Understanding customer motivation
Companies assume that customers know exactly what they want, are fully informed about all prices and features, and are basing their decisions purely on rational criteria. The reality is different. We will show you the criteria your customers are using to make decisions and the leeway you have to optimize prices.
Understanding and influencing decision-making processes
The model of the rationally-thinking "homo oeconomicus" endangers company success. Depending on the type of customer, decisions are often based upon a feeling of fair treatment, finding a good bargain, not being taken advantage of, and not having to worry about anything.
No-one makes entirely rational decisions
Even the most driven bargain hunters do not make logical decisions. Though they are close to being rational decision makers because they are well informed and the price is important to them, their decisions are nevertheless emotional. Their priority is finding a bargain and getting a large discount, even if they don't particularly want the product in question.
There are only five types of decision makers
This was the conclusion of an international study carried out by Vocatus that included 150,000 interviews in 26 countries. All human purchasing decisions can be categorised into five different groups (GRIPS types). None of these five groups makes rational decisions. We will determine which pricing policy you should use for optimum appeal to these types.
This is how we analyze your customer's decisions
Only when companies really understand how and why their customers or potential customers decide for or against their products, can they begin to systematically influence these decisions.
First of all, we determine how interested the customer is in the various product features or the price.
All too often a great deal of money is spent marketing something that is simply not of interest to customers.
We analyse the extent to which consumers are informed about product features or the actual price.
Consumers frequently claim to know exactly how much something costs, but are actually off by up to 30% in either direction.
We determine how your customers evaluate prices according to the situation.
A drill in a specialist store is often considered to be more expensive than the same drill at the same price at a discount store.
Low interest in price means significant potential for margins
We often receive blank looks from companies when we ask if the customer is really interested in the price. They just assume that price is important to the customer and this is where companies concede significant potential for margins.
Not every customer is interested in the price
Companies believe that customers are principally bargain hunters. The opposite is true. An astoundingly high percentage of customers do not care about the price when it comes to many products.
Do you know your customers?
Within the framework of pricing policy, Vocatus next answers the following questions:
- How relevant is the price for the purchasing decision?
- For which customer types is the price particularly relevant?
- In which phase of decision making are judgments made about the price?
- How relevant is the price for customers in every phase?
- Is the price the reason for going with a competitor?
- Does the price first become relevant when deciding to switch to a competitor?
Communicating prices when they are relevant
It is only once these questions have been answered that optimal communication decisions can be made regarding which price should be communicated through which communication channels, in which form, in which decision-making phase and to which customer types.
"Vocatus helped us to optimally exploit our price potential ..."
"The newspaper sector is in a state of upheaval, and the business model is changing. Things that have endured for many years are nowadays being questioned. The search for fresh sources of revenue is occupying publishers, yet there's a great deal of uncertainty. In this phase where experience is no longer any help, we need new tools in order to make the right decisions. Vocatus helped us to recognise our price potential in the reader market and optimally exploit it without taking any unnecessary risks. The significant increase in sales revenue has made a major contribution to FAZ being able to rapidly overcome the consequences of the financial crisis and once again address future issues on the basis of a stable business model."
Frankfurter Allgemeine Zeitung
Insufficient price knowledge harbours potential
Companies are not alone in falsely believing that consumers are fully aware of market prices: consumers are also convinced of their price awareness. A concrete review shows that customers are regularly wrong 70% of the time. They are even most wrong about the price of services that they have already used.
Only 32% of customers know the cost of their bank account
The accompanying example demonstrates that only 32% of customers knew approximately (+/- 25%) how much they pay for their checking account. The rest of the customers were significantly off in their estimation in either direction and had no idea what price they were currently paying. This was important information for the bank we were working with.
Even "price-sensitive" customers have no idea
And most interestingly, 70% of customers who falsely estimated the price were convinced of the accuracy of their own estimation. Astoundingly, this was even true in price-sensitive markets and with customers who had themselves indicated price as their most significant decision-making criterion.
Source: Vocatus AG
Huge leeway for companies
Of course, this opens up a wide playing field for price creation. It is for this reason that every company should understand the customer's actual price awareness before pricing.
- How do customers go about receiving price information?
- Which informational sources do customers use?
- How well informed are customers about price during each phase of the decision making process?
- How well informed do they consider themselves to be?
- What are the price markers and price anchors?
- How well informed are they about the cost and pricing structures?
- Do they remember previous increases in price?
