The Australian financial year has clicked over, and with it no doubt some tweaks to profit and loss. Your opportunity this year is to use behavioural economics to rethink one of the most common activities associated with this time of year: introducing a price rise.
While common place, prices rises aren’t necessarily well received. Be mindful of these behavioural principles:
Relativity – we judge one thing relative to another, so in this case your pricing will be compared with inflation, competitor prices and value. How do you stack up?
The best course of action is undoubtedly to increase the value at the same time you increase your price, but let’s be honest: sometimes you just want a healthier profit line. Here you will need to do some homework. With what can you compare your pricing favourably?
Guide the relativity judgement by providing cues (for example: last year’s rise, overpriced competitors, allied industries etc) otherwise your customers will do it themselves.
Status quo bias – This is one to help you feel better about your decision! We have a strong status quo bias, tending to stick with what we know. Still scared that your price rise will result in customer attrition? Sure, it may happen. But take heart from banks. Remember when one of the big banks raised interest rates above the RBA’s cash rate increase?
Outrage followed by mass exit? Well, no. Same goes every time the health insurers raise their fees. Of course, exit fees and other penalties for changing provider may have helped, but what is really at play is inertia. Often we just can’t be bothered taking our business elsewhere.
Have a business issue on which you would like a behavioural economics perspective? Let me know at peoplepatterns@gmail.com. Until next week, happy pricing.
