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How cognitive biases influence consumers' price perceptions
Daniel Kahneman, winner of the Nobel Prize in Economics in 2002, transformed our understanding of decision-making. He passed away last March, leaving behind him a fascinating body of literature on the links between psychology and economics.
In the early 1970s, he and Amos Tversky introduced the concept of cognitive bias. Their research helped to explain certain tendencies towards irrational decisions in economics. In their wake, researchers in cognitive and social psychology have identified a multitude of biases involved in decision-making. We’d like to take a look at 5 of them, and explain their impact on your consumers’ perception of your prices.
Representativeness heuristic
The representativeness heuristic is a mental shortcut that consists of making a judgement based on a few elements that are not necessarily representative.
Where can it be found in pricing?
When consumers do their weekly shopping, they don’t remember the prices of all the products they buy.The image of a store as expensive is built up around ‘price-image markers’: the amount of the basket, the products they buy regularly and/or which account for a significant proportion of their purchases.
The representativeness bias then influences the consumer’s perception. Based on the price image markers, the consumer will form a general image of the retailer’s price level.
This is why the analysis of sophisticated price-indices is vital: you have to assess your price level with the same eye as the consumer. Optimal price indices take into account the different weightings of products/categories in consumer perception. For more information, read our article on mastering the consumer price image.
Hostile attribution bias
This bias is a tendency to attribute bad intentions to others in situations that are often described as ambiguous or unintentional. In the majority of cases, the action does not reveal the intention of the person carrying it out, but the person who suffers the repercussions thinks that the act was deliberate. For example, person A pushes person B, so person B thinks that person A acted deliberately rather than considering an accidental motive.
Where can it be found in pricing?
This bias is very damaging to retailers who cannot control their consistency. YouTube is full of videos of influencers informing their followers about supermarket ‘scams’, by comparing the price/kg of different grammages, or the promotional price and the price at the back of the shelf. These ‘scams’ are actually mistakes. They are the result of ageing pricing tools that do not guarantee consistency, or inaccurate prices that lead to manual price changes in shop. In fact, when an independent (member, associate or franchisee) is not satisfied with the prices recommended to him, he will tend to make manual changes that will break the consistency of the range. Indirectly, local pricing (or geopricing) is a way of obtaining more accurate prices, and therefore fewer manual changes, and therefore greater consistency on the shelf.
Working on consistency means above all working on the consumer’s confidence in your prices. This should not be underestimated, especially if you sell products that are bought regularly and the challenge of building customer loyalty is high.
Confirmation bias
The tendency to seek out and consider only information that confirms our beliefs and to ignore or discredit information that contradicts them.
Where can it be found in pricing?
Once a consumer has formed an image of supermarket prices in their area, it will be difficult to change this perception. A consumer who thinks that a supermarket is more expensive than its competitors will focus solely on the items they find expensive in that shop, reinforcing their initial belief. Even if the supermarket offers numerous promotions and competitive prices on other items, these elements will be overlooked.
Decoy effect
This bias leads the consumer to choose, between two options, the one that is closest to a third option despite the strong asymmetry of information.
Where can it be found in pricing?
That’s the art of category management! The value we place on things is built almost exclusively by comparison. When building your pricing, it is therefore vital to work at the right level of assortment granularity. For example, to work on price consistency, you need to know which consistency groups to use. Consistency groups are groups of products that consumers will compare in order to choose their product. To find out more, we recommend that you readthe example of Daniel Ariely’s study in the article on consumer perception.
Sunk cost
Sunk costs are costs that have already been paid definitively; they are neither refundable nor recoverable in any other way. This bias leads consumers to consider these past costs in their current decision-making.
Where can it be found in pricing?
When a consumer has made the investment to go into a shop and has already browsed the shelves for 90% of their shopping list, it is unrealistic to think that they will abandon their basket to go and buy elsewhere. Nor is it realistic to think that all consumers will go to another shop just for a product that costs less than €2.
This bias leads to major complications in calculating the impact of prices on sales volumes in physical food retailing. In fact, the fact that a consumer buys a product does not really give any information about the level of acceptance of the price by the consumer (willingness-to-pay). I refer you to our article which shows the analogy with studies by the American army, to get an idea of what is at stake in statistical analysis.
