The Truth About Pricing - Supporting Materials

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Glossary [Pricing]

These terms are found within Melina Palmer’s third book, The Truth About Pricing: How To Apply Behavioral Economics So Customers Buy. This document is created in Coda so it can evolve over time.
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The Truth About Pricing
Episode(s) of The Brainy Business podcast
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Anchoring & Adjustment
Humans tend to rely too much on the first information given about a topic and this impacts the choice they make. The most common examples use numbers, but we also anchor on ideas or concepts that don’t include numbers. In the case of pricing, I recommend you include a high anchor that is more expensive than your , to help the pricing of the thing you want to sell to feel like a better deal in comparison. Your can be your , but that isn’t required.
Authority Bias
This is the tendency to be more likely to accept and believe opinions, views, recommendations, etc. from those in authority (or who appear to have authority). This can be directly related–someone is more likely to take health advice from a doctor in their white coat, and it can also have a strange –where we are also more likely to take that doctor’s advice on our investment portfolio (even though they don’t necessarily have any expertise or credibility in this area). This can be used in tandem with to help a potential customer feel comfortable about buying from you.
Behavioral Economics
A field which combines traditional economics and psychology (along with influences from neuroscience, philosophy, anthropology, and sociology) to understand how people will make decisions and behave in the real world (instead of what we may think people “should” do).
Best Offer
This is the main thing you want someone to buy, which you will be creating a strategy around in this book. Your goal is to combine this with a , , and possibly a dissimilar third item to help your customer decide and be most likely to see the best offer as the best choice for them.
Also known as Parkinson’s Law of Triviality. The tendency of people to dedicate an inordinate amount of time to something trivial (that feels incredibly important) while letting crucial items go unattended. The concept got its name “bikeshedding” because of Parkinson’s observation of a group that was designing a nuclear power plant, but spent an inordinate amount of time designing the bike shed (instead of the much more scary and important work of the plant itself). In this book, we focus on how bikeshedding combines with , , and planning fallacy to keep you stuck in the , and how to overcome those tendencies.
Choice Architecture / Choice Architect
The way decision sets or choices are presented to people is known as the choice architecture. The person (or entity) presenting the options is the choice architect. Whether you think about it (or want the responsibility) or not, the way you present the options is absolutely impacting the decision someone makes, so it is better to be thoughtful about it. Also see .
Cognitive Load / Cognitive Stress
Our brains are amazing, but they tend to get overwhelmed easily. When the conscious brain () is bogged down with too much information (it takes much less than you think) that cognitive load/stress will cause an increased reliance on the subconscious () for more and more (even very important things). Because the subconscious has a preference for the , when someone has an increased cognitive load, they are less likely to be receptive to changes (even small ones and even ones that are “obviously better”).
Cold State
When we are in a cold state (i.e. not in the “heat of the moment”) we like to think we will have more control and better decision making when the crucial moment comes. The prediction/hope for what we think will happen while in a cold state and the difference in what actually happens in the hot state has a gap, which is known as the cold-to-hot empathy gap. For example, when smokers underestimated their cravings to smoke when they were in a cold state or someone was confident they would be able to resist dessert until the menu arrived and everyone else was ordering. Also see .
Conscious Brain
There are many amazing research findings and insights within this book, the entire field of , and beyond. While it may be tempting to try and copy exactly what was done in those studies or instances to get the same results, it doesn’t work that way. Nothing is fully generazliable and the small details (things you don’t think should matter) often have a massive impact (as the entire field of behavioral economics finds time and again). Whenever you are setting up a test or project, it is always important to be thoughtful to the context–things like time of day, day of the week, temperature and weather, how it was sent, the relationship to your business, and so many other factors all help to understand the context and can impact behavior.
The default option is what will happen if someone does nothing, and/or what aligns with their already established . Whatever is presented as the default is more likely to be chosen (a type of ). For example, research has shown that if you have a setting where people have to opt in to participate, you will have a lot less participants than if they have to opt out (regardless of whether they like the idea more or not). Consider default settings on your phone for its ringtone, or how quickly your screen saver goes on...we accept defaults for many of our choices and don’t even realize it. Also see .
