The Pain of Paying

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From the course by University of Virginia

Customer Value in Pricing Strategy

104 ratings

University of Virginia

Customer Value in Pricing Strategy

104 ratings

Course 2 of 4 in the Specialization Pricing Strategy Optimization

The traditional approach to pricing based on costs works to pay the bills, but it leaves revenue on the table. You can, in fact, price your products in a way that increases sales--if you know what your customers are willing to pay and can leverage psychology to create better deal and discount plans. In this course, we'll show you how to price a product based on how your customers value it and the psychology behind their purchase decisions. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of value-based pricing and how to use it to capture more revenue. By the end of this course, you'll be able to... -- Apply knowledge of customer value to price products -- Leverage core value-based pricing techniques to inform pricing decisions -- Measure customer willingness to pay using models (surveys, conjoint analysis, other data) -- Use knowledge of consumer psychology to set prices beneficial to both consumers and sellers

From the lesson

Considering the Human Nature of Customers

Last week you considered pricing using a rational utility model. But humans are not always rational beings--and your pricing strategy needs to consider other behavioral drivers. We'll look at the psychology behind consumer purchase decisions and the mental accounting that impacts those decisions. Next we'll consider consumer price perceptions and ways to frame prices and create better deals and discount plans that work for both the consumer and the seller. Then, we'll take a look at two real-world cases, the Portland Trailblazers and Fidelity Investments so that you can practice using tools from throughout the course in a real-world case. You'll finish the course with fresh insights into value-based pricing and its applications.

Considering Consumer Price Perceptions: The Framing Effect4:52

Gain and Loss Frames in Pricing2:55

The Pain of Paying3:00

Separate the Pain of Paying from Consumption6:01

Meet the Instructors

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing

The other major psychological factor influencing price perception

is the pain of paying.

What do I mean by pain of paying?

Let's use some actual example.

I want you to think about last time when you see a running taxi meter.

How does that make you feel?

If you are like most people, nobody likes to

watch a running taxi meter because it's painful

even though the incremental change in monetary value is pretty small and

trivial at each moment. But

overall we have a general negative feeling whenever we see the meter running.

And that is what happens when you are being reminded of how much you paid for

each transaction.

So I have other examples including pay per call phones,

pay per usage charges for fitness gym.

So in both of these cases,

consumers do not like to be reminded about the process of paying,

because it's highly unpleasant, it can evoke the sense of pain of paying.

And similarly, none of us like to be parted with our actual cash,

because it's a valuable resource, it actually feels quite painful to be

paying via cash versus just paying via plastic card or a gift card.

So all of these examples illustrate how consumers can

acutely feel the pain of paying during the moment of transaction.

Now a formal definition of the pain of paying, requires an evaluation

of what goes through consumers mind when they are considering a major purchase.

So in that case, consumers typically do a cost versus benefits analysis.

So the cost is typically factored into the price that's being paid.

And if the cost or the price exceeds the anticipated benefit of the purchase,

then consumers are not likely to go ahead with that purchase.

Now if the cost and perceived price is perceived to be lower than the anticipated

benefit, then consumers are much more likely to go ahead with the purchase.

So similar mental processes was going on

when consumers try to evaluate any of their consumption experience.

For example, if consumers are contemplating taking on their next big

vacation, they need to do an evaluation off their consumption experience.

If the perceived cost is considered to be greater than the benefit here,

they are going to have overall a rather unpleasant experience,

looking forward to their vacation.

Now if the perceived cost is relatively small compared to the perceived benefit,

in this case, consumers are going to overall have a pretty positive

experience looking forward to the vacation.

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