TimJ.SmithPricingStrategy:SettingPriceLevels,ManagingPriceDiscounts,&EstablishingPriceStructuresPowerPointbyTimJ.Smith,PhDManagingPrincipal,WiglafPricingAdjunctProfessorofMarketing&Economics,DePaulUniversityChapter5PsychologicalInfluencesonPriceSensitivityTheRoleofNon-PhysicalInfluencesonthePerceptionsofAlternatives,Value,andPricesWhydopricesendinnines?Ifprivatetransactionsarejustthat,private,whydocustomerscarewhatotherspaid?Howdocustomersperceivepricesandofferings?Aretheirinherentbiasesthatinfluencetheperceptionofvalueandprice?Canafirminfluenceacustomer’sperceptionofthevalue?Stretchquestion:Isthebestpricealwaystheonethataccuratelyreflectsvalue?AgendaQuantitativeMethodsAloneareInsufficientforPricingDecisionsPricingaproductproportionaltovalueisfundamentalprincipalinstrategicpricing,howevervalueisasubjectivematterValueBasedPricingTechniquesallsufferfromaninabilitytofullyincludesubjectivebehaviorExchangevaluemodelsrevealthepotentialvaluewithinaproduct,yetdependuponthebenefitsthatarequantifiedwithinthemodel,andwhichbenefitsshouldbequantifiedisasubjectivedecision.Conjointanalysisrevealsthecurrentperceivedvalue,butnotthepotentialtochangevalueperceptionsEconomicpriceoptimizationignorestheothermarketingvariablesundercontrol:branding,placement,pricestructure,Convincingcustomersofthevalueshiftsthepricingchallengetomarketingcommunicationandsalesprofessionals,whomustconfrontcertaindecisionmakingbiasesofcustomers.CustomerbeliefsareundertheinfluenceofthefirmInfluencingPriceAcceptanceTherearenumerousfactorsthatinfluencehowcustomersperceivevalueandprice.Manyofthesefactorsarisefromdeeper,psychologicalinfluences,andperhapsevenbiologicallyevolutionaryinfluencesintheirdevelopmentandexpressioninhumanbehaviorRatherthantakinganapproachofattemptingtocorrecthumanbehaviorandmakepeoplesomehowmorelogicalinourpurchasedecisionmaking,itismoreusuallyefficienttoUnderstanddecisionbiasesinpurchasingbehaviorUncoverapproachestoreducingpsychologicaldissonance,UnderstandthelimitationstopricingpowerAndthusfacilitatecustomerdecisionstopurchaseBrainasaPredictiveMachineCurrentresearchinneuroeconomicsisrevealingmanyintriguinginsightsintohowhumansthinkInonemodel,thehumanbraincontinuouslygeneratespredictionsaboutwhattoexpectintheenvironment.Forexample,ifyouseeachairthatyouhaveneverseenbefore,youcanstilldeterminewhatitis,itsfunction,approximateweight,approximateprice,andothersuchcharacteristics.Toderivetheseexpectationsrapidlywerelyonsurprisinglylittleinformation.Neuralcircuitsmediatevitalmentalskillsthattranslateinformationintoimpressions,preferences,judgments,andpredictions,andthereforewillingnesstopayConsiderusasCOGNATIVEMISERSrelyingonHURISTICStomakedecisionsfasterIt’syourbraintoo.

Useyours,Don’tfixtheirs.Someofthebetterunderstoodfactorsthatinfluencepriceperceptionsandvalueperceptionshavebeenwelldocumentedinresearch.Somedecreasepricesensitivityandcanbeinfluencedbythefirm’sactionsanddecisions,thusformanareatoimprovethepricingpowerofthefirmOthersprovideinsightsintothepsychologicalinfluencestoacustomerspricesensitivityandwillingnesstopay,thusprovidingguidancetorestraininappropriatepricingpracticesTrueEconomicCostsSharedCostEffectSwitchingCostsExpenditureEffectDifficultComparisonEffectPerceptualChallengesPriceEndingsin9sFairnessEffectOverconfidenceinFutureEconomicEfficiencySmallPieBiasPromotionalInfluence ProspectTheory LossesWeighHeavierthanGainsInflectionatthePointofReferenceDiminishingSensitivityRiskAversioninthePositiveFrameandRiskSeekingintheNegativeFrame UtilityFunctionfromProspectTheoryPrescriptionsEffectsRelatedtoProspectTheoryReferencePriceEffectsEndowmentEffectAnchoringComparisonSetEffect FramingEffect OrderBiasEnd-benefitEffectBehavioralEffectsthat