Part of the (our four most common “happy” chemicals): dopamine, , and . Dopamine is key for motivation as it is released most when we anticipate something. Think about playing a game when you aren’t sure if you’ll win, or watching a movie and waiting to know how the story will end–the joy is in the anticipation (when the dopamine is released) and dissipates once you know the result (dopamine stops being released).
DOSE Brain Chemicals
The four most common “happy” chemicals in the brain: , , , and . They play key roles in motivation, pleasure, and well-being.
Part of the (our four most common “happy” chemicals): , , , and endorphins. Endorphins mask pain and are tied to that well known “runner’s high.” Focusing on endorphins and their related could be a good strategy for personal trainers or those offering a thrilling experience (skydiving, mountain climbing, other sports).
Endowment Effect
We value things we own more than things we do not, even if they were given to us arbitrarily (and we wouldn’t have chosen them over something else). For example, imagine I give one half of the room $2 and the other half a lottery ticket that would have cost $2. When people are asked if they want to trade, very few do because they have painted the best picture for the thing they have been endowed with and it skews their view. Those with the lottery ticket think about how upset they would be if they traded and it was a winner, and those with the cash think about the odds and that the lottery ticket is likely a worthless piece of paper (and they both would have used the same logic if they had been part of the other group).
Expect Error
This nudge acknowledges that humans are prone to mistakes and seeks to design systems or processes that are forgiving of these errors. By anticipating where mistakes may occur and implementing safeguards or corrective measures, it helps ensure that minor errors don't lead to significant adverse outcomes. This approach recognizes human fallibility and strives to create an environment where the person creating a product or service understands where someone might err, and then introduces a (see ) to help the chooser adjust their behavior if they so choose.
Familiarity Bias
We like things more when we are familiar with them. It doesn’t necessarily mean they are better, but our brains like predictability so we prefer the familiar. This is a “the devil you know is better than the devil you don’t” bias. Also see .
How you say something matters more than what you say. My favorite example is buying yogurt at the grocery store. Imagine there are two nearly identical stacks, one listed as “90% Fat Free” and the other as “10% Fat”—which one do you want to buy? Most everyone prefers 90% Fat Free. Logically we know they are the same thing, but our brains hear them completely differently. Changing the frame can change the decision someone will make. Framing is a key part of the .
Fresh Start Effect
The tendency for people to take on new goals or behaviors following temporal landmarks like the beginning of a new week, month, or year. This is why people are much more likely to diet or run a marathon / half marathon / 10k / 5k at an age that ends with a nine (29, 39, 49, 59) than they are at an age that ends with a 1 (31, 41, 51, 61).
Give Feedback
This type of combines closely with the “” nudge. As a when you expect someone may make a mistake, you can give feedback to help them realize their error and then determine if they would like to change their behavior. As an example, car manufacturers expect that people may forget to buckle their seatbelt at some point, which is something they likely want to do. Because it is important, the car is designed to give you feedback (dinging noise that gets progressively more annoying) so you can fix the error. You can’t give feedback for everything (because the user would learn to ignore it all) so it is important to be thoughtful about which moments to provide feedback on.
The average person makes 35,000 decisions every day, the bulk of those are made on habits. Habits are built up of a that has been repeated enough over time where the brain knows we get some sort of reward on the other side. Understanding (and often changing) the context is the key to changing habits (willpower is not typically an effective strategy). It is important to know that even very small habits being upended can impact how we feel about other changes when they are presented. If too many habits change at once, we rely on the subconscious for big stuff that we may not like the outcome of. Lesson: be aware of the changes going on and how habits might be impacted. Don’t try to make too many changes at once. Prioritize projects.
Halo Effect
A positive impression of someone (or something) created in one area (such as attractiveness) which tends to spill over and influence positive opinion in another area (like charisma). This means if you think someone is attractive, this trait likely has a halo effect where you assume they are also charismatic. In reality, these don’t both have to be true or need to go together. When this happens in the negative, it is known as the horn effect (which we didn’t discuss in this book).
Humans are a herding species, like cows, sheep and guppies. We look to others like us to help determine our best course of action (especially when we are in unfamiliar territory). Be sure to know where the herds are so you can use them in the right way (instead of having a short term herding gain for a long term loss). This is combined with for part of the .
The mental shortcut (rule of thumb) that the brain uses to make its 35,000 decisions per day. When these don’t align with our intentions and show an “error” we end up with a cognitive bias. The subconscious elephant () runs on heuristics and these are the building blocks of .
