Human Behavior & Pricing

Before we jump into the meat of pric­ing there are a few things that need to be under­stood because they form the foun­da­tion of any pric­ing strat­egy and they reflect the results of recent research on con­sumer behav­ior by lead­ing behav­ioral economists.

Markets/buyers don’t behave rationally

Tra­di­tional or /classic eco­nomic the­ory has held for cen­turies that buy­ers and sell­ers in any mar­ket will always behave with their own best inter­est in mind and in so doing pro­vide a level of equi­lib­rium to the mar­ket place.

Sig­nif­i­cant research is show­ing that nei­ther buy­ers or sell­ers always act with their own best inter­ests in mind and often do so with­out any con­scious knowl­edge that they are act­ing against their own self inter­est. Recent remarks by Alan Greenspan stat­ing he was “shocked” that the pre­vi­ous mar­ket assump­tions of ratio­nal­ity were not work­ing. This research can help us under­stand not only the behav­ior of our poten­tial buy­ers but also how we can break through it and help them towards bet­ter value dri­ven buy­ing decisions.

Buy­ers and sell­ers gen­er­ally oper­ate within either social norms or mar­ket norms but never both

Social norms

Defined as unwrit­ten social con­tracts cre­ate a level of inter­ac­tion and trust that is more like “fam­ily” and is often the best way to cre­ate loy­alty and trust based on a com­mon cause, goal or con­nec­tion. Exam­ples are a com­monly under­stood but unwrit­ten agree­ment that you as a seller will trust your buy­ers to pay you if they can’t at the time of pur­chase (some­thing many artists do). Or an agree­ment that you will ship their pur­chase with in a rea­son­able num­ber of days. Social norms are often based on per­ceived or real value and respect with sales being more inter­ac­tive than trans­ac­tive, the focuse is placed on the abil­ity of the prod­uct to meet the needs of the buyer and not on its price.

Mar­ket Norms

Defined accord­ing the tra­di­tion­ally under­stood ways of doing busi­ness in a strictly trans­ac­tional man­ner…I sell some­thing for $xxx.xx you buy that some­thing for what I set the price at. Your desire to buy can be manip­u­lated by me by apply­ing cer­tain rules of pric­ing that are known to make you want to even when you don’t need or want what I have to sell.

Recent research has shown that once an inter­ac­tion moves from oper­at­ing under the rules of social norms to those of mar­ket norms inter­ac­tions change dras­ti­cally and can­not return back to a social norm way of inter­act­ing. For exam­ple: You have set pric­ing for your stuff but infor­mally you are will­ing to mutu­ally agree on a price your rep­u­ta­tion for this has let sell more and aver­age higher income over time. If you were to change that to strictly stick­ing to your set price you would then be oper­at­ing under mar­ket norm rules and would likely see a decrease in sales.Those who bought your stuff under the old way of sell­ing will revert back to their mar­ket norm way of behav­ing and will only see your price and since you are no longer flex­i­ble they will move on to find  some­one who is.

Another exam­ple of these two in action would be dif­fer­ent pric­ing strate­gies, one that takes the focus off price and puts it on help­ing the buyer by not manip­u­lat­ing price to force a pur­chase. The other, strat­egy would be using Mar­ket Norms to manilu­late price to entice a buyer to buy some­thing even if it doesn’t meet their needs. For exam­ple, it is well known that buy­ers will always choose some­thing that either is free or includes some­thing that is free even if the “free” thing has no value or even the com­bined value/quality of the pur­chased item and the free item are less that of the same item that doesn’t have a “free” sec­ondary thing with it. So peo­ple will always pick a two for one deal of lesser com­bined value/quality over some­thing that more ade­quately meets their desires.

Oppor­tu­nity cost must always be included in your cost analy­sis when set­ting pric­ing strategy

Briefly an oppor­tu­nity cost is the cost occurred when we choose between alter­na­tives or what is given up in favor of a par­tic­u­lar course of action. The cost is found in the cost mostly in non-monetary terms of choos­ing one alter­na­tive over another.

This effects artists in set­ting prices and in their own profit and loss analy­sis. For exam­ple: You decide to design your web site your self even tho you don’t @#$$% about how to do it, because you think  doing so is “sav­ing” you money since oth­er­wise you’d have to pay some­one to do it. Doing it your­self would mean time away from mak­ing art, or work­ing on your mar­ket­ing. That time has a cost in both emo­tional terms and mon­e­tary terms, the cost in dol­lars is your hourly rate ( because your don’t work for free) and the lost oppor­tu­nity of cre­at­ing more inven­tory together with the loss of profit from fewer sales.

So just as you would add the  dol­lar cost of build­ing the web site to your over­head costs, if you had some­one else do it, you also need to add the hourly rate you pay your­self plus  the objec­tive cost “value” of lost hap­pi­ness in hav­ing the prof­its from pro­duc­ing the addi­tional inven­tory and the joy you get from mak­ing your art.

The point is just because you choose to do it your­self don’t fool your­self into think­ing you don’t need to pay your­self. That com­bined cost needs to be added into your costs when you cre­ate your pric­ing strategy.