02 Dec How you can cash in on irrationality
Most people would assume accountants are very rational people – some might even say boringly so! But it turns out rationality is not a terribly common trait – even among accountants.
Behavioural science studies are throwing up more and more evidence that human beings are more often irrational than rational, and you can use this knowledge to advantage in your business. Take pricing for example. There are some very surprising results from experiments that you may be able to cash in on:
- There are 3 different attitudes to spending among customers: 24% will be tightwads, 61% unconflicted (average) and 15% spendthrifts. A small change to the language you use in your pricing can make the tightwads more likely to spend. A trial of the cost of overnight shipping on a DVD compared payment of “a $5 fee” with “a small $5 fee”. The second option sold 20% more – just by planting the idea that the cost was low.
- Which of these prices is cheaper: £1,499.00, £1,499 or £1499? They are all the same, obviously. But in studies the simple presentation of the price (with no zeros or commas) was perceived to be cheaper. So make sure you present your prices as simply as possible.
- The same item of clothing was tested at $35 and $39 and, guess what, the higher price sold more! 9, it seems, is a much more appealing number. So much so that when used in a sales situation “Normally costs $70 now on sale for $39” out -sells “Normally costs $70 now on sale for $35”. You can cash in on the power of 9.
- In situations where the price differential is exactly the same, but is presented differently, the first digit effect comes into play. Pen A was on sale for $1.99 and Pen B for $3.00. The market share of Pen B was just 18%. However when the prices were altered to be $2.00 and $2.99 the market share of B rose to 44%. This is the first digit effect, i.e. the same first digit makes the differential appear smaller. You should compare your prices against those of competitors to see if you are taking advantage of the first digit effect!
- We all know that FREE sounds good, but how good? Chocolates were on sale for 1 cent and 15 cents (for the more luxury brand). When this was altered to free and 14 cents (the same differential) the share of the free chocolates increased from 22% to 69%. Offering something for free (free guarantee, free trial, etc.) can significantly increase the engagement of customers with your products.
There are many more examples (we are saving for later blogs) but you may have wondered why the heart in the picture with the price tags above? Apparently words and symbols associated with love increases generosity and triggers loving behaviour! We’d love to hear from you about your experiences using irrationality in pricing. Leave comments below!
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.