What does Behavioral Economics & Pricing Have in Common?

Using Behavioral Economics To Optimize Pricing In Grocery

Here’s how we make purchasing decisions: We decide to buy something in the blink of an eye, triggered by the emotion centers of our brain. We then spend however long it takes to justify that decision using logic. If you buy a $2 million Bugatti and you have five kids and a mortgage you’re barely covering, the logic part will take longer than if it was a $6 can of imported olives. But the principle holds. Shoppers do not shop according to logic, value, or any other principle of classical economics. Price, as a factor, can be a benefit or a liability that has to be considered along with myriad other considerations.

In October, economist Richard Thaler won a Nobel Prize in economics for his work in behavioral economics and exposing humans’ “predictably irrational” purchasing choices. Thaler wrote a book called “Nudge” about helping people make better decisions based on how they actually make decisions. And logic isn’t it. It is about a sense of having won, or having treated yourself, having supported a good company or having proven your wisdom and clarity in purchasing. None of which is necessarily connected to what would constitute good decisions making if pure logic was making the calculations.

Five Types of Shoppers

In 2008, a German research company did a study that revealed all purchase decisions could be divided into 5 different types of buyers:

  • Indifferent buyer (has low interest in price/product comparisons)
  • Loyal customer (has strong confidence in the brand and the product or service)
  • Bargain Hunter (focused on making a good deal)
  • The enthusiast (who loves the product or service and will accept the price)
  • The suspicious (who is afraid of being cheated)

Each of these types of buyers has an emotional or identity stake in the purchasing decisions they make. For the bargain hunter, for example, it’s not just about saving a buck. It might be about honoring an ethos they grew up with, proving themselves savvy shoppers, contributing to the family coffers, or the sparing money designated for a particular goal.

The loyal shopper may always shop at one retailer because of the conviction that their produce or butcher shop is always superior, and be unswayed by a sale or event anywhere else. The enthusiast loves the experience or values of a particular store and often evangelizes about its virtues to everyone around them. These are some of the most valuable customers you can acquire and their decision making may be among the least “logical” in economic terms.

Pricing strategy Should be as Complex as Shoppers

A winning pricing strategy will take all of these shoppers into account and plan competitive pricing accordingly. It will recognize which products tend to be loyalty or enthusiast products—by the number of repeat customers who buy them—and which tend to be more frequently purchased by bargain hunters. It will not try to sell high-end products by deep discounting because that undermines high-spending shoppers’ sense of themselves as particularly discerning, an identity some high-spending shoppers treasure. It will use price comparisons between the usual price and the sales price to appeal to those who fear they are being cheated and then invite them to compare outside the store, to reassure them they’re not being bamboozled.

Just dropping prices is not the solution. Though some evidence suggests that grocery shoppers gravitate toward stores with relatively consistent price strategies, that plan has backfired. In openview.com, co-founder Stephen Forth told the story of Praktiker, a popular European grocery store whose tendency to run 20 percent discount events left the store packed during the events and empty in between. The store went out of business in 2013.

As Thaler explained, humans are far too complex to assume that any one factor will universally influence all shoppers in a particular direction. Today we have access to data that, if sliced and understood correctly, can help retailers get maximum profits while continuing to create the kind of customer experience shoppers are looking for.

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Bruce is the founder and CEO of RW3 Technologies. Having spent more than 35 years in the consumer goods and grocer space Bruce has experienced the industry disruption first hand and understands how artificial intelligence, POS data, and mobile technology can transform a good organization into a great one.

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