InfluencePriceSensitivitySharedCostEffectPricesensitivityisreducedwhencustomersuseotherpeople’smoneytopayforaproductForinstance,businesstravelersoftenreceivefullreimbursementfortravelexpenses.AirlineloyaltyprogramsenableairlinestomarginallyincreasepricesbecausethepriceispaidbythebusinessbutthechoiceofairlineisinfluencedbythetravelerToalesserdegree,rebatestolowerpricesensitivityduetothepartialpaymentoftheproductthroughtherebate.FourFundsofMoneyFundsSourceFundsPurposeThemselvesSomeoneElseThemselvesSomeoneElse1ModeratePriceSensitivityHighUtilityPersonalSensitivity2ModeratePriceSensitivityHighUtilitySensitivityofGiftGiving3LowPriceSensitivityHighUtilityPersonalSensitivity4LowPriceSensitivityLowUtilitySensitivityFourFundsofMoneyPeoplespendtheirownmoneyonthemselves.Whentheydoso,theypayhighattentiontogainingutilityfromtheproductandgettingthemostutilityperdollarspent.Peoplespendtheirownmoneyonsomeoneelse.Whentheydoso,theyareseekingtomaximizetheutilityofthegiftrecipientaswellasmaximizetheirutilityingivingthegift.Thus,theyremainpricesensitivebutthedefinitionofutilitychanges.Peoplespendsomeoneelse’smoneyonthemselves.Inthiscase,thecustomerwillbeverybenefitoriented,butlesspricesensitive,thanwhendrawingfrompriorfundsofmoney.Andlastly,peoplewillspendsomeoneelse’smoneyonsomeoneelse,suchasinthecaseofbuyingproductsforabusiness.Intheabsenceofdecisionmakingoversightandproperincentives,peopledrawingfromthislastsourceoffundsareneitherverypricenorbenefitsensitivity

SwitchingCostsEconomicSwitchingcostsareanycosts(opportunityanddirect)relatedtoswitchbetweensuppliers.Theyarisefromproduct-specific

investmentsbuyersmake,whichmaycomederivefrominmonetaryorpsychologicalfactors.ProductspecificinvestmentsdecreasepricesensitivityforexistingcustomersComplimentarygoodsAcustomerpurchasesaniPodandlaterpurchasesaniPoddockingstationtolistentotheirmusicinthehome.Thedockingstationisacomplimentarygood,andpurchasingthedockingstationmakesthecustomermorelikelytorepurchaseaniPoduponthenextpurchaseoccasion.LearningAcustomerpurchasesDreamweaverandlearnshowtomakewebsites.SwitchingtoPagemakerrequiresrelearning.EngineeringCostsAcustomerlearnshowtoimplementaspecificchipforaspecificapplication.Changingthechiprequiresre-engineering,re-certification,andotherdirectcosts.(ProductYields/TQM)BrandLoyaltySwitchingCostsfrom

