Pricing is the Key to Success
Handbook on the Psychology of Pricing
Most entrepreneurs and business owners like to assume that the customer is the most important part of the business, because they will be the one purchasing the good or service offered. However, that is debatable. Markus Husemann-Kopetzky’s “Handbook on the Psychology of Pricing” takes a step back and looks at businesses before the customer even gets involved. After reading Husemann-Kopetzky’s book it became apparent that the key to eventually having a successful and reliable business was pricing. More specifically, how to use pricing to a business-owner’s advantage so they can appeal to customers.
At first glance, price is just a number. A number that simply tells the customer how much they need to pay for the product or service. But look beyond the number and its true complexities begin to show. Just to emphasize the complexity, think about how long it takes business owners to price their goods. The process is tedious and requires quite a bit of research. For example, they need to consider the quality of the good or service, the competing prices, the current state of the market, and even an ideal amount of profit they need to earn to pay their fixed and variable costs to keep their business running. The list could go on, but the overall message is that a lot of variables need to be considered when pricing.
While reading, I came across the underlying theme of quality vs. quantity, and how that ongoing debate also plays a role. Producing good quality products is what differentiates the cheaper quality chain corporations from the dedicated and smaller one-of-a-kind businesses found in local communities. Those smaller businesses that were once started by determined entrepreneurs know their worth, and know that even if they charge a little bit more, customers will still buy their products because of the excellent quality they will receive. Compared to the huge corporations that push their workers to sell as much as possible and as fast as possible, which sounds a lot more like quantity to me. The book also hinted at the addition of customer service, and its effects on customer’s willingness to pay. After thinking about it more, I realized that it’s often the smaller and local businesses that have the most welcoming employees who help without bombarding the customer with questions. They value the simple aspects of respect when hiring, which shows in their employees, and it often makes customers feel comfortable. Customers are more likely to purchase a higher quality product that’s a on the more expensive side because of pleasing customer service. It was at this point that I had this realization. The one word that summarized all of what I’d learned and thought about while reading was balance. Knowing the worth of the company and the worth of the product without pricing too high or too low is the perfect balance that every company should try to achieve.
Although the book did have its dry and repetitive sections in the middle, it also had its fair share of intriguing information that I had never even realized before. Even something as simple as labeling sale prices in red font being more convincing instead of black font was surprising. The human brain is already fascinating, but just think about how every little number, color, or letter order makes a difference in our decision-making process. When Husemann-Kopetzky wrote about discounts or sales and their effect on the decision-making process, my mind was blown. The smallest details such as adding the regular price next to the sale price was proven to increase the percentage of a customer purchasing the item on sale because they were able to see how much money they’d be saving. Or maybe next time there’s something in a store that costs over 1000 euros, check if there is a comma or space between the thousands and hundreds place, because that too apparently makes a difference. It was all of these small details I kept reading that made me realize just how complex and mindboggling the concept of pricing really is. It was difficult for me to wrap my mind around the fact that every time we go to the store our brain goes through such an intricate process just to choose one product over another.
Now try looking through the customer’s perspective for a change. Or maybe ask yourself, what is my current financial situation? Is it worth buying this product in the long run? What are the other brands offering? Is there a sale going on at the other store? These are just a few of the thoughts that run through our mind when trying to make the choice of purchasing or not. And some consumers may even take a break from staring at the product and walk around the store before returning to the product and deciding to purchase it, because the thought process may take a long time. Another crucial message I interpreted was how customers know when they are paying too much for a low-quality product or getting ripped off. It goes hand in hand with the Internal Reference Price (IRP). A human’s IRP is the standard reference price for a product that they use to check if a price is suitable or not. Apparently if we buy a lot of the same product, we get accustomed to paying an amount in our IRP range, and when we see the same product priced too high or too low, the likelihood of purchasing the product decreases. Which would explain why people know if they’re getting ripped off.
It is starting to become apparent that customers are just as sneaky as the businesses when it comes to prices. They know how to work the system, and sometimes even do their research to know if the purchase will be worth it. Humans judge everything from first glance. That classic saying, “don’t judge a book by its cover” is hard to avoid in the pricing world. As soon as we see the price for a product or service, we make assumptions about its quality, we just can’t help it. That goes for things priced too high, but it also goes for things priced too low. For instance, I remember this one time I saw a very nice-looking kitchen gadget that was being sold for a very low price, and it seemed suspicious. My immediate reaction was to question its quality and whether it functioned or not, so I would not be paying for a broken product. This made me wonder if the same suspicion applied to the international market. A lot of us order items from abroad if they aren’t available in our home country, so a lot of new brand names will pop up. Often these brands are unheard of, and may even seem sketchy, or like the knock-off version of a product seen earlier. Later on, the author did cover the similar uncertainty consumers experience when purchasing from abroad, because it is outside of our comfort zone, and requires taking a risk. It’s these types of alarms that ring in customer’s heads when they react to a price. Sometimes the measures taken by customers to be aware of a product are uncontrollable, because it is all a part of the human brain’s decision-making process.
As I kept reading, the words like discount, pricing, competition and profit started to cloud my thoughts and I had a difficult time attaining anything useful from the book. The way it was structured reminded me of an instruction’s manual, however it was instructions for pricing. Each page had a different tip or trick to remember that was bolded, and different order that would be most beneficial, which would be helpful, however I am not a business owner yet. Typically, if I am reading a book and those concerning thoughts start to arise, I stop reading and find something I enjoy more. However, this topic of people’s reasoning behind purchasing, and importance of pricing right intrigues me so much that I pushed forward and ended up finishing the book. Not only was that difficult, but it helped me learn a lot more about the topic of pricing and just how crucial it is to new businesses. It is something we will need in the future and will be useful when developing a business with other entrepreneurs.