Why now is the time for behavioral pricing

Fabien Cros, Data Consulting Director at Artefact.

In today's marketing world, personalization is crucial - all brands are obsessed with delivering the right messages to the right people at the right time. But in addition to tailored messages, there's one thing that many brands don't consider - personalized or behavioral pricing strategies. In short, this involves presenting customers with different prices or offers based on their specific needs.

The market has been looking at behavioral pricing for almost a decade, but so far few brands have implemented it properly, mainly due to a lack of relevant data and cumbersome implementation. Now, however, the time is finally right for several brands to embrace behavioral pricing. There are three reasons for this.

Firstly, customers today are used to price fluctuations when shopping, especially in digital ecosystems where ride-sharing apps or travel websites are constantly changing prices.

Secondly, brands can create more precise customer clusters and more targeted offers than ever before thanks to sophisticated, data-driven and digital tracking capabilities. Thirdly, at a time when Covid 19 restrictions are forcing people to isolate, internet traffic has increased by up to 90 percent in some markets. This means that more people are receptive to receiving attractive offers from brands at home. So how can brands get their strategies right?

Understanding consumer psychology

It is crucial to understand the context. Customers will pay a price that "makes sense" for them based on their needs at a given time. Some will always prefer the lowest prices, while others will happily pay more for the same - or additional - products if you offer contextual added value, such as express shipping or gift wrapping when looking for last-minute gifts.

Uber or Lyft, for example, know that passengers are willing to pay variable amounts during periods of high demand, while some delivery service apps, such as Seamless or Doordash in the US, charge a surcharge for food deliveries after a certain time.

This is the crux of behavioral pricing. Instead of "just" persuading them to buy, brands need to learn what consumers are willing to pay in certain situations. Since this can look very different, brands need to cluster their customers based on various psychological, emotional and behavioral factors, as well as their previous willingness to buy low- or high-priced products and services.

These clusters are similar to those of personalized and data-driven marketing (DDM), which rely on first- and third-party data (such as hobbies and past purchases) but use data from a more diverse set of sources - including browsing histories, demographics, loyalty programs and (increasingly) social media to create more sophisticated consumer profiles.

Analyzing this data is a complex process, but it's worth it. If you understand the entire sales funnel, especially the last few seconds, you can achieve a 10 to 15 percent increase in net profit (depending on the sector).

No discrimination

It is important to emphasize that behavioral pricing does not mean that certain people should be "discriminated" against. Amazon, for example, was previously criticized for raising prices for people in affluent urban areas. The travel website Orbitz has also made a similar mistake with Apple users. Especially in times of crisis, it is extremely important to avoid such tactics.

Instead, the best behavioral pricing strategies adjust offers based on consumer interests and offer upselling opportunities and complementary services. A price increase is only considered when demand exceeds supply.

To understand the difference between the two approaches, let's look at the example of a movie theater in the US. In 2015, the company tried to charge Mac users more for their tickets than PC users. Macs are expensive, so surely these people must have a higher income, right? This was blatant price discrimination and caused public outrage. Instead, the movie theater should have segmented its audience into clusters based on previous purchases and customer loyalty. For example, it could have advertised premium seats for real movie lovers, advance tickets for fans of blockbusters and ticket packages for bargain hunters.

Similar strategies could also be applied in other sectors. For example, grocery stores could offer express delivery for frequent shoppers or exclusive offers for products with limited availability. DIY stores, on the other hand, could provide a complementary digital course offering tailored to the products purchased (for example, wallpapering tips for people buying wallpaper.) Ultimately, behavioral pricing is not about selling at a higher price per se. Rather, it's about selling smarter through a better understanding of customer needs - and that's something all brands need to think about if they want to be profitable in the future, even in times of crisis.

Five ways to get started with behavior-based pricing

Getting behavioral pricing right isn't easy, but the right approach will lead to optimized, personalized customer experiences and help strengthen customer loyalty. Here's what you need to do:

1. Organize your first-party data. You need to understand what makes your customers spend more or less money with your business. If you don't know the "what" and the "why", you need to focus on improving your data collection and maturity.
2. Start by dynamizing prices online . This gives you a better opportunity to track results, perform A/B tests and minimize risks.
3. Address the less price-sensitive customers first. It is easier to test behavioral pricing on a cluster for whom quality and service are more important than price.
4. Create a roadmap for targeting. Once you have success with online behavioral pricing for your top-tier clusters, you can optimize other customer journeys. Gradually train your teams to focus on improving the quality of sales deals rather than simply selling more.
5. Never stop developing the process. A price-driven customer journey is never "finished". There are always opportunities to improve your targeting. Use "continuous improvement" methods to perfect your approach to behavioral pricing.