not necessarily be the deciding factor in them. When people say did not buy something because it was “too expensive,” they are often avoiding talking about a decision that is too complicated to explain.
Verb: Why do we pay the prices we do?
Dr. Wiegran: In most markets there are typically five different ways to make purchasing decisions. Which decision making process a person uses depends on the person but also on the product and the situation. The same person can be a bargain hunter when shopping for a new phone, a risk avoider when buying health insurance, or a routine buyer when buying butter. The very same person can avidly compare prices when shopping for chocolate at Aldi (a German-owned discount supermarket chain) and one day later be totally indifferent to the price when buying that very same chocolate bar for twice the price at a fuel station.
The different types are explained quite well in this short clip prepared by Vocatus. The old idea in economics of a Homo Economicus, who has a certain set willingness to pay for a specific product, has perfect knowledge of all the products on the market, and makes rational and unemotional decisions is just that: an idea. As Behavioral Economics shows us, this idea is pretty far away from real human decision making.
Can we have a rational approach to price-setting?
Certainly. Every company needs to know how their customers really make decisions. Then they can adapt the product, the communication, the price level, the price structure, and the price dynamic to that decision-making pattern. It makes the product more adapted to the customer’s needs and also makes the decision-making process easier and less painful for the customer.
In your many years of experience, what have been the most surprising or counterintuitive takeaways from your research in the field?
Companies still grossly overestimate how important the price is in the decision-making process. Many customers don’t know the price (even for products they just bought) and the price was far less important in the decision-making process than companies usually assume. When they ask the customer why they did not buy, the answer might often be, “It was too expensive.” But that is only because the customer did not feel like explaining that, firstly, the product has 23 features of which he only needs 8, and that, secondly, the number of different options offered was just too overwhelming and the decision seemed too complicated, so the customer decided not to make a decision at all.
Also, in quite a few projects we found that fairness is a factor that can be much more important than price.
Newspaper subscriptions are also a good example. Newspapers are usually afraid to raise prices. From their past experience, it leads to cancellation of subscriptions, which reduces the circulation and with it, the prices they can ask for from the advertisers. When raising prices they usually put an editorial on the first page, announcing the price increase, apologizing for it (prices of energy and paper have gone up, etcetera). But to give more value to the reader, they add a special about vacations for the next four weeks. And predictably, a lot of people cancel their subscription. And the newspaper assumes it was because of the price.
When we interviewed a few thousand people to find out the real reason why they cancelled their subscription, we found the following: People do not know how much they pay for their subscription, because it has been automatically taken out of their bank account for decades. If the newspaper had not informed about it on page 1, they would not even have noticed the price increase. The main reason for cancelling is that the newspaper has become too thick and they don’t get through it during breakfast. And they feel bad every day because they did not make it through the paper. And it always feels bad to pay for something you are not using. So our advice was: Inform about the price increase on page 35 at the bottom, don’t give reasons or apologies and do not make the paper thicker. And that works beautifully. (Of course, we also do a more detailed analysis about what the optimal new price should be). And that is the reason why Vocatus has done the pricing strategy for basically all German newspapers. And most DAX-companies.
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