ProductSpecificInvestmentsExpenditureEffectTheexpenditureeffectreferstotherelationshipbetweenthepricetagandthewillingnessofcustomerstoshoparoundWithlargeexpenditureproducts,customershaveanincentivetosearchforalternativesandpricecompareinordertoreducetheirexpenditure.Withproductsthatareassociatedwithsmallerexpenditures,thefinancialincentivetopricecompareisreducedwhilethesearchcostsremain.Thewillingnessofcustomerstoevaluatealternativesdependsonhowlargetheexpenditureisrelativetotheeffortnecessarytoreduceit.Higherpricesensitivitywhenexpenditureislargerportionofbudget.DifficultComparisonInfluenceBymakingproductandpricecomparisonsdifficult,marketerscanincreasesearchcostsandthedecisionmakinguncertaintyofcustomers,thusdiscouragingproductswitchingandreducingpricesensitivity.BrandedCommoditiesAspirinBrandedpainreliefmedicineandunbrandedgenericmedicinecontainthechemicallyidenticalactiveingredients.Howeverconsumersarereluctanttotrustanunbrandedsupplierandtendtohaveahigherwillingnesstopayforpainreliefmedicine.Brandingitselfmakesinter-productcomparisonsmoredifficultandenableshigherprices.WholeFoodsPricingQuakerOats:$3.49365WholeFoodsStoreBrand:$2.99Vonagevs.AT&TIncumbentsliketomakethepricecomparisonmorechallengingbetweenoffers,obfuscatethebenefitsandprice,thusincreasingtheinformationgatheringchallengeforpotentialswitchersanddiscouragingbrandswitchingNewEntrants/AttackerliketomakethepricecomparisonexplicittoenabledecisionmakingandbrandswitchingNewEntrantsvs.Incumbents

MarketShareFightsProductSizeVelkyorMalyPivo?AtahospodainPrague,onecanenjoylargebeerfor20CzKorsmallbeerfor14CzK.Onthefaceofit,asmallbeerappearscheaper.Howeveralargeprovides0.5litersofbeer,makingtheunitcostsof4.0CzKperdeciliter,whilesmallisonly0.3litersofbeer,makingtheunitcosts4.7CzKperdeciliter.Onaperdeciliterbasis,largeislessexpensivethansmall.Inthiscase,thedifficultcomparisoneffectenablesthesuppliertoprovideproductatahigherperunitpricebutatalowerperceivedprice.Hieneken5LMiniKegor24Pack?SharedCostEffectFourfundsofmoneyimpliesindustrialpurchasesinvolveseveraldecisionmakersanddecisioncriteriaSwitchingCostsProductspecificinvestments,whetherrealorpsychological,increaseswitchingcostsanddecreasepricesensitivityforexistingcustomersExpenditureEffectInindustrialmarkets,increasesintheabsolutesizeorstrategicimportanceofthepurchasedriveincreasesintheincentivestosearchforalternatives,andthereforepricesensitivityDifficultComparisonEffectMakingcomparisonsdifficultbetweenoffersincreasessearchcostsandthereforedecreasespricesensitivity.TrueEconomicCostsTrueEconomicCostsSharedCostEffectSwitchingCostsExpenditureEffectDifficultComparisonEffectPerceptualChallengesPriceEndingsin9sFairnessEffectOverconfidenceinFutureEconomicEfficiencySmallPieBiasPromotionalInfluence ProspectTheory LossesWeighHeavierthanGainsInflectionatthePointofReferenceDiminishingSensitivityRiskAversioninthePositiveFrameandRiskSeekingintheNegativeFrame UtilityFunctionfromProspectTheoryPrescriptionsEffectsRelatedtoProspectTheoryReferencePriceEffectsEndowmentEffectAnchoringComparisonSetEffect FramingEffect OrderBiasEnd-benefitEffectBehavioralEffectsthat

