Sloth

Sin #6  Sloth

The laziness of overusing price and special offers

The quick skinny:

  • Using tactical offers is risky and can be damaging long-term, particularly with price offers.
  • The better bet is to raise the anticipated value of your customer experience and deliver on that.

 

“Mention this ad and receive 10% off”. “Tell’em you heard it from (radio/TV personality) and receive a free _____”.  “Call in the next 10 minutes and get a______!” How many times have we seen hokey offers like this from local advertisers??   What’s more surprising is that they keep popping up year after year even in major markets.  It’s a noble enough attempt to “make the advertising work” but it commits two sins we’ve already addressed: trying to create demand by attempting to change consumer behavior, and tracking a lead vs. measuring a result.

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.

 

“Price is what you pay, value is what you get” – Warren Buffett

 

There is an entire science behind pricing psychology that this paper will not delve into, except to say that “price” is a transactional term, but “value” is a relational term.  Price is reality. Value is perception, and value is simply the difference between what you expect to pay and what you actually pay.  Price tactics are a losing game because there will always be someone who will sell it cheaper.  Business owners cannot cut their way to prosperity, but (getting back to the four pillars of advertising) they can raise the level of customer experience, thus raising the anticipated value for the customer.