Hot State
In a cold state it’s much easier to make better decisions than in a hot state or in the moment. When in a hot state, we tend to underestimate how much those hot factors are impacting our decision making. When very hungry, we don’t realize how much that is impacting our reactions to questions someone may ask us or how we judge others, or our preferences for what we will want in the future. The gap between how we feel in the hot state to how we will feel when we are on the other side (in a cold state) is known as the hot-to-cold empathy gap. Also see .
IKEA Effect
People will value things more that they made themselves or helped to create than things that they didn’t (and also believe that others will find them to be more valuable as well). If there is an opportunity for people on your team to be part of the pricing process, they are more likely to support it when it is implemented. If customers can participate in the design of their product (even choosing a color or material) they will feel more ownership over it. If customers are about to be part of the brand, it can be more likely to feel like part of their identity, increasing loyalty and profitability.
This type of revolves around using rewards or penalties to guide individuals toward making specific decisions. By carefully aligning the incentives with the desired behavior, individuals are more likely to choose that behavior. The incentives can be both tangible, like monetary rewards or discounts, or intangible, like social recognition or personal satisfaction. Be thoughtful before implementing any incentives as they don’t always behave the way you expect them to, and they are very hard (and often costly) to remove once they are in place. Start with the free stuff first.
It’s Not About the Cookie framework
This is my framework for creating your pricing strategy, and it includes six main concept areas from : , /, /perceived ownership, , , and . This is the focus of the first chapter of Part III and how you begin to apply what you learn in this book.
Loss Aversion
Humans don’t like to lose things. Many studies have shown that we feel the pain of a loss twice as much as we feel the “joy” of a realized or potential gain. In other words, it would take $40 to make us feel “healed” from losing $20. Our likes to think that because people like things we need to give more things, and we believe we will not act from loss-led messaging, but that is often incorrect. Loss messaging doesn’t have to be negative and is a very important piece of the . your offer using loss aversion can often increase the likelihood someone will act.
Mirror Neurons
Neurons that fire both when an individual acts and when the individual observes the same action performed by another, playing a role in empathy and understanding. These type of neurons help us to learn by observation. These are one reason things like unboxing videos are valuable, as they help the viewer to feel like they have already bought and opened the item, increasing their likelihood of perceived ownership and .
Nudgeability Quadrant
My way of determining which micro-moments to prioritize and focus your attention on. There are two spectrums on the quadrant, importance and . The more important and more nudgeable something is (upper right corner of the quadrant), the higher its priority.
NUDGES (also nudgeable, nudge, nudgeability)
One of the foundational concepts of , as introduced by Richard Thaler (Nobel Prize winner) and Cass Sunstein in their work and book Nudge. The term “NUDGES” is an acronym for the six types of nudges: , , , , , .
In the field of behavioral economics we work in nudges — where the concepts of the field are introduced to help nudge a decision toward a certain outcome (but the decider still has free choice). The way the options are presented are known as the .
Optimism Bias
Our tendency to think that things will work out well for us and those close to us—and that we are better, faster, stronger, smarter than everyone else (including the “us” of five minutes ago). In this book, we focus on how optimism bias combines with , , and to keep you stuck in the , and how to overcome those tendencies.
Overwhelmed Brain
When we are overwhelmed, we tend to make worse decisions. This can be because of (a form of stress), , or many other factors. It takes much less information than we think to overwhelm the brain. For example, when people were asked to remember a 2-digit number and then pick a snack, they were much more likely to choose the healthy fruit salad than those who were remembering a 7-digit number (who were more likely to choose chocolate cake). Also see .
Part of the (our four most common “happy” chemicals): , oxytocin, and . Oxytocin is for empathy and social bonding. Great storytelling can help to release oxytocin and increase perceived value as well as likelihood to buy.
Paradox of Choice
Popularized by Barry Schwartz in his book, The Paradox of Choice. Humans like to think that they would prefer to have as many options as possible, but when there are too many choices (and it doesn’t take that many) people get stressed and often will choose badly or not at all (and feel anxiety or regret as they dwell on the decisions made). In general, look for ways to reduce the choices you present to make it easier for people to buy and feel good about their choice. Also see .
