Archive for June, 2012

The Conventional Wisdom Trap

Published by admin on June 22nd, 2012

  “In this economy, people are just looking for a deal” – Customer of mine who shall remain nameless

Conventional economic wisdom says that the reactions to price fluctuations should be inversely proportional (assuming there is adequate demand for a product or service).  Drop the price, consumers buy more.  Raise the price, consumers buy less.  But there’s a quirky thing about manipulating price and using price offers…

Prices have meaning beyond “the price”: Because we make decisions emotionally, consumers are irrational beings.  We imbue variables like price fluctuations with feeling or meaning.  The short-term reward from a discounted price offer is disproportionate to the fear of loss over a price increase. Manipulating prices to attract business in the short-term is a slippery slope and it is very difficult to recover from for three scientific reasons:

1)       Loss Aversion- Loss aversion is a conditioned response that refers to a person’s tendency to avoid loss over acquiring a gain. It is an emotion rooted in fear and it is innate in all of us.  The less the emotional connection there is, the more important price becomes as a factor. With no “emotional tie-breaker”, your customer is more likely to revert to the emotion of fear in the form of loss aversion and think in terms of potential losses vs. potential gains, and pay the lower price.

2)       Value Attribution- Consumers attribute value based on their initial perception. Particularly when attempting to attract new customers, the lifeblood of any growing business, “first impression” is difficult to overcome. If you use price tactics to attract customers, you can expect to lose them to a competitor on price as well.  Moreover, price tactics alone make building repeat and referral business a challenge. Asking a customer to pay $20 for a lunch that she paid $10 for the first time she patronized the business is a tricky proposition.

3)       Confirmation Bias- Similar to value attribution, confirmation bias is our natural inclination to favor information that confirms our initial impression.  What we believe is our reality, and we reject evidence that contradicts our beliefs.  Confirmation bias is a key-critical element in long term planning of your advertising.  There can only be one price-leader in any given category, and chances are you are not it. In the long run, raising the anticipated value and creating the confirmation bias of an excellent customer experience is always the more profitable move.



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