InfluencePriceSensitivityPriceEndinginNinesOneofthemoststudiedpsychologicalinfluencesisonethatdrivespricestoendinninesIfthereweren’tpsychologicalfactorsdrivingthetendencytoendpricesinnines,weshouldexpectarandomdistribution,meaningthateachdigitwouldendthepriceabout10%ofthetime.Frequencyanalysisofpriceendingsfromzerotoninerevealthatpricestendtoendinnines,andlesssoinfivesandzerosDebunkingHearsayon9endingsAcommonhearsayreasonforendingpricesinninesisduetohistoricalartifactrelatingoddpricingandshrinkageatthecashregisterThistheoryisWRONGThetheorywentasfollows:Even-pricedmerchandisewouldoftenbepaidincashwiththeexactamountallowingclerkstopocketthecash.Byusingoddamounts,clerkswouldhavetousethecashregistertomakechange,thusmakingthepocketingofthecustomercashbyclerksobvioustoshoppersaswellasbookkeeperswhowouldlaterreviewthecashregistertally.Yetifitwasonlyatheftpreventionmeasure,thenalloddpriceswouldbemorecommonthanthoseendinginzero.Weseefromthedatathatclearlythereismoregoingoninpricesettingthanwouldarisefromahistoricalartifact.Infact,endingapriceinninescanincreasethesalesofanitemoverotherprices.Theeffectofendingapriceinninesalsoextendsbeyondthelast,rightmostdigit.Informalresearchhasexaminedsellingbehaviorandoddpricepointssuchas$24.99,$29.99or$28.53,Whilethelowestpricetendstosellmorethaneitherofthehigherpricesaspredictedbyadownwardslopingdemandcurve,anoddobservationisassociatedwiththepricepointsof$28.53versus$29.99Theproductsellsbetterwhenpricedat$29.99over$28.53,adirectcontradictionofeconomictheory.QuantityPriceQHPHQMPMQLPLEconomicallyPredictedQuantityPriceQHPHQMPMQLPLObservedEndinginNinesDoesHaveEconomicImpactMeaningPricesendinginninestendstoimplydiscounts.PricesendinginzerosaresuspectedtoimplyqualityPostershopsvs.artgalleriesCognitiveAccessibility.Roundnumberssuchaszeroandfiveareeasilyperceived,remembered,andcompared.Thus,zerosandfivesmayfacilitatepricecomparisonandleadtoincreasedpricesensitivityUnderestimationeffectbyLeftRightencodingWiththeArabicnumeralsystem,consumersencodenumbersfromlefttoright.Furthermore,themostimportantdigitsarealwaysontheleft.Timepressedandcognitivelybusyconsumersattemptingtomakedecisionsregardingvalue,alternatives,andtradeoffs,andareencouragedtoreadonlytheleftmostdigitanddiscardtheremainingdigitsasameanstosaveonmentalenergyandtime.Theresultisanillusioniscreatedwhichmakesthe$9.99productappearmuchcheaperthan$10,00MeasuredBehavioralEffectsofNineEndingsMeasuredBehavioralEffectsofNineEndingsFramingeffect.PricingjustbelowtheroundendingpricecanbeframedasaroundnumberwithasmallgainThesmallgainmaymildlyencouragesapurchaseonapsychologicalbasisItinvokes“wins”inamentalbargainingwiththevendorPricingendingseffectsareculturallydependent.PriceendingsinfiveswereobservedtobeoverrepresentedinPolandshortlyafterperestroikaliberalizedmuchofthesovietblockcountries.ThePolishtendencyforfiveshasbeenattributedtotheconfrontationalbargainingpositionofanex-sovietPolandthatledPolishconsumerstoperceivethe9-endingpricesasalossabovethelowerroundnumberratherthanasagainfromahigherroundnumberIncontrast,priceendingsineightswerefoundoverrepresentedinAsianandJapanesecountries,wherethenumbereightrepresentsluckandprosperityFairnessEffectMarshall’sandSmith’smicroeconomictheoryisstructuredontheassumptionofaself-interestasthesoleprimarymotive.Ifpricesareperceivedastoohighforthebenefitsdelivered,customersarefreenottopurchase.Likewise,ifpricesaretoolowforabusinesstopersist,theyarefreenottoproduce.Howeversuchacursoryexaminationoffairnessissuesintradingdoesapricing,sales,andmarketingprofessionaldisservice.Intrading,theconceptoffairnessispersistentlypresent.Fairness&TheBrainFindingsinbrainphysiology,especiallyevolutionaryneuroscience,showthatthetransactionalcommercialmarketevolvedfromtheinterplayofourself-preservational(egoistic)andaffectional(empathetic)neuralcircuitries.Thus,sharingwithinfamilies,giftgiving,andcommercialactivitiesareallreliantuponanoverlappingsetofcognitivefunctions.Thepresenceofsharingmotivesincommercialtransactionsdrivesexpectationswithrespecttopriceandbenefits.Consumersexpectthatthepricerepresentsasharingofthesurplusbenefitsbetweenthecompanyandthecustomer.Whenpricesareoutoflinewiththeseexpectations,customerscancallfoulandthefairnesseffectwilldampenconsumerwillingnesstopay.FairnessPerceptionsCustomersperceivepricesasfairwhentheyarewithinexpectationsbasedonpastinteractionwiththecategoryLargepriceincreasescanbemisperceivedas“profittaking”onbehalfofsuppliersandproducers,orastakingadvantageoflesspowerfulcustomers.CustomersperceivepricesasunfairwhentheyvaryrandomlybetweencustomersThislattereffectplaguedAmazonin2005whencustomersuncoveredpriceexperimentationanddiscriminationattheirwebsite.Theissueoffairnessisnotspreadequallyamongallproducts.Ithasalargerroleinnecessitygoodsthanthoserelatedtodiscretionarypurchase.OverconfidenceinFutureEconomicEfficiencyWithsomeproducts,customerspurchasethemwithanexpectationofperforminginsomespecificbehavioralpatterninthefuture,howeverpeoplearesystematicallypoorintheirabilitytopredicttheirownfuturebehaviorExample:CustomersselectedfromacontractofmenusfromthreeU.S.healthclubs.Memberswhochooseamonthlysubscriptionoverpricedat$70attendedthegymonaverage4.3timespermonth,makingaper-visitpriceofmorethan$17.Thesesamememberscouldhaveselectedtopay$10pervisitusinga10-vistpass.Furthermore,customerswhochosethemonthlysubscriptionwere17%morelikelytostayenrolledpastthefirstyearthanannualmembers,whichissurprisingduetothefactthatmonthlymemberspayahigherfeefortheprivilegeofcancellingtheircontractatwill.Theinabilityofexpressedbehaviortomatchexpectedbehaviorwasattributedtooverconfidencebythecustomerswithrespecttotheirfutureself-controlandfutureeconomicefficiency.SmallPieBiasTheSmallpiebiasisfoundfromresearchonnegotiationsNegotiatorsconsistentlyunderestimatethesizeofthebargainingzone,orinotherwords,believetheyarenegotiatingoverasmallerpiethantrulyexists.Byimplication,theyoverestimatetheshareofthesurplustheycaptureinthenegotiation.Inotherwords,thesmallpiebiasleadssellerstosettlefortoolittleofaprice.OvercomingtheSmallPieBiasToovercomethesmallpiebias,itissuggestedthatsellersmakepriceexpectationsofthebuyersreservationprice,andusethenegotiationtoseekdisconfirminginformationthatupdatestheirbeliefsofthebuyer’sreservationprice.Thedisconfirminginformationiselicitedfrombuyersbysellerswhensellersmakeinitialoffersthatareoutsideoftheirexpectedbuyerreservationprice.Inthenegotiation,theycanusebuyerreactionstoupdatetheirexpectationsoftheybuyersreservationprice,andthuspricethetransactionclosertothebuyersreservationprice.PromotionalSensitivityPromotionsinfluencepriceoptimizationthroughtwokeypaths:Themessagecommunicatedaffectspricesensitivity.ThemarketattractedthroughpromotionsholdsadifferentpricesensitivitythanthemarketoverallWhatYouSayInfluencestheir

