Hi and thank you all for joining us for a pricing podcast with
the Professional Pricing Society.
My name is Megan Ford with the Professional Pricing Society and
we're excited that you all are listening to us on today.
Today's topic is going to be one for the books.
We are excited to feature Dr. Florian Bauer and we're
discussing behavioral pricing, shifting the paradigm from value
based pricing to leveraging behavioral economics in B to C&B
to B pricing. Now Dr. Florian Bauer is a great
friend of PPS and he's also a featured speaker at our upcoming
global and European Virtual Pricing Conference this
December. So learn more about this full
lineup is going to be extremely exciting.
Three days with exclusive content just for our European
market with global presenters, workshops and the opportunity to
earn CPP credits. You can follow along the hashtag
PPS Euro EU ro two one across all social media platforms to
learn more or visit us directly at the AT the Pricing Society
website, which is www.pricingsociety.com back
slash European conference. You'll get more information
there. We cannot wait to welcome you
and all of your teams. Registration is now open.
You can also learn more about Dr. Florian's offers and
contributions. He has several content
contributions within our vault within our website.
So go to our membership website and search Doctor Bauer for more
of his pricing contributions. But today we're excited to talk
about shifting the paradigm. So before we jump into
interviewing Dr. Bauer, let's learn a little bit more about
him. Doctor Florian Bauer studied
psychology and economics at the Technical University of
Dormstop, the Massachusetts Institute of Technology, MIT and
Harvard University before going on to complete his doctorate at
TU Darnstock. Having spent four years working
as a strategy consultant for Booz Allen Hamilton, he joined
with three partners in 1999 to found the Bocatas A G Bocatas is
an international consulting company focused on developing
and implementing behavioral economics based pricing and
sales strategies across B to C&B to B Industries.
Dr. Bauer is a sought after expert on pricing psychology and
behavioral pricing and has authored numerous articles and
books on pricing strategy and pricing research.
He is also an Honorary Professor at the Technical University of
Munich. We're excited to welcome you
today. Dr. Bauer, thank you for joining
us. Thanks for having me, Megan.
Hi. Yeah.
So let's jump right in. First question for you, you know
that you are speaking at our upcoming pricing conference.
Thank you very much and your workshop is entitled was talking
about shifting the paradigm from value based pricing to
behavioral pricing by leveraging behavioral economics for B to
B&B to C pricing. Can you tell us why pricing
strategies powered by behavioral economics are much more
effective than the value based approach?
Yeah, sure. My pleasure.
Well, I mean stating that we want to shift the paradigm is a
quite strong statement. So let's ask ourself what, when
is it worthwhile to shift the paradigm to take a new
perspective on pricing? What do we have to do?
Well, generally speaking, I would say an approach is is
ready to shift the paradigm if it provides better answers to
the question why do people pay? Or for what do people pay?
And exactly here behavioral pricing goes one step further
than value based pricing. What do I mean by that?
What is the notion of value based pricing?
When it comes to the question what do people pay for?
Very clearly, if the answer is people pay for value.
Within this paradigm, people do pay for objective value and
subjective value. That is basically incorporated
in the product and its features and it's basically the
preferences of customers that define how much confronted with
that value in these features and the products people are willing
to pay. And that's what we do in value
based pricing. We measure people's preferences
to predict their willingness to pay.
Now, behavioral economics, or behavioral pricing, does not
reject the idea that people pay for value.
Not at all. People do pay for value, but
people do also pay for how they make decisions, being
predictably irrational. So within their decision making
process, people make predictable mistakes that reflect nothing
else than an additional potential for marching or
conversion rate. And in behavioral pricing, we do
measure on the one hand the willingness to pay resulting
from value, on the other hand the price acceptance resulting
from the fact. That people are making
predictable mistakes when they are buying something.
So sometimes people are not perfectly informed about price
or product, so some of the price acceptance results from that.
Sometimes people want to avoid some cost, so some marching
results from from that. Sometimes people are influenced
by the choice architecture in which they make a decision, so
part of their prices acceptance results from that.
So basically behavioral economics says that there are
more sources of price acceptance than the ones result from
product features alone. And this is what we do in
behavioral pricing. We take all sources of price
acceptance into account, no matter whether they result from
the value people see in a product.
