Does a $214 Grilled Cheese Really Sell? How Behavioral Economics Tricks Your Brain into Buying

Why Is Apple So Expensive? Learn the ‘Pricing Mindset’ Strategy That Makes Customers Pay More

Stop guessing your prices and start using science. Join behavioral economist Melina Palmer in The Truth About Pricing to discover how ‘nudges,’ ‘social proof,’ and ‘choice architecture’ can make your product the obvious choice—regardless of the price tag. Don’t leave money on the table—read the full summary below to learn the simple ‘wingman’ pricing trick that guides customers exactly where you want them.

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You may be surprised to learn that the price of a product or service is not most people’s first consideration when they’re making buying decisions. Consultant Melina Palmer advises businesses on how to focus on human behavior to get people to buy, instead of just setting a price and hoping to attract customers. The pricing context of behavioral economics draws on tactics such as nudging consumers at appropriate moments, catering to their herd instincts, and framing a purchase in an enticing way. Readers will find this important guide useful for its insights into drawing in customers.

Take-Aways

• When it comes to their purchases, consumers are less focused on an actual price tag and are more attuned to what’s going on in their own heads.
• It’s better to start with knowing the right pricing mindset and consumer psychology, rather than researching the market and competition.
• Understanding the human brain’s biases can help inform pricing strategy.
• Target a specific market and align your messaging to that target audience.
• Set up the right framework to sell your product and to prime consumers to buy.
• People like to have social proof that others are also interested in your product.
• Understand the consumer and market.
• Find ways to give to your customers so they value your brand.
• Strategically structure the choice consumers face so that they will buy.
• Present your pricing in such a way that consumers will choose your best offer.

Summary

When it comes to their purchases, consumers are less focused on an actual price tag and are more attuned to what’s going on in their own heads.

The truth about pricing is that “it’s not about the price.” Consumer psychology, and what’s going on in the consumer’s brain before seeing the price, matter more than the price tag you place on a product or service. If a seller provides adequate cues to the consumer, price won’t be the only aspect that draws in a buyer. When you provide a well-structured consumer experience, price is less important. Otherwise, the buyer has little to go on except the actual price itself.

“You don’t need everyone to buy. You need the right number of people to buy at the right price that makes sense for your business goals.”

Making a few simple changes to how you offer and present your product to consumers could influence their purchasing decision without having to make changes to your price or product. While you can frame your consumers’ interaction in such a way that price becomes almost an afterthought to them, it doesn’t mean that your price can’t be too high. A price can be too expensive for your target audience and more than the value they would get from your product. That’s why you should keep in mind your target audience and the value you are offering them.

It’s better to start with knowing the right pricing mindset and consumer psychology, rather than researching the market and competition.

Sellers often approach product or service pricing by starting at the top: the global and local market. Then they work their way down to look at the competition, the company, and then the product. The consumer is last in this pricing approach. The drawback to this sort of pricing methodology is that thinking about what consumers value and how best to communicate with them is lost in this process.

“Zoom out to the market and your competition to get a better understanding of the customer journey and what they are using now (uncovering your hidden competitors) before considering your own company. Once you have looked at your own company, it is time to choose the specific product or service you will focus on — your ‘best offer’.”

This omission can upend your efforts, since pricing and setting up the right frame of mind around it are the most crucial aspects. That’s why it’s good to start by turning to customers and getting a better idea about what’s important to them. After that, you can look to the market and your competition to find out what is satisfying your potential customer’s need. Then, consider your own company and the best it can offer consumers. Pricing comes after that, and you can look into the numbers to set a price that works for your business and your customers.

Understanding the human brain’s biases can help inform pricing strategy.

Human brains have evolved to react in certain ways, and they tend to fall for the same kinds of traps over and over again. The brain has two systems: the subconscious and the conscious. The former can automatically process an enormous amount of information each second, while the latter has to evaluate data and makes slower, more thought-out decisions. The brain is geared to operate on a habitual basis, with up to 95% of decisions based on habit. For instance, when you feel threatened, the brain sets up a fight-or-flight response without you having to think about it. The brain is also attuned to the status quo, looking to the past to make decisions. While this may not be the optimal way to manage a given situation, it helps in navigating the world.