WillingnesstoPayPriceorientedpromotionsleadstowardsbothlowerpricesandincreasedconsumerpricesensitivity.Oneformofpriceorientedpromotionsarethosethatfocusonthebrandandthepricealone.Suchpromotionsarecommonlyfoundinlocalcircularspreparedwithdistributorstohighlighttheavailabilityofawellknownbrandatalocaloutlet.Valueorientedpromotions,tendtoleadtolowerpricesensitivityofconsumers.Valueorientedpromotionsarethosewhichfocusonthebrandandthefeaturesorbenefitsoftheproduct.Theyarecommonlyfoundinnationaladvertisingeffortswhicharedrivenbytheoriginalproducingfirm.Theeffectofpromotionalmessageshasalsobeenfoundinnegotiationsresearch.Usingkeysellingpointsenablessellerstoachieveahigherfinaltransactionpricesinanegotiation.WhoYouTalktoInfluencesWillingnesstoPayThesecondaryeffectofpromotionsonpricesensitivityarisesfromtheabilityofadvertisingtoincreasethesizeoftheaddressablemarket.Advertisingsensitiveconsumerstendtobemorepricesensitiveconsumers.Bybringingnewcustomerintothemarketthataremorepricesensitivethanthemarketoverall,advertisinghasanindirecteffectofoverallincreasingthepricesensitivityofthemarket.PerceptualChallengesPriceEndingsin9sMeaning,Accessibility,Encoding,FramingallimplypriceendingsinfluencepriceacceptanceFairnessEffectTheexpectationoffairnessincreaseswitheconomicsophistication,andinfluencespricechanges,differentials,anddiscriminationOverconfidenceinFutureEconomicEfficiencyPeoplebelieveareoverconfidentintheirabilitytochangeoutcomesandbehaveinaneconomicallyefficientmannerSmallPieBiasNegotiatorsroutinelybelievetherangeofacceptablepricesissmallerthanitis,andmoreoveranchortheirexpectationpricearoundtheirwalk-awaypricePromotionalInfluenceWhatyousayandwhoyousayittoinfluencestheabilitytocaptureagoodpriceBehavioralEffectsthat