Or from the fact that they make decisions in a certain way.
So basically we look at 2 dimensions.
What do people want? What are the preferences?
What do they pay for in terms of value on the one hand.
On the other hand hand, it's how do people make decisions?
What kind of predictably irrational mistakes do they
make, and how does that translate into additional margin
and conversion potential? So when we develop a pricing
strategy, we do not try to measure or quantify willingness
to pay a loan, but we rather want to understand what is the
role of the price in the customers decision making
process And that's much better described rather than in one KPI
in a more complex understanding. When does the price play a role?
How do people compare? How do they come to a
conclusion? And once we understand the role
of the price in the customer's decision making process, we can
also tackle another issue, another very traditional issue,
classic issue in value based pricing, which is the clash
between pricing and sales. Very often when you develop a
pricing strategy using the classical tools of value based
pricing, for example a conjoint analysis in which you want to.
Quantify the willingness to pay based on understanding how
people value certain features. You end up with an analytical
result predicting that people should be willing to pay a
certain price. You take that price, you write
it in the price list, and then you go to sales.
Tell your colleagues this is the price you should go out and get.
Very often sales comes back and said that's it says that this is
impossible. We need some more discounts to
execute this pricing strategy because the price is too high.
And then there's a big argumentation going on between
pricing and sales pricing arguing with a very analytical
process that this is the way we derived our price.
We measured people's willingness to pay and that's why they
should be willing to pay that and then Sales says.
But that's not reality. And there's not much support
coming for each of the other side.
Now when we look at pricing from a behavioral perspective, we
develop a pricing strategy out of understanding the role of the
price in a customer's decision making process.
This not does not only give us a better pricing strategy, taking
advantage of more sources of price acceptance, but it also
helps us. To develop tools and techniques
to better execute a pricing strategy for sales, so we gain a
better understanding how we can proactively support our sales
colleagues in being more successful executing the pricing
strategy because our understanding is much more
holistic on the customer's decision making process rather
than quantifying partial utilities of features of
products. Which is traditionally done in
value based pricing. So, in a nutshell, behavioral
pricing goes one step further, considering more sources of
price acceptance without neglecting the fact that people
do naturally also pay for value, but not only.
And we need to go and come to the conclusion that we should be
less product centered, less feature centered in our pricing
and sales approach and try to understand that we are not
selling products, but what we do in pricing and sales, we want to
manage customers decisions and that is basically the notion of
the behavioral pricing. Thank you Dr. Bauer.
We've got a few more questions. So let's talk a little bit more
about the customers decision around strategies and
motivations. Well, when we look at how
customers make decisions, then what we found is that, you know,
the classic take away if you read behavior economics books is
what I just said. People make predictable mistakes
when they're make decisions. That's quite interesting, but
not very helpful from a practical perspective.
From a practical perspective, we have to better understand how do
people make decisions on the one hand and on the other hand we
have to understand if there are differences between different
customers in kind of what decision strategies they follow.
And based on this, we like 15 years ago we did a huge
international study in which we wanted to segment people in
respect to how they make decisions.
That is not in respect to what they want like in traditional
marketing segmentations, but we wanted to apologize people in
respect to how they make decisions.
So exactly those two dimensions looking at the second dimension.
We found that there are five distinct types of how people can
make decisions. None of them is rational, but
all of them are different in how irrational or in what respect
they are irrational. So on the one hand, the first
type we found is is the bargain hunter.
Everybody knows the bargain hunter.
The bargain hunter is somebody who actually buys a discount
rather than the product. He wants to be the winner in the
negotiation and so on. So we need to be prepared to
sell totally different and price totally different for this type
than for another type. So for example the second type
is the risk avoider. The risk avoider is a customer
or decision making strategy that is also looking at the price and
comparing the price like the bargain hunter but result or
based on a totally different. Motivation.
The risk Avoid is not seeking the lowest price and the biggest
bargain because the risk avoid is a little bit skeptical about
two two big discounts. The risk avoid is much more
interested in fairness and transparency, and the motivation
in his decision is to not being ripped off.
So rather than finding the lowest price, they seek fairness
and transparency to make sure that they get.
And a fair offer at the end of the day, a totally different
decision strategy compared to the bargain hunter.
