Monetizing Innovation

Chapter 11Use Behavioral Pricing Tactics to Persuade and SellSometimes Your Customers Will Behave Irrationally

People make decisions based on both rational and emotional factors. For example, imagine you are on a beach on a hot day and you crave a cold beer. A friend offers to bring you one from the only place nearby that sells beer—a fancy resort hotel.

How much will you pay for the beer?

Now imagine you are on a beach on a hot day, craving a cold beer, and a friend offers to bring you one from the only place nearby that sells beer—a small, run-down corner store.

How much would you be willing to pay for the same beer now?

Remember: The beer is the same, the weather is the same, and, best of all, you don't have to move. Your friend is willing to make the beer run.

When asked, people typically are willing to pay twice as much for the beer from the resort as from the run-down store. From an economic perspective, this makes no sense; it is, in a word, irrational. Behavioral economics springs from this recognition that buyers are not always rational actors. Their willingness to pay (WTP) for your product is not solely based on the value they get from it. Psychological factors also can play a big role. We refer to the pricing tactics that play to this irrational side of customers as behavioral pricing.

The topic of behavioral economics is of growing interest in academic and business circles. It was first popularized by researchers Daniel Kahneman, Amos Tversky, and Richard Thaler ...