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The Neuroscience of Pricing

Neuroeconomics has progressed to decision neuroscience - the biological study of how we really make decisions. We can apply some of this new research directly to consumer pricing strategy issues.

 

For example, in an inflationary environment;


 * How many price points should we offer our consumers?
 * How do we determine what those prices should be?
 * How do we optimise a dynamic pricing strategy?

The answer to at least some of these questions might come from the neuroscience of decision making.

 

As research from Peter Bossaerts and Casten Murawski point out “...the availability of a third, clearly inferior, option makes people choose the lower value option from a pair of options more frequently...".

 

We must be very careful to distinguish here between ‘price’ and ‘value’. Bossaerts is talking about perceived value, not price. So, conversely, when we create a set of three price points, adding in the lowest value, which is often most attractive to consumers in terms of price, reduces the probability that the consumer will take the higher price option. If we only present the higher two price points, the higher one is chosen more frequently. Our decision making depends on the available range of choices.


This may seem obvious and although classical economics has always seen value as an unchanging quantity, we have always known, intuitively, that context is important. But dynamic pricing has highlighted the importance of context. Amazon, for example, have lead the way with dynamic pricing. Since 2012 they have systematically changed their prices on line every 15 minutes or so! The price and value context of decision making for Amazon consumers is very dynamic because it’s easier to do this on line than in a bricks and mortar store but the principle applies everywhere. Prices must be taken in context and they are changing more rapidly. Consumers are therefore reframing their buying decisions more frequently. And now we have a neurological mechanism which supports that feeling.

Not surprisingly, it seems that we have a neural mechanism specifically designed to allow us to make new choices in the context of our options.

 

This re-valuation of perceptions reflects a neural re-scaling process with a mathematical counterpart usually referred to as 'divisive normalisation'.

 

This is all about context.


Do contact us for a chat about the research behind these findings and the very significant impact on your pricing strategy they can have.  For example;


* Value perceptions after deflationary or inflationary price changes can be optimised and depend on the price position of the product within the available product range
* Strategically, in an inflationary environment, is it better to have your prices in the higher end of the competitor pricing distribution or the lower end - our research can find out.
* Our mathematical analytics can be used a part of predictive modelling tool to deliver quantitative estimates of changes in perceived values in a rapidly changing price environment.


At Watson Gill, we can build the mechanics of customer valuation into our predictive models of a product’s environment so that we can model consumer perceptions of price changes as well as actual price changes.


By applying our expertise in the optimisation we can go further and build models which can eventually optimise your price distributions, considering not only your own key price points but also their location within the range of prices widely available to your consumers; the whole market context.