Why The Psychology of Pricing is not about The Numbers
An Interview with Author, Podcaster, and Behavioral Scientist, Melina Palmer
Even when the product is right, and the market is ready, there’s still one lingering question that marketers hate: How should the product be priced? What should it cost the consumer? And how should it be presented? Pricing is one of the most difficult - and most consequential, questions that business owners face.
Thankfully, Melina Palmer has released the perfect book to help demystify the process, fittingly titled, The Truth About Pricing. In this interview, we explore the book’s origins, why pricing is such a hard topic, and why it's just more about psychology than it is economics.
Let’s dive in
Given the naming conventions of your two previous books (What Your Customer Wants and Can't Tell You, 2021. What Your Employees Need and Can't Tell You, 2022) this new book, The Truth about Pricing, may seem like a radical departure. What is the origin story of the book?
This book was originally pitched to the publisher with the same naming convention as the other two. The title was What Your Buyer Values and Can't Tell You. There was a little bit of concern that it didn’t feel different enough from my first book, What Your Customer Wants and Can't Tell You. But in fact, they are very different in the way that they are written and in their focus, even though they both dive into behavioral economics, psychology, and behavioral science - but how we use them, and how they’re applied is a lot different.
Why, specifically, did you choose to focus on The Psychology of Pricing?
I felt strongly that there needed to be a book specifically about pricing. In my consulting work, I’ve found over the years that everyone hates pricing! It is something that everyone also struggles with, from global corporations to small, solopreneurs. And I saw the same troubling pattern emerge, again and again: people get hung up on how to do it perfectly the right way. They tend to overfocus their efforts on picking the absolute perfect number, and end up missing the bigger picture.
When it comes to pricing, it’s often not about what we think it's about - you can dwell and stress about it for such a long time, and go nowhere with it. I don't want that for people, knowing that there is a better, simpler, and more effective way. You can have a formula of sorts to approach your pricing in a thoughtful way, that will also help you to sell more, to convert more, and to make it easier for people in such a way that they're going to be excited about buying from you. So with all of this in mind, why would you not want to write that book?
Let’s dive further in. Let’s say a small business is first starting out, and they’re getting ready to launch their first ever product. Where should they start when it comes to thinking about pricing this product?
Right off the bat, you want to be thinking bigger than you think that you should at that stage of the business. As I mentioned, we tend to get hung up on the narrow, specific details of the price itself. We obsess over questions, like “Does it end in 5 or a 7 or 9 or a 0?”. We tend to get hung up on the small nuances. But really, pricing is not about price itself. Whether or not someone's going to buy is not about the number on the tag. Instead, it's about all the things that happened before they get to that stage. These almost always matter more than the price itself.
Having an awareness that psychology matters is the first major step. I wouldn’t say it's the whole thing, but it’s essentially everything when it comes to pricing and selling. Being open to the idea of psychology is a huge way that you should think as a business person - not only about the way that you price, but also about how you present your product and services.
Ultimately, understanding the role of psychology is where everyone should start.
When a lot of businesspeople are starting with pricing, they tend to examine it from a purely economic perspective. They want to do a competitive analysis, they want to understand the customers’ WTP (Willingness to Pay), and glean insights about the elasticity of that demand. Where does psychology come in?
Those things are all a good baseline. You should know how much the thing costs when you're going to set up your price, because this is how you’re going to calculate your break-even analysis. It’s also very important to know how much you think people are willing to pay for your product.
As the book explores, understanding customer willingness properly is crucial. But finding it involves entails methods we would not traditionally be asking people about how much they would pay for things. The psychology matters because people value things very differently than we think that they should, and so understanding where the value is, why it matters to someone, and how to tell the right story is very important.
This enables you to showcase whatever it is that you're selling in a way that gets somebody excited about it - in a way that makes it feel that you “have to have” it.
If you think about it, we all have those products and services the brands that become a part of our identity that are a big piece of who we are. Everyone has their go-to brand, whether it’s Starbucks, or Volvo, or Kate's Spade. Ultimately, you have the brands that you love. But here’s the thing - if you were to ask “What is it about them you like?” or “Why would you pay more for this bag than this one that looks exactly the same” it’s difficult to give an explicit answer.
These beloved brands and products have this incredible way of tying into our life experience. If a brand isn't tapped into these psychological aspects, and isn't thinking about how they're going to be, that can be a problem. What the customer values, what they care about, and what's important to them on a deeper level within the marketplace is crucial. The brand’s messaging, the choice you're looking for people to make, and all the little micro-moments that lead up to that are hugely important. And unfortunately, people just don't do very much of this thinking when it comes to developing the price.
Overall, it’s not that these economic concepts don’t matter - they do. In fact, there is a chapter on these numbers in the book about calculating them. More generally though, business owners and marketers need to zoom out and see the broader picture.
More from Melina Palmer on Value v. Quality Brands, and What Serendipity 3 teaches us about Pricing
Photo by Vanessa Murrieta on Unsplash
About Melina Palmer
Melina Palmer is a globally celebrated keynote speaker with a mission to help great brands and the people within them do greater things by leveraging the power of behavioral economics. She is CEO of The Brainy Business, which provides behavioral economics training and consulting to businesses of all sizes from around the world. Her podcast, The Brainy Business: Understanding the Psychology of Why People Buy, has more than 1 million downloads from over 170 countries and is used as a resource for teaching applied behavioral economics for many universities and businesses. Melina teaches applied behavioral economics through the Texas A&M Human Behavior Lab and obtained her master’s in behavioral economics from The Chicago School of Professional Psychology. Her first book, What Your Customer Wants and Can’t Tell You (2021), was a finalist in two categories of the International Book Awards and won first place in the Chanticleer International Book Awards.
