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Businesses give a lot of thought to their pricing policy. Sometimes, however, even a well-planned pricing policy could anger customers. Consider this. A friend recently got a handsome discount as a new subscriber to a certain magazine whereas another friend received just a gift for renewing his subscription! Can behavioural psychology explain customer reactions to such pricing policy?
Price differentiation is a logical outcome of product or service differentiation. We typically accept such a policy if it offers us a choice of paying a higher or a lower price. The price for a just-released book is typically higher. Wait for a year and you can buy a paperback edition for one-third of its original price. It is the same with newly-released movies. With airlines, the pricing policy is – the earlier you book, the lower the cost.
We are also comfortable paying a higher price for a similar product that is cheaper elsewhere! In a study conducted by behavioural economists, subjects showed their willingness to pay twice as much for buying a beer from a resort compared with buying the same product from a nearby shop. Why?
Paying more
For one, customers pay for the experience as well. Drinking beer or having food in a resort could be an absorbing (no pun intended!) experience. For another, it is conspicuous consumption or value-expressive, as it is called in behavioural economics. That is, some products charge a premium that enables you to signal to your peers about your social status!
We are, hence, willing to pay twice as much for even a tomato-and-lettuce sandwich at an upscale restaurant. This is also because we are conscious of fair pricing. We understand businesses should make profits and that resorts have higher costs than neighbourhood restaurants. But we dislike profiteering- an upscale restaurant charging 25 times the typical price for a regular sandwich. And we frown on price differentiation without product differentiation, especially when we do not have a choice on the price- magazine subscription that offers discounts only to new customers.
(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )
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