The third type is the price acceptor.
The price acceptor is a customer that has maybe a certain budget
in mind, but looking at the product and diving into the
features and understanding what different options they have.
They might be willing to expand their budget if it's explained
in the right way, and if it's individual in the sense that it
better fulfills their need. The 5th, the 4th type is the
routine buyer. The routine buyer is somebody
who always buys the same brand, always buys the same product,
does not really compare. Price does not even know the
price in many situations, but always picks the same product
and the last type is the indifferent buyer.
The indifferent buyer is a customer that in this very
situation, he makes the decision, doesn't really care
about the product, know the price, he just cares about
having a very quick. And easy to get solutions.
So think about you. You drive your car on the
highway. You ran out of gas.
In that situation, you don't start to compare prices as
different stations. And you're not looking for a
certain station, but you just go and fill fill up your car
without considering how much it costs.
That's an indifferent buyer situation.
So we have these five types of decision making that we need to
distinguish and that's for example is one of the things we
support sales with to identify who is in front of them and how
they, what kind of strategies they should pursue in order to
execute the pricing strategy. Thank you, Dr. Bauer.
That was very thorough. A follow up to that would be, is
behavioral pricing really still are also relevant when it comes
to B2B? Aren't B2B decisions much more
rational? Well, that's a question I'm I'm
often asked because it's assumed that if people make decisions in
their company, they are much more rational, rational than if
they would do it at home, which is not the case.
And there are several reasons for that.
First of all, the kind of insights we have from behavioral
economics. Are not falling from heaven.
They're not just pure mistakes people make out of not thinking
enough. But the insights behavioral
economics showed us or brought us are based on the fact that
our decision apparatus, our cognitive system, our
motivational system, is shaped by evolution.
And evolution never brings up perfect solutions.
It just brings up. Sufficiently good or
sufficiently for sufficient for survival solutions, so to say.
So our decision apparatus is not attuned to utility maximization.
That's a purely academic idea that has nothing to do with
rationality. But if our decision apparatus is
designed that way. We will be a we will not be more
rational if we do B2B decisions than if we do B2C decisions.
That's a very fundamental theoretical answer.
I can give you a much more practical answer to your
question. Just think about the motivation
you have as a B2B customer. You always have two motivations.
You want to find the best product and price for your
company. But you also have the motivation
of not risking your career, and those two motivations go not
hand in hand necessarily. So you probably know the
sentence. No one ever got fired for buying
IBM. This is definitely not
displaying A rational decision strategy, but something that
very often takes place in companies.
That's how people decide and that's the kind of decision
strategy. By the way, translated in our
five Crips types, which I was just explaining, that's the risk
avoider strategy. No one ever got fined for buying
IBM. And the third answer to your
question is many decisions in companies are group decisions.
They're not made by one single decision maker, but they're made
by different roles in the company.
And group decisions per se do not tend to be more rational,
they rather tend to be less rational.
So taking that all together, I would even argue that B to B
decisions very often are even less rational in terms of being
utility maximizing than B to C decisions.
So behavioral pricing is as well applicable for B to C.
At least as well As for B to B. Thank you.
We've got only a few more questions.
So I appreciate this fabulous interview.
What do you think are the key SuccessFactors if someone wants
to leverage insights from behavioral economics within
pricing and sales? That's a very good question.
If you listen to presentations today on behavioral economics or
also behavioral pricing, very often they exhaust themselves in
a long list of academic experiments, presenting you with
one academic experiment after the other.
And it seems to be very easy to copy and paste this academic
experiment. To your pricing and sales
strategy and that's a mistake and that's a big risk.
So the key success factor is not to copy and mistake the copy and
paste the academic insights from some some academic book to your
marketing practice. But the success factor is to
understand the underlying implication that has for pricing
and sales. And that actually is what we
spent the last 20 years of distilling.
Out of these thousands of experiments, what do they mean
for pricing and sales? And based on that, we developed
a framework and a procedure to make sure we take advantage of
these insights without making the mistake of copy and pasting
academic experiments to your pricing strategy.
Another success factor is the fact that you should not try to
factor in this behavioral pricing at the end.
