Behavioral Pricing: A Comprehensive Guide for Online Retailers

There is a large spectrum of pricing strategies that can prove to be helpful in online retail, and the majority of them are based on sales statistics and companies’ desired profit margins. Yet, there is one more aspect that should not be overlooked: customer behavior. It is based on a variety of factors, not just logical assumptions. Behavioral pricing takes all of them into account to help sellers figure out the most optimal rates. This article explains everything you need to know about behavioral economics and behavioral pricing approaches: how they work, ways to implement them, and how to automate data collection and processing.

The practice of basing prices on consumer behavior patterns is known as behavioral pricing. Analyzing a large amount of market data reveals customers’ habits and preferences. This strategy belongs to the broader discipline of behavioral economics.

In traditional pricing theory, rational factors are assumed to affect consumer behavior patterns. Customers receive comprehensive price information, and it becomes easier to predict their buying decisions based on that. The buyer selects a value (the product) and expects to reap certain benefits by buying and using it.

Yet when it comes to the above-mentioned behavioral economics, they fail to take into account the fact that customers don't always act logically. People evaluate a price based on a range of factors, including the manufacturer's reputation or their personal finances. They also exhibit unpredictable, impulsive behavior. For example, consumers have the option of pausing and then continuing their product search. They can also fail to recall prices and make accurate comparisons.

As a result, price decisions seem to be influenced by a variety of factors, not only logic – this is what behavioral pricing strategies should take into account.

A behavioral pricing strategy is built in three steps:

1. The beginning point is gathering factual information, such as the product offering, market information, and product description.
2. Assessment of pricing information is the outcome of the consumer's attitude, perceptions, and interpretation of the factual information. Occasionally there might appear additional information that has nothing to do with the products, for example, a change in the consumer’s financial situation.
3. Next comes the reaction to the price information. This action might be a purchase, a delay, or a decision not to buy. The process starts over in case of a delay, and the customer may recall the initial price he saw.

Say a buyer plans to purchase a mini dress for summer. She explores several online shops and merchant platforms while conducting research using Google. One retailer uses behavioral pricing and records customer visits. Additionally, the merchant has access to crucial information like the browser's search history or the website's breadcrumbs. After first leaving the website, the buyer quickly returns to view the product page. Since she has previously viewed the product page, the store is aware that she is interested in that particular item.

The seller could use this information to raise the price of the summer mini dress if the customer comes back to the product page. This often takes place in online retail. When users visit particular stores and marketplaces frequently, the prices of goods are slightly changed — by 5%, for example. This is a signal that the customer should act. After recollecting the item’s price when she first visited the website, she believes the price will increase more and makes a purchase. This is how effective behavioral pricing works.

Decoy pricing can constitute a behavioral pricing strategy. Say a small and large coffee at a coffee shop used to cost $3 and $7, respectively. At that time, only 13% of customers purchased a large coffee, while 87% chose a small one. At this point, a mid-sized third alternative with a $6 price tag was introduced. After that, 74% of customers began purchasing large coffees for $7, while just 26% continued to buy small ones. This case demonstrates once more how our purchasing decisions are influenced by a false perception of a good offer.

Now, let us observe the major principles that comprise the behavioral pricing strategy – you can deploy them separately or in combination.

In order to evaluate customers’ purchasing behavior and understand purchasing decisions, it is essential to introduce at least three options to choose from. This model can be named “good-better-best.” Make sure to provide alternatives to see which pricing works best – do not make buyers purchase the only item available.

While providing several options to choose from, you can nudge customers to make a particular purchasing decision. As a rule, retailers do it by introducing “best deals” or “best value for your money.” Writing such things on price tags is a nice illustration of how default nudges work.

It is no secret that “freebies” are the best motivation for buyers. Give buyers a chance to get a product for free when buying something expensive – this approach is very likely to work and help you increase sales.

Pricing thresholds are specific limits that indicate customers’ willingness to pay. For example, the majority of buyers are ready to purchase a carton of juice for less than three dollars. As soon as the price goes beyond three dollars, their willingness to buy it will drop significantly. It is crucial to be aware of pricing thresholds in order to maximize your profit margin and maintain customer loyalty.

A great case in point is Apple, which charges unreasonably high prices when a new phone is released. Soon after the launch, they lower prices, making them more attractive, but the initial price point serves as an anchor.

Similar to freebies, other treats such as loyalty cards or a fast return policy can add extra value to your brand. Receiving something besides the purchased item is a great motivation for every shopper.

Since informational technologies keep advancing, algorithms have made it possible to implement behavioral pricing in the online retail industry. Today, online sellers can use software to analyze such concepts as price elasticity and dynamic pricing.

Why is that important? Price elasticity directly depends on buyers’ psychology, as it reflects their willingness to buy products depending on price changes. Search engines process tons of relevant data, such as historical sales, price fluctuations, promotions, and so on – all that makes it possible to measure how demand shifts after price corrections.

You may be wondering how to use this in your retail business. The answer is pricing software. For example, Priceva offers a dynamic pricing tool that offers the best automatic price recommendations for you to make optimal decisions. It also fetches information about your competitors’ prices and your customers’ demands. All these insights can help you learn more about behavioral economics and adjust your prices accordingly.

Although behavioral pricing might seem to be somewhat manipulative and discriminating, this approach allows for better personalization. All in all, it is not so bad when buyers get offers that they need. Behavioral pricing helps retailers boost customer loyalty and improve their financial metrics. However, this approach requires deep analysis of your audience’s behavior, so you should consider automating this task with pricing software. That is why it can be quite beneficial to conduct behavioral pricing research to find usefull data points and explore behavioral economics.

The price you decide to charge for a good or service has a big impact on how the customer acts. Customers may buy more from you if they think your price is less expensive than that of your rivals. However, the reaction can be negative if the price you set is much higher than anticipated.

Companies may target customers based on the findings of behavioral economics. Due to advertising's relevance to consumers’ browsing habits and interests, they are frequently more likely to interact with more targeted messages.

Apple uses a combination of various strategies, and behavioral pricing is one of them. First, it is reflected in how much it charges for new models of its smartphones: the latest models are overpriced on the basis of all-around hype, which allows Apple to skim profit. Some time later, it reduces the prices, making buyers believe they have a great deal. Second, Apple does not round off the last two digits of the price tags of its products (for example, an iPhone may cost $799 instead of $800), which is intended to provide a positive psychological impact.