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Pricing beyond the Homo Oeconomicus

Classic pricing research methods are designed to measure the maximum “willingness to pay” (WTP) of a rationally deciding homo oeconomicus. However, when it comes to real people it’s often not only the absolute price level that determines purchase; buying behaviour is instead influenced by many more aspects, such as the underlying price motivation, price knowledge, price interest and the role that price as a whole plays throughout their decision-making process. Vocatus has used a multi-national and multi-industry baseline study to investigate consumers’ actual decision behaviour, and in doing so has defined five different consumer types with regard to price.

The spectre that haunts pricing research versus the trinity of emotion, cognition and behaviour

A ghoulish spectre is still wreaking havoc in pricing research: the so-called homo oeconomicus. His knowledge of the market is flawless; he’s aware of the prices of his preferred products together with those of comparable alternatives, and he’s always looking for the best value for money. Classic pricing research methods such as conjoint analysis still assume the existence of this perfect consumer – the consequence being that the resulting pricing strategies are based on a rational consumer model which might be ideal but not real.

If one takes a closer look at the actual purchase processes of real-life consumers, it quickly becomes obvious that people very rarely decide as rationally as a homo oeconomicus: thus, for example, consumers may normally buy their potato crisps from a supermarket where they actively compare offers, and the price is then frequently the crucial factor within the purchase decision. On the other hand, if it’s late at night and they’re overcome with a sudden desire for crisps, they’re willing to go to the nearest petrol station and pay two or three times as much – maybe without having even looked at the price.

Absolute and relative Price increase are not the same

This example demonstrates that people by no means always act consistently with regard to price; instead, they are influenced by many different factors. Classic pricing research methods tend to ignore the fact that consumers make serious “errors” when dealing with prices. For example, they often ignore the fact that price assessment is “framing-sensitive”: depending on how one frames the questions about individual WTP, totally different results will be obtained. Let us assume, for example, that a face cream costs €40 today. When asked about their absolute price acceptance, customers may be willing to pay €50 for it, i.e. €10 more, since it is only when this amount is reached that a noteworthy price threshold becomes apparent, for example in a PSM analysis. However, companies should treat this response with considerable caution. If one had instead asked the same consumers what absolute price increase they’d accept, the consensus increase may well be only around €2. By contrast, they would probably accept a 10% (i.e. €4) increase if they had instead been asked what relative price increase they would accept. This demonstrates how contradictory consumers’ responses can be, depending on how the question is asked. However, pricing researchers must understand this puzzling variety of perspectives and not rely upon indications of the absolute price that people would be willing to pay.

As long as our pricing tools implicitly build on a “rationalistic” consumer model that is divorced from reality, the potential for price increases will often remain hidden. If we are to detect additional margin potentials, pricing tools must become more sensitive to the multitude of psychologically relevant pricing dimensions and to the predictable errors customers make with regard to price. Yet how can one measure consumers’ seemingly unpredictable purchase behaviour?

Even though people may not always act rationally, the decision process is in no way arbitrary; instead, they make consistent and predictable errors. In order to recognize, understand and finally leverage them, companies must first understand the so-called ‘Psychological Price Profile’. This not only examines how consumers assess a given price, but also looks at the other price dimensions such as price motivation, knowledge, interest, and the role of price in the decision-making process.

An international baseline study identified five different consumer types with regard to price

Based upon this Psychological Price Profile, Vocatus used an international study to examine the behaviour of more than 7500 consumers in 16 countries and 10 sectors. The objective was to understand how consumers in a wide variety of sectors actually deal with the topic of price within the context of a purchase decision. We discovered five consumer types that differ fundamentally with

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