Peak-End Rule
When thinking about an experience and how we feel about it, we don’t evaluate all the possible decision points (that would be far too much to process and a very complex equation). Instead, we tend to summarize everything in two points: the peak and the end. If you have a positive experience, it can be a good idea to end on the best possible moment (think of the final display at a fireworks show). If you have a negative experience, it is best to not have the end be on the worst point. As you build your experience, look to remove your big negative peaks first (especially before asking for testimonials and other ) and then find opportunities to bolster positive peaks. This can be done by leveraging .
Planning Fallacy
When we are planning for things (like projects) we tend to underestimate how long it will take (thanks in part to optimism bias) and also not think about all the little things that can add up into a big problem (emails, notifications, client “fires,” getting a snack, talking to our kids, other breaks, distractions). This causes us to grossly underestimate how long something will take. Unfortunately, while it might seem like having a group work together would make this better, groups have been shown to be even worse at this — perhaps because people are trying to prove how great they are to the group. In this book, planning fallacy is discussed along with , , and , to show how you might get stuck in the when creating a pricing strategy (along with tips for how to overcome those tendencies).
Whatever happens just before a decision has a big impact on the choice someone will make or the associations that come to mind. All the senses are a big part of this and it is an incredibly important (and often overlooked) piece of the . All the little things that you think “shouldn’t” matter, are so much more impactful than you think. This “scent of the cookies” should come first in the experience to help draw people in and set the stage.
Productive Procrastination
See .
Quality Brand / Quality Business
One of the two brand types every company must choose between as you go through this book. Quality brands often set higher prices than their competition, which can be due to a variety of factors. If you sell products, they may be made with higher-quality materials or be sustainably sourced. If you are selling services, your team may have expertise or special certifications that others do not hold, making you worth the additional investment. You might invest in innovative methods or extensive research and development that helps you and your customers to stand out. Luxury brands also fall into this category, so if you want to cater to celebrities or have an air of sophistication, you are a quality business as well. While the quantity you sell isn’t limited per se, quality brands typically focus on making a higher margin on fewer sales. Quality brands still can talk about how they are valuable as well as how they can add value to their clients and customers. While these companies might have a sale or put things on discount, it is not part of their overall strategy and should be used sparingly with a lot of strategy. When choosing number pricing, these should be whole numbers and not rounded down (i.e., $500, and not $499). Also see .
When people are given a gift (even a very small one) they feel the need to give back in some way (reciprocate) and often in a way that outweighs the gift they were given. This is another important component of the , and can be leveraged in many ways, including clear and transparent communication, giving generously to others, actual gifts and incentives (monetary or otherwise), as well as creating lead magnets and newsletters that can become part of your “choice before the choice” strategy.
Humans are bad at making one-off decisions. The different presentation of options will help someone to determine what feels like the best choice, and the “obvious best” choice will shift based on the information presented. This is the concept behind the and strategy.
When there is less of something, we believe it to be more valuable. There are four types of scarcity: time (“today only,” “flash sale,” and special coupons), demand (“sold out”), supply (limited quantities, small batch production, high-quality items that are sustainably sourced), or limited editions (holiday prints, nostalgic colors). and have different areas of focus when it comes to scarcity, as outlined in the “framework” chapter, since this is another important component of the .
Part of the (our four most common “happy” chemicals): , , serotonin and . Serotonin is related to our mood and pride. If your brand is able to help people feel like they have status (possibly through something like gamification, or showing follower counts and likes) that is a good way to help them build you into their .
Social Proof
Because we are a herding species, we look to others to help determine our best course of action. Common instances of social proof include testimonials, reviews, star ratings, and anything else which shows us what others have done previously. There are seven main categories for social proof: customers, experts, celebrities/influencers, masses (wisdom of the crowd), friends/personal connections (wisdom of your friends), certifications, and earned media. This is part of the .
Status Quo Bias
Because our brains run on predictability we have an affinity for the status quo. This allows the subconscious () to remain in control more, which it likes. Change may feel uncomfortable because it represents a shift in the status quo, but that feeling doesn’t mean change is “bad.” Everything that is now our status quo was new to us at one point or another. The same goes for your customers, so even if you aren’t the status quo today, don’t be discouraged.
