Neuromarketing: 5 Cutting Edge Pricing Tactics

One of the most fascinating fields to arise over the last few decades is called neuromarketing; well this new field of science represents the intersection of Madison Avenue skyscrapers and subatomic synapses of the brain.

Using its tools, we can determine which emotional trigger words to sprinkle into our presentations, choose the best colors for our graphic design and even unmask which survey respondents are being dishonest even if they don't consciously know they're doing so.

Neuromarketing has yielded other treasures, too. Among these are a variety of techniques that vigorously impact the outcome of the sales process. We'll call these "pricing tactics" for our purposes, and in today's article we'll look at five leading examples.

1) Anchoring.

The most famous anchoring experiment is perhaps our clearest example. Professors Amos Tversky and Daniel Kahneman asked a group of subjects to guess what percentage of African nations were members of the UN. The answers to this question fully explain the anchor tactic. Those who were first asked, "Was it more or less than 10 percent?" guessed 25 percent, on average, while those who were first asked, "Was it more or less than 65 percent?" guessed 45 percent, on average. You see, the guesses were contextualized around the anchor.

The implications of anchoring are numerous. For instance, if you were to purchase a $29.99 iPhone cover as a standalone item, it might seem frivolously high-priced. But if you've just plunked down $299.99 on the iPhone itself, then throwing in the $29.99 case at the same time will seem pretty cheap.

Sales often revolve around negotiations, and clever negotiators will use anchoring to their advantage. When setting the anchor around which negotiations will circle, it is considered a good tactic to always put your bid in first: the seller should bid high, the buyer should bid low.

2) Hyperbolic discounting.

The second tactic is based on the fact that people prefer instant gratification over delayed reward, but there's something more to it. We also tend to prefer guarantee over risk. Put the two together and you get what's called hyperbolic discounting. In other words, the sooner an incentive is delivered, the smaller it needs to be.

Very interesting experiments were conducted where individuals who were given a choice between $50 today and $100 in a year's time usually preferred the immediate reward. But, when given the choice between $50 in five year's time or $100 in six year's time (still a year apart), people preferred the larger reward.

The reason for the above mentioned results is because of the way we view the distant future, where size becomes more significant than timing. As one marketer puts it, "What can you deliver immediately to take advantage of our lack of patience, even if the value of the reward is less than you would have given in the future? What can you do to understand that our ability to appreciate time in the future is far from rational?"

3) Price perceptions.

What is a $1,200 per year premium other than a $3.30 per day premium by another name? In other words, no more than the price of a latte to protect your family against the risk of an extended care event. Such examples of "perception equals reality" aren't limited to simple re-framing like this.

In fact, it's common for people to gauge what things should cost through research. Deviate from your customers' reference points of what your product should cost at your own peril. Consider, insurance carriers generally have had limited success marketing "bargain" LTCi (and STC) in tandem with an industry brand of marble security. We've discussed previously how our customers often bring wildly skewed perceptions to the table, which presents a dilemma: We clearly wouldn't want to reinforce these.

Starbucks is one of the businesses that found a great solution to eliminate the effect of customer research. Create your own category is the tactic the coffee mogul uses, one in which there are no prior reference points. In this way Starbucks was able to charge $3/cup where others charged only $1.

In any industry when there is no reference price, the first carrier to own it can set its own price.

4) Three options.

One of the most widely-known techniques of behavioral economics is the offering of 3 options to induce the selection of the middle choice. But does it work? According to researchers, it does. Why? Because it re-frames the conversation from a high-pressure "Should I buy?" into a low-pressure "Which option is best?"

In an experiment, subjects were presented a low-price beer ($1.80) and a high-price one ($2.50). Eighty percent chose the premium option when there were just two choices. Next, a bargain brand was introduced ($1.60). What happened when there were three choices? This time, 80 percent chose the middle (the $1.80 beer), the rest chose the premium option, and nobody bought the bargain brand. Finally, the bargain brand was swapped for a top-shelf option ($3.40). Now, the $2.50 beer had become "the middle" and what do you suppose happened? Most chose it. Also noteworthy: A small minority continued to buy the top-shelf brand because some buyers will always pay for perceived quality, no matter the price.

5) False consensus.

As the name implies, we tend to assume that everyone else thinks just like we do. In a classic experiment, a group of students was asked to walk around campus wearing sandwich boards emblazoned with the neutral message, "Eat at Joe's". No reason was given. Of those who agreed, 62 percent thought other students likely to agree to wear the board. Of those who declined, only 33 percent thought anyone would choose to wear the board. It doesn't matter how many ultimately chose to walk around wearing the sandwich board; the take away is that whichever group we're in, we assume others think as we do.

This carries ramifications not just for the herd mentality of buyers and non-buyers, but also for the monitoring of our work. For example, just when we think we've created the ultimate ad campaign, it's wise to step back and ask ourselves objectively: Might we be the victims of a false consensus?

The field of neuromarketing and its application in real life is evolving continually, there is a large and ever-expanding body of research which suggests that neuromarketing and behavioral economics are potent forces we are only now beginning to comprehend. Not only does it make sense to incorporate much of this cutting-edge research into our own sales and marketing messaging, but we would also be wise to appreciate how much is being catapulted at us.