“Because of the overwhelm and uncertainty that comes with something scary (like finally going to market or raising your prices), your brain will rebel a bit and do what it can to keep things predictable.”

In buying situations, which create uncertainty, a consumer is geared to the status quo. Consider how the status quo is helping or hurting your business success. Run all your pricing decisions through a behavioral economics filter. Don’t overwhelm consumers with too much choice. Similarly, you could also feel overwhelmed if you face too many pricing options.

The brain has certain biases, including:

• “Optimism bias,” which inclines people to believe they are better than others.
• “Time discounting bias,” which disposes humans to value immediate rewards more than future ones.
• “Bikeshedding,” which means spending a lot of time on unimportant matters while setting aside important ones.

Target a specific market and align your messaging to that target audience.

If you position your product well by using behavioral economics inputs, there will be a market for it at the price you choose, irrespective of what your competition is doing. Consider the difference between a generic handbag and a designer handbag. Consumers are willing to pay far more for the designer product because of the sense of luxury it conveys, which goes beyond the value of the actual product. A New York City restaurant, Serendipity 3, sells a “quintessential grilled cheese” sandwich for $214. This makes its other menu prices, even though they are higher than those of its competitors, seem reasonable in comparison.

“It isn’t about the number on the tag. It’s about the value, the perception, and the entire experience surrounding the product or service.”

You can choose to be a quality business, like Apple, or a value business, such as Costco. There’s no one right way to go. However, you shouldn’t make the mistake of combining the two strategies. That’s where a lot of businesses go wrong. For instance, if you tout yourself as a quality business, don’t run a lot of discount sales. And if you promote yourself as a value business, don’t also consistently price yourself above your competitors. This sort of mixed messaging will confuse consumers and increase their “cognitive load,” which will make it hard for them to buy from you. You may even be called to change your industry’s business model regarding pricing strategies. For instance, companies such as Amazon, Airbnb, and Zappos have successfully broken away from industry norms.

Set up the right framework to sell your product and to prime consumers to buy.

After identifying a market you’d like to target, don’t focus on lost opportunities. The brain’s bias toward “loss aversion” causes you to think that more customers would be good for business. Instead, you should appeal to the right consumers in such a way that their subconscious prefers your product over their current situation, or status quo. You can do this by “showcasing” the right stories about your brand. Ideally, they would be from the consumer point of view, telling their experience about what their need is and how you are able to fulfill it. You should get out of your own status quo bias and look beyond a specific demographic group that might have worked for you in the past. Other customers could add value to your business through repeat purchases or by advocating for your brand.

“It probably won’t surprise you to learn that humans hate to lose things. In the context of business, this can mean customers might hesitate to switch products or services due to the fear of losing what they already have. This concept is crucial when considering your pricing strategy.”

Understand your ideal consumer and the path they take to get to buying your product, and stay in their awareness. Understand what problem you are solving for them. And give them a nudge — a behavioral economics idea about influencing choices — at the right time. You can continue to engage with them after their purchase by putting out a newsletter on social media, with direct mail, or in advertising. This will keep your business in their mind so that they will turn to you again. Consider whatever it is that prompts your customers to buy — maybe a life change, such as moving — and try to provide something useful to them at that point for free. In return, you could get their email address and be in direct touch with your target audience, rather than being dependent on social media platforms that are likely to change their policies and algorithms.

People like to have social proof that others are also interested in your product.

Social proof is the concept that people’s decisions are influenced by what they see others doing. If people see that others are happy with your product, it’s likely to induce them to buy. Humans are inclined to go with the herd, and that’s why social proof matters to them. Your customers are one form of social proof. You could also get recommendations from credible third parties. This creates a “halo effect” that can also attract people to your product. Some companies will pay for celebrity endorsements, while celebrities who actually use a product organically provide social proof when they are seen using it.

“Getting seals of approval from trusted third parties with expertise creates a halo effect that helps people feel comfortable about buying from you.”