Structuring Complex Choices
Making decisions among complex and numerous options can be overwhelming. This involves organizing and presenting choices in a way that simplifies the decision-making process. By breaking down complex choices into more manageable parts, providing comparisons, or grouping similar options, it helps individuals navigate complexity and make decisions that are more aligned with their needs and preferences. This approach respects the complexity of the choices but aims to make the decision process more user-friendly and intuitive. It combines most closely with the
Subconscious Brain
Surprise & Delight
Delight drives loyalty, which is more profitable for businesses. Delightful experiences are shareable, increasing the likelihood of , so they are a smart strategy for your company. The big key for something to be delightful is that it can’t be expected. Surprise and delight works closely with the and also incorporates a lot of brain chemicals, most specifically .
Survivorship Bias
When we are making decisions for what to do next, we may miss big pieces of data that are incredibly important in our decision making (we are missing what’s missing, to quote the Ted Talk by David McRaney on this topic). For example, if we search for stories about successful people getting up at 5:00am and believe that we will be successful if only we get up at 5:00am too, we forget about all the people who are successful but don’t get up at 5:00am, and the many “unsuccessful” people who do get up at 5:00am.
System 1 and System 2
A Nobel-prize winning idea credited to Daniel Kahneman and Amos Tversky on their many decades of work which helped create the field of . This refers to the two systems of the brain which should be considered in decision making. System 1 (which I call subconscious) is fast, automatic processing. System 2 (which I call conscious) is slower and more manual. System 1 makes the vast majority of the decisions using the biases and heuristics that make up the field of behavioral economics.
Time Discounting
When we think about ourselves in the future, our brain lights up as if we are thinking about a completely different person. It is very easy to commit “future me” to do something, but in the moment when it is time for us to do something, it feels much more difficult (and we have a tendency to kick it out into the future again where it isn’t our problem). This is why we often prefer short-term gains over long-term ones (it is enjoyable to eat that cake now over the long-term benefit that jogging will give me years into the future). To overcome this, it is important to help the person realize the importance of whatever the task or action is today, instead of saying they will do something tomorrow (or 5 minutes from now). Instead of saying, “I will ask Suzie to hold me accountable.” take the step to reach out to Suzie right now to leverage the precommitment benefit and value of an accountability buddy (who you don’t want to lose face in front of because humans are a species). I call this the “I’ll start Monday” Effect and in this book, it is talked about most commonly with , , and .
Time Pressure
When we are put under time pressure (think of the ticking clock on Ticketmaster) we will make different decisions (we become more — FOMO! — than risk averse). This is an important factor of buying and impacts more than just time .
Understanding Mapping
This type of involves designing the way information is presented to make it easier for individuals to comprehend and navigate. Thaler and Sunstein define this as “the relation between choice and welfare.” This could mean providing clear and concise instructions, visual aids, or organizing information in a logical sequence. By enhancing understanding, this approach aims to help individuals make more informed and confident decisions that align with their best interests. This nudge is most commonly used alongside .
Value Brand / Value Business
One of the two brand types every company must choose between as you go through this book. Value brands are typically less expensive than their competition—they are a bargain, a deal, a great value for the money. They invest in efficiencies that can be passed along to their customers, members, and clients. While they don’t have to sell only on quantity, they are more likely to have smaller margins and sell by volume. Value brands can still sell quality items (i.e., they don’t have to be cheap or low quality). They run a lot of sales, discounts and promotions and these are a big part of the strategy. They reflect “bargain” pricing with numbers that are rounded down (i.e., $499, and not $500). Also see .
This is what I call the offer whose sole purpose is to make your look good. This strategic product placement is used to enhance the appeal of what you really want someone to buy. The wingman product often appears to be similar but less attractive in certain ways—such as being larger, more expensive, or otherwise not aligned with what your key customers are seeking. (It is important to note that the opposite could also be true, where a larger, more expensive item is the best offer and the wingman is smaller and less expensive–this is why knowing what type of company you are and understanding all the psychological elements in this book are so important to your pricing strategy.) Also, while we say that the wingman is “worse” than the best offer, it doesn’t mean it is bad quality or a bad product. This is something that you can be happy if someone buys, but the goal isn’t to sell a lot of that particular item.
Instead, its presence provides the necessary context for customers that helps them perceive the value and appeal of the best offer. By giving a reference point for comparison, it simplifies the decision-making process for customers, making them more likely to purchase the main product. The concept illustrates how human decision-making often requires context and comparative information to assess value and make choices. Also see and .
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