Marketing Monday: Human Behavior & Pricing

Before we jump into the meat of pricing there are a few things that need to be understood because they form the foundation of any pricing strategy and they reflect the results of recent research on consumer behavior by leading behavioral economists.

Markets/buyers don’t behave rationally

Traditional or /classic economic theory has held for centuries that buyers and sellers in any market will always behave with their own best interest in mind and in so doing provide a level of equilibrium to the market place.

Significant research is showing that neither buyers or sellers always act with their own best interests in mind and often do so without any conscious knowledge that they are acting against their own self interest. Recent remarks by Alan Greenspan stating he was “shocked” that the previous market assumptions of rationality were not working. This research can help us understand not only the behavior of our potential buyers but also how we can break through it and help them towards better value driven buying decisions.

Buyers and sellers generally operate within either social norms or market norms but never both

Social norms

Defined as unwritten social contracts create a level of interaction and trust that is more like “family” and is often the best way to create loyalty and trust based on a common cause, goal or connection. Examples are a commonly understood but unwritten agreement that you as a seller will trust your buyers to pay you if they can’t at the time of purchase (something many artists do). Or an agreement that you will ship their purchase with in a reasonable number of days. Social norms are often based on perceived or real value and respect with sales being more interactive than transactive, the focuse is placed on the ability of the product to meet the needs of the buyer and not on its price.

Market Norms

Defined according the traditionally understood ways of doing business in a strictly transactional manner…I sell something for $xxx.xx you buy that something for what I set the price at. Your desire to buy can be manipulated by me by applying certain rules of pricing that are known to make you want to even when you don’t need or want what I have to sell.

Recent research has shown that once an interaction moves from operating under the rules of social norms to those of market norms interactions change drastically and cannot return back to a social norm way of interacting. For example: You have set pricing for your stuff but informally you are willing to mutually agree on a price your reputation for this has let sell more and average higher income over time. If you were to change that to strictly sticking to your set price you would then be operating under market norm rules and would likely see a decrease in sales.Those who bought your stuff under the old way of selling will revert back to their market norm way of behaving and will only see your price and since you are no longer flexible they will move on to find  someone who is.

Another example of these two in action would be different pricing strategies, one that takes the focus off price and puts it on helping the buyer by not manipulating price to force a purchase. The other, strategy would be using Market Norms to manilulate price to entice a buyer to buy something even if it doesn’t meet their needs. For example, it is well known that buyers will always choose something that either is free or includes something that is free even if the “free” thing has no value or even the combined value/quality of the purchased item and the free item are less that of the same item that doesn’t have a “free” secondary thing with it. So people will always pick a two for one deal of lesser combined value/quality over something that more adequately meets their desires.

Opportunity cost must always be included in your cost analysis when setting pricing strategy

Briefly an opportunity cost is the cost occurred when we choose between alternatives or what is given up in favor of a particular course of action. The cost is found in the cost mostly in non-monetary terms of choosing one alternative over another.

This effects artists in setting prices and in their own profit and loss analysis. For example: You decide to design your web site your self even tho you don’t @#$$% about how to do it, because you think  doing so is “saving” you money since otherwise you’d have to pay someone to do it. Doing it yourself would mean time away from making art, or working on your marketing. That time has a cost in both emotional terms and monetary terms, the cost in dollars is your hourly rate ( because your don’t work for free) and the lost opportunity of creating more inventory together with the loss of profit from fewer sales.

So just as you would add the  dollar cost of building the web site to your overhead costs, if you had someone else do it, you also need to add the hourly rate you pay yourself plus  the objective cost “value” of lost happiness in having the profits from producing the additional inventory and the joy you get from making your art.

The point is just because you choose to do it yourself don’t fool yourself into thinking you don’t need to pay yourself. That combined cost needs to be added into your costs when you create your pricing strategy.

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