The 5 biggest mistakes in pricing
Our guide teaches you to avoid price wars, to take full advantage of your customer's willingness to pay, to correctly increase prices, and to use targeted discounts.
Replace your gut feeling with knowledge and facts.
Typical errors in price management
- "Our customers know the price of our products and they remember increases in price."
- "Our customers pay attention to price and will definitely react to changes in price."
- "A price increase of more than X% is in no way possible."
- "Our pricing should be based on the price trends of the competition."
- "Price setting should be based on inflation."
- "Price increases should fall within a previously established framework for price changes."
- "We don't need price-determination studies – our sales staff are closer to the customer and are in a better position to estimate price sensitivity."
- "Recommended prices are irrelevant – businesses will enforce a different sales price anyway."
Recognising price sensitivity and reference prices
Only when we have a solid understanding of pricing and the price interest of customers, do we actually determine pricing. This provides answers to the following questions, for example:
- How sensitively do target individuals react to changes in price?
- Which reference prices do customers use to make comparisons?
- Which price elements are hidden during a price comparison?
- How are price increases and price reductions evaluated?
- What is the optimal cost for each customer Group?
Focusing only on the cost leads to mistakes.
Determining the optimal cost is naturally an important topic in all price management. All too often, companies consider price setting to be the only topic in pricing.
Many companies close their eyes to the greatest potential in the complex area of pricing policy and pricing strategy.
"... when it came to pricing research it was important to us to work with THE experts in that sphere."
"We were determined to discover what role price plays when people make decisions in the 'low awareness' area, and when it came to pricing research it was important to us to work with THE experts in that field. Our confidence was entirely justified: Vocatus consistently provided an excellent service, from conceiving the project right through to analysing, interpreting, and presenting the results. And our hypothesis was totally confirmed too."
Ard Jen Spijkervet
Vice President Marketing Europe
Esselte Leitz GmbH & Co KG
Price differentiation: There's no such thing as THE customer
Different prices for individual customers
Different prices per customer are not a problem as long as the price difference remains hidden or is experienced as fair and understandable. This is why we generally accept lower newspaper subscriptions for students or cheaper airline tickets for early bookers.
Price differentiation must be fair
However, in general, all discounts from the reference price must make sense to the customer. Arbitrary discounts or prices that vary for no obvious reason give customers a sense of insecurity and unfairness.
Do not undermine product worth
Even worse, arbitrary discounts undermine the perceived worth of the product and the readiness of the consumer to pay in the medium term. Many companies ruin their own market with discounts.
In pricing, it is therefore important to investigate not only individual prices, but also the perception of the entire pricing structure from the point of view of various consumer segments.
"I was ... astounded"
"At first I was astounded. Some market researchers come along and explain the newspapers' pricing strategy, which leads to an exciting result: our products are actually worth a lot more! And the most fantastic thing is that it works! A huge 'thank you' to the experts from Vocatus!"
Member of the Management Board
Mittelbayerischer Verlag KG Regensburg
"Once again, a huge pat on the back ..."
"Once again, a huge pat on the back for your presentation yesterday - it was extremely knowledgeable, as well as being eloquently delivered."
Director & Vice President Service & Parts Division
Make use of decision-making mistakes
When making a concrete decision, the dimensions of price awareness, price interest and price evaluation all work together. This can result in exciting "discrepancies" - decision-making mistakes with enormous potential.
Customers who are very interested in the price often do not know the prices very well (low price awareness) Or the final purchasing decision is no longer based on the features that originally made the offer interesting.
It is precisely these decision-making mistakes that harbour the actual cognitive potential. In fact, they reflect typical decision-making mistakes, which are well documented in Behavioural Economics. And they are the best starting point for companies who want to optimise their own pricing policy.
Better to change the price image than to lower the price
At a very early stage in the decision-making process, subjective price image determines the reasons customers choose certain products or companies. Image can be so important that some providers can be shut out of the selection altogether.
High-price image not a problem with established customers
A fashion retailer asked Vocatus to analyse his price image, because the company was seen as being more expensive than it actually was. TV advertisements, magazines, and the Internet promoted the high-priced premium image.
This was not a problem for established customers because they trusted the retailer and felt that the prices were fair, if not always the cheapest. Half of all established customers do not therefore compare prices at all.
Changing price communication for new customers
On the other hand, a vast majority of potential new customers didn't even consider that retailer because they assumed the prices were too high. In this case, it was easier and cheaper to change the price image of the retailer than to change the actual prices.