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Pricing beyond the ‘Homo Oeconomicus‘

Expensive mistakes and profitable opportunies in pricing research


It’s undoubtedly paradoxical that when German dairy farmers protested in front of bottling plants and chain stores in 2008 and demanded higher prices for producers, the majority of consumers were right behind them, even though this solidarity meant that they would ultimately have to pay more for their milk. Some dairies are nowadays even using the fact that their product is, for example, 10 cents dearer to conduct successful advertising campaigns, whilst naturally reassuring people that this money goes straight to the farmers (see figure 1).

Price motivation can be diverse - more diverse than the assumption of a "Homo oeconomicus" would suggest

At roughly the same time, similar price increases in the German energy sector (be it gas or electricity) were causing feelings to run high. There was considerable disquiet, with people even talking of being ‘ripped off’.

So whereas people in the one case voluntarily and knowingly accepted a significant price increase and even “welcomed” it as being fair, they were virtually apoplectic with rage about the price of a different product being increased. How can this be reconciled? From the perspective of classic pricing management, it is totally incomprehensible since in this context everybody is assumed to equally share the motivation of a homo oeconomicus who simply wants to pay as little as possible for the best possible product or service – especially when it comes to commodity products like milk or energy.

People may not decide rationally, but they don’t decide in a totally erratic manner either. Instead, they make predictable errors – particularly when dealing with price. The challenge for pricing research is to decode this “psycho-logic” of consumer choice. Pricing research has to understand the role of price throughout the decision process without prematurely falling back on unrealistic assumptions resulting from a normative and rational consumer model. But this is precisely the problem of all classic pricing research tools, from price sensitivity meter (PSM) through to conjoint analyses (CA): however familiar and popular they might be, they’re totally unsuited to recognising the price potentials that are hidden behind the myth of the “rational consumer”.

This is even more critical as price optimisation is the most efficient lever to maximize profits: if Fortune Global 500 companies had been able to realise only a 1% price increase in 2008, their profits would have been boosted by 103%! At the same time, studies have shown that managers regard pricing decisions as their most difficult task – especially in times of economic turbulence. Finally, this is the only area in market research where respondents have an inherent motivation to systematically distort their responses. Given this background, this paper tackles the way in which our conventional pricing tools have to be re-invented to better meet this growing need for more valid pricing research.

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ESOMAR Congress
Umfang: 12 Seiten

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