So basically I saw a few charts from basically saying what's the
pricing process. So they do a lot of really
pricing work and then at the end you can add some behavioral
pricing that's the wrong way. We have to start developing a
pricing strategy based on understanding the role of the
price in the customers decision making process.
That is nothing you can factor in later on if you do so.
It's a little bit like building a rocket and checking it if it
abides the law of physics shortly before you launch it,
that's not the right way. So if you want to take advantage
of behavioral pricing and the additional sources of price
acceptance and the potential of higher margin and conversion
rates, you better start developing your pricing strategy
based on these insights and not try to add them at the end.
So basically what we do in behavioral pricing is answer the
same questions as we do with other pricing approaches.
We rather have more dimensions we look at and more levers to
skim margin and increase conversion rate.
And that's why it makes a lot of sense to follow this approach
from the very beginning of designing a pricing strategy.
Great answer our final question today.
What are the typical projects that you're working on and how
does your approach differ from that of others?
Well, basically the typical projects we are working on are
the typical projects everybody's working on in the pricing world.
So it's about pricing new products, managing price
increases, developing price and product portfolio, managing the
change of price models from selling a product to managing
subscriptions. We work on discount management,
we work on incentive system for sales.
So all these things that have to do with pricing and sales we
work on just as everybody else. The, the main difference is, as
I just said, we take into account more dimensions when we
look at that because we understand that it's not only
about value, it's about managing decisions of our customers, it's
about managing decisions of our sales team when we design an
incentive system, for example. So we look at these two
dimensions, what do people want and how do they make decisions?
Let me give you a concrete example.
So let's assume you have a product that is new, that's very
innovative. The traditional approach of
value based pricing is basically saying going out and researching
what do people value in terms of the features of the product, how
much would they pay for these features.
Now the behavioral issue with an innovative product is that
people don't know how much they pay for a certain product.
If it's really innovative. Just think about when the first
iPad was presented. Nobody had to, you know, that
was a new product that did not exist before.
There was no willingness to pay. You could measure because it was
totally new. People had no experience with
that. So the challenge from a
behavioral pricing perspective is rather to help people
developing a price acceptance while they understand what this
product can do. Now Steve Jobs did a tremendous
job as you can actually see on YouTube when he was presenting
this iPad because when he presents presented this iPad, he
was saying okay, what kind of features this had and so on.
And he was talking about that they did very good developments
and they try whatsoever. So they were talking about he
was talking about product development.
And while he was talking in the back of his presentation, there
was a huge screen just showing $999 as a number, as a price.
He did not refer to that very much, but at the end of his
speech he said OK, this is our wonderful product.
I just explained to you now our question, what was what should
we price it at? And then he was talking about
the fact that they invested very much in efficiency and so on.
And in the end he said, and you know what, it's not 999, it's
just 499. And the 999 in his back
disappeared and 499 came up and everybody was applauding.
In this very moment, he presented this 999 in his back.
He was creating price acceptance because people were thinking,
not knowing what this product is really about that they why they
should be willing to spend 999. So they were already going
through part of their decision making process.
And when he said it's not 999, it's only 499.
People actually already bought this product and that has
nothing to do with features. That has to do with creating
price acceptance in the customer's decision making
process, for example in this case, by working with price
anchors. So it is not about defining
prices based on understanding the value of features, it's
about developing a pricing strategy on the basis of
understanding the role of the price in the customer's decision
making process. And that was just one example.
That was an excellent example. We want to thank you so very
much for your time today. You were an outstanding
contributor and we want to invite everyone that is
listening to learn more about Doctor Florian Bauer by visiting
the Professional Pricing Society website because he is a featured
speaker during our European conference as we've mentioned
before and he has additional resources that you can find
within our membership vault. Also visit the Volcatas website,
Volcatas AG on behalf of everyone in the Professional
Pricing Society. We wish to thank you all.
Thank you again. Bauer for joining us.
It was a great interview. Any final words?
No, thanks a lot. I'm looking very much forward to
have a lot of people joining for our workshop where where we have
the chance to dive much deeper into the topic.
Yes, Sir. It's gonna be a great time.
All right, everyone. We'll see you at the PPS Euro
event. Hashtag PPS EUR O2 one across
social media platforms. And until next time, keep
listening and happy pricing. Thank you, right.