InfluencePriceSensitivityTrueEconomicCostsSharedCostEffectSwitchingCostsExpenditureEffectDifficultComparisonEffectPerceptualChallengesPriceEndingsin9sFairnessEffectOverconfidenceinFutureEconomicEfficiencySmallPieBiasPromotionalInfluence ProspectTheory LossesWeighHeavierthanGainsInflectionatthePointofReferenceDiminishingSensitivityRiskAversioninthePositiveFrameandRiskSeekingintheNegativeFrame UtilityFunctionfromProspectTheoryPrescriptionsEffectsRelatedtoProspectTheoryReferencePriceEffectsEndowmentEffectAnchoringComparisonSetEffect FramingEffect OrderBiasEnd-benefitEffectProspectTheoryTheresearchquestionasked:Howarepeoplesystematicallynon-utilitymaximizing?BasictenetofeconomicsisthatpeopleseektomaximizetheirutilityinatransactionNumerousstudieshavefoundaberrationstothisbasictenet,waysinwhichhumansarepredictablyirrationalProspectTheoryattemptstodefinefundamentalheuristicstopredicthowhumansarepredictablyirrationalItdoessobyasking:HowdopeoplechooseamongriskyprospectsNON-UtilityMaximizingWhichofferwouldyouaccept50%Chanceat€10,000€4,500withcertainty50%ChanceofLoosing€10,000Loosing€4,500withcertaintyProspectTheoryProspectTheoryexaminespredictablemannersinwhichhumanbeings(customers)reliablymakechoiceswhichfailtomaximizetheirutility,allelseheldequalProspectTheoryexplainsmanyconsumerbehavioraleffects,andtherefore,strategicpricingopportunitiesMorerecentresearchisuncoveringneurallinkswhichexplainprospecttheorywithrespecttoevolutionarypressuresLossesloomlargerthangainsTheaggravationthatoneexperiencesinlosingasumofmoneyappearstobegreaterthanthepleasureassociatedwithgainingthesameamount.Utilityfunctionsforlossesareconsiderablysteeperthanthoseforgains.ShiftofReferenceImagineapersonwhoisinvolvedinabusinessventure,hasalreadylost$2000,andisnowfacingachoicebetweenasuregainof$1000anda50%chancetowin$2000ornothingIfhehasnotyetadaptedtohislosses,heislikelytocodetheproblemasachoicebetween-$2000@50%and-$1000ratherthanachoicebetween$2000@50%and$1000HeismorelikelytotaketheriskychoicewhenheviewstheprospectiveoutcomesfromthefirstframethanthesecondThefactthatthetendencytobetonlong-shotsincreasesinthecourseofthebettingdayprovidessupportforthehypothesisthatafailuretoadapttolossesinducesrisktakingDiminishingSensitivityOurperceptualapparatusisattunedtotheevaluationofchangesordifferencesratherthantotheevaluationofabsolutemagnitude.Itiseasiertodiscriminatebetweenachangeof3°andachangeof6°inroomtemperaturethanitistodiscriminatebetweenachangeof13°andchangeof16°.Thus,thedifferenceinvaluebetweenthegainof100andthegainof200appearstobegreaterthanthedifferencebetweenagainof1100andagainof1200.Similarly,thedifferencebetweenalossof100andalossof200appearstobegreaterthanthedifferencebetweenalossof1100andalossof1200.Themarginalvalueofbothlossesandgainsdecreaseswiththeirmagnitude.ReflectionEffectChoicesmadeinthenegativeframearethemirrorofthosemadeinthepositiveframeRiskaversioninthepositivedomainisaccompaniedbyriskseekinginthenegativedomainPeopleeschewriskswhentherisksreducethechancethatsomethingverypleasurablewillhappenPeopleseekriskswhentherisksreducethechancethatsomethingverypainfulwillhappenCertaintyincreasesaversiontolossesaswellasdesirabilityofgainsMoreLossAversethanGainSeekingA$10losscausesmorepainthana$10gaincausespleasureLossesB

