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Vocatus Pricing & Selling Blog

Pricing and selling powered by Behavioral Economics

Behavioral economics in B2B selling: Higher margins despite the crisis

Industrial electronics case study: why behavioral economics can be applied to B2B selling, and how to use it to achieve higher margins, even in commodity markets and in times of crisis.

Behavioral economics is essentially based on one assumption: people are unable to make objective judgments and rational decisions as a result of their limited cognitive resources. Thus customers use rules of thumb (‘heuristics’) when evaluating offers, are susceptible to misjudgements (‘biases’), and consequently make ‘irrational’ choices. The more complex the decision, the more likely this mechanism is to work.

Can behavioral economics be applied in B2B?

What applies to private customers also applies to business customers: the decisions the latter have to make are often much more complex than private consumers’ decisions. Nevertheless, it’s difficult to accept that B2B customers also make irrational choices and that behavioral economics can be an effective lever for optimizing pricing and selling. Why?

The reason for our scepticism about the effectiveness of behavioral economics in B2B is that it’s harder to call professional decision-makers ‘irrational’ than to say the same thing about private customers. Surely anyone who makes business decisions must be professional enough not to make irrational decisions?

Irrational decision-makers aren’t stupid or lazy – they’re efficient

At this point, it’s worth clarifying the term ‘irrationality’. ‘Irrational’ doesn’t mean ‘stupid’ or ‘lazy’. Instead, it means using the available energy efficiently, i.e. simplifying and taking short cuts in complex situations to make ‘reasonable’ (albeit not ‘rational’) decisions with justifiable effort.

‘Reasonable’ decisions are decisions that customers can justify to themselves and others (their team, their superiors), and this requires cleverness, so it has nothing to do with stupidity or laziness.

What does this mean for pricing and selling in the B2B sector?

One of the most widespread misconceptions in B2B is that customers are only persuaded if they’re offered the best value for money. Or, in the case of commodities (products without actual differences), the offer with the best price is chosen.

However, what’s relevant for customers is not whether the offer is objectively good or bad (i.e. whether the decision is rational or not), but how well or badly they manage to justify the decision to themselves and others. This judgment can turn out quite differently. Some buyers – especially inexperienced ones – don’t want to make the wrong decision. They’ll ensure they don’t choose the cheapest supplier, but rather the one that seems the safest bet (“No one ever got fired for buying IBM”). Others need a discount – regardless of the effective price – to achieve their purchasing targets.

For example, you persuade Risk Avoiders (“No one ever got fired for buying IBM”) by signalling safety and fairness. Excessively low prices make them somewhat sceptical, whereas with Bargain Hunters you can name a high entry price and then (‘even though it hurts’) award a discount. For more information on the five GRIPS types and why they are the only reliable decision typology for pricing and selling, click here.

What does this look like in practice?

The following steps are key to applying behavioral pricing and selling in the B2B environment: firstly, you start by understanding how your customers make decisions and justify them to themselves (and others). Secondly, you design your offers and prices in such a way that the decision customers are supposed to make appears to be the (only) reasonable one. Once you’ve done this, the only thing left is to provide customers with arguments that will enable them to optimally justify the decision to themselves, their colleagues and superiors. After all, customers won’t make the most rational decision, but the one they can best substantiate with arguments.

This works in all areas and with relatively simple measures: with resounding success, we’ve trained the sales staff of a manufacturer of electronic components to quickly recognize their customers’ decision motivation during the sales pitch. When submitting their proposals, this has enabled them to approach their customers in such a way that the offer is convincing and justifiable in accordance with the specific customer type. As a result, offer conversion was stabilized within a few weeks, and significantly higher prices were achieved. Our colleague Hardy describes this in the following video.

Interested in more information on the potential of behavioral economics in the B2B sector? Click here: You’re not the cost leader in your industry – why do you still have customers?

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