Other forms of social proof include endorsements from third parties of your expertise, such as certifications. Also, some companies pursue “earned media” mentions, which happen when they are organically mentioned in a media outlet. This is why firms engage in public relations efforts.

Understand the consumer and market.

Learn about consumer habits so that you can better decide how to influence buying behavior. Identify the top instances, habits, and opportunities that you can tap into. For instance, you could provide a nudge, such as the one given by a children’s hospital that had a message on a mirror saying “hang in there, Dad,” which touched a man whose son was undergoing surgery.

Keep in mind any seasonal fluctuations that might affect the demand for your product. For example, KitKat identified more demand for its product in Japan around the time of exams: Students were giving the chocolate wafer bars to each other because the name “KitKat” sounds like the Japanese phrase for “you’ll surely win.” This insight helped the brand align its marketing efforts around milestone events in that country.

Find ways to give to your customers and make them value your brand.

Instead of just being a business that focuses on sales, try to become a brand that resonates with consumers by establishing a deeper connection with them. Customers’ favorite brands even become a part of their identity. Develop a brand promise and message. One point to be aware of is whether consumers prefer to buy your product whenever they need it or as part of a subscription or membership plan. You can also use this input as part of your pricing strategy. Memberships foster a sense of community, while they can also be exclusive. Subscriptions can create value for an individual and benefit you with a big base of customers.

“When your pricing, brand values, and everything else you’ve been working on align, it creates this beautiful, virtuous cycle that continually reinforces itself over and over, making buying from you that much easier.”

You can also bolster consumer confidence by guaranteeing satisfaction in the form of a “money-back” assurance or store credit, for instance. This offers customers a risk-free way of trying out your product. Make it easier for people to do business with you by delighting and surprising them. When something is expected, customers will only be satisfied, but giving them something extra they didn’t anticipate will charm them and encourage them to share the experience with others.

Strategically structure the choice consumers face so that they will buy.

Lead consumers to choose your product by priming them for the choice. For instance, the aroma of freshly baked cookies can send the right purchasing signal, better than having a salesperson thrust a flyer advertising the cookies at passersby. Use words in your communications that capture what you stand for. These words should be a part of your internal communications, advertisements, website, and sales outreach. For instance, consumers are familiar with Apple’s “different” approach used to showcase innovative products. While quality brands should aim to become part of their consumers’ identity, value brands’ focus should be on the fear of missing out, tapping into humans’ tendency toward loss aversion, by offering flash sales and short-term deals.

“These tiny moments of yes are a form of self-herding. Remember that every interaction with your brand builds up a memory of how this person feels about you. If they ‘buy in’ on what you are saying in your email communication, it will be much more natural to buy when the time comes.”

Make customers happy so that they will talk about their positive experience with you, instead of ending on a sour note that will make them put an end to the relationship. And don’t make promises you can’t keep. Give your customers a small gift, such as mints, to tap into the human tendency to reciprocate. Also, humans see scarcity as a source of value, so find ways to incorporate this mindset into your sales efforts. For instance, you could present a limited-time sale.

Present your pricing in such a way that consumers will choose your best offer.

Ensure that your “choice architecture” guides people’s decision to buy. Consider a point in the consumer journey that creates an opportunity to use behavioral cues like nudges. One way to provide an organic nudge is by coming up with engaging content, such as blog posts or social media input. Another approach is to use a “wingman” product, which will provide a price comparison that will make your customer prefer the product you are really trying to sell. Service businesses can also use this tactic by offering different service packages. You could also spotlight a third item that is not related to your best offer to make buyers feel that they have some framework for comparison.

“This third offer needs to be different enough from the best offer and wingman to help put them in a box together, while not being so different that it adds complexity and creates a paradox of choice.”

Also, decide how to present your pricing — in a chart, with a written description, or in a script to be read — so that a buyer is inclined to go with your best offer. Avoid using decimal points in your pricing, however you present it.

About the Author

Melina Palmer is the CEO of The Brainy Business, a behavioral economics consulting firm. She is also the author of What Your Employees Need and Can’t Tell You.