Value–(Pain)Value+(Pleasure)GainsA

PerceivedRealHighlightGainMinimizePainDecliningSensitivityTwo$5lossescausemorepainthanone$10lossTwo$5gainscausemorepleasurethanone$10gainBothlossesandgainssufferfromdecliningperceivedimpactUnbundleGainBundlePainLossesB

Value-Value+GainsA

ValueFunctionPerceivedRealCertaintyandPricingPriceGuaranteesGuaranteestomatchorbetterthelowestpriceacceleratecustomerpurchasesConsumersareuncertainoftheirabilitytoattainthelowestpriceatanyparticularretailoutletPromisestoensurethelowestpriceorreimbursingwithacheckforthedifferenceenablescustomerstopurchasewithgreaterconfidenceUsesInfrequentlypurchasedconsumergoodsMatcheslowestpriceinthemarket(Orbitz),matcheslowestadvertisedprice(electronics),orredeemscompetitorscoupons(grocers)ResultHighervolumesPotentialtoreducecompetitivepricepressureandshiftthepressuretootherdimensionsofcompetition(costs,customerexperience,distribution,promotion,etc.)ReferencePointSensitivityPeoplearemoreaversetoa5%chanceofnotreceiving$50thana95%chanceofgaining$50LossesB

Value-Value+GainsA

ValueFunctionReframePainsasGainsReferencePointManagementandSalesPlacingtheproductincustomers’handsatbazaarsIncreasesthe“instantendowmenteffect”,thusincreasingtheirwillingnesstopayAskingcustomerstoimaginethepositiveimplicationsofusingtheproductIfyouhad$5,000moretoinvestinyourcompany,whatwouldyoudowithit?Ourofferwillsaveyouthat$5,000inthenext12monthssoyoucanachieveyourgoal.OverarchingInsightsfromProspectTheoryOrganismshabituatetosteadystatesThemarginalresponsetochangesisdiminishingPainismoreurgentthanpleasureLossesB

Value-Value+GainsA

ValueFunctionProspectTheory

It’sReal.It’sHuman.It’sUsable.Utilitytheoryineconomicsassumeshumansare“rational”.Wearen’t,oratleastnotrationalinthesensethatutilitytheorypredicts.Behavioraleconomics,fromevolutionary,neuralactivity,andexperimentalstudies,betterdescribeshowcustomersmakepurchasingd