The 4 minds approach to pricing

It is often assumed that we make decisions about pricing ‘in the moment’ versus other items at the shelf. But while this may be true some of the time, in reality we have a number of different mindset

One of the topics that marketers and indeed policy makers often struggle with is how to price something.  Of course, if adopting cost-based pricing, it is a simple matter of working out how much something costs and then adding a mark-up to arrive at a price.  But it is not as easy as that:  pricing also needs to be informed by consumers’ willingness to pay which of course is not all that simple.

Value, in the eyes of the consumer, can be created through a range of means not just about what something costs to make – and the pricing strategy deployed in itself offers information that influences us.  For example, luxury goods are famously not discounted as this lowers the equity of the brand, which influences its value.  So, we can see how, in some situations at least, pricing has shared meanings that is over and above a simple calculation of a rational calculation of what offers ‘value for money’, but, instead, a more nuanced evaluation is at play. 

We can see the way in which pricing therefore needs to be understood from a variety of angles:  sometimes we may indeed be trying to avoid over-paying but at other times we may be looking for something that is ‘reassuringly expensive’, signalling to us, and those around us that the goods we are buying represent ‘good value’ and that we are of discerning tastes.

Looking through the literature on the behavioural science of pricing, it can be hard to see these different considerations consistently represented. Much seems to be made of the way in which presentation of pricing information can influence our judgement value. For example, In his TED-talk, Maciej Kraus gives an example of the way human ‘biases’ impact decision-making. He outlines how a coffee shop used to sell a small coffee priced at $3 and large coffee priced at $7 respectively. 87% of consumers preferred to have a small coffee while only 13% bought a large one. 

Then, applying the well-known ‘decoy effect’, a mid-sized option was introduced priced at $6. Following that, 74% of consumers started buying large coffee for $7 with only 26% remaining loyal to a small one.

This sort of information seems hugely useful.  But does that mean we can apply this to all situations at all times?  Inevitably not –we need to think a little more clearly about what sort of decision is being made when we are choosing to make a purchase and how the context of the decision impact the nature of the evaluation that takes place. 

To explain, it is clear that a very different decision is being made about buying a luxury bag than when we are buying a take-away coffee.  Or between fabric care and a new car.  Given that different considerations are at play, then we need to draw on different principles or theories. 

Four minds

One approach which seems to have value here is that of Ryan Hamilton and Uma Karmarkar who talk about the ‘4 Minds’ of the consumer.  The value of their approach is that it sets out broad categories of theories, describing four different approaches that customers could bring to bear on any particular decision:

• The Ideal Point Mind uses the customer’s perfect (hypothetical) option as the point of comparison for evaluating any option under consideration.  This is an entirely subjective type of evaluation built around an internal reference point.  In these situations the customer chooses the option that is closest to their mental ideal (e.g., dream home).

• The Market Comparison Mind relies on the evaluation of a range of individual attributes based on the customer’s experience or research.  The chosen option would be considered most attrative releative to what else is sold on the market place based around performance on the attributes the customer considers is important (e.g., digital camera).

• Local Comparison Mind evaluates options based around the set of options avaiable at that moment .  The evaluation point is external, based around what is on the shelf in front of the customer at that point in time (e.g., candy).

• The Image Mind also uses external reference point but is based around favourable impression or reputation, rather than what is directly on the shelf (e.g. bottled water).

We can plot these different minds therefore on two axes, as set out below:

Implications for pricing

Much of the time behavioural science operates as if it assumed the only mindset taking place is Local Comparison, making decisions ‘at the shelf’ such as the decoy effect, outlined earlier.

While this is part of the answer it is far from the full picture.  Each of these categories has quite different implications for pricing strategy, as set out below:

• Ideal point: This category has low levels of ‘price sensitivity’ as the decision is highly individualised and shaped by their own personal priorities and values.  Understanding what this ideal point is can be hard, as pricing point will be difficult to meet given the inevitable range of criteria on which any solution will potentially fall short on. 

• Market Comparison:  In this mindset people will typically focus on a relatively small number of features to evaluate different options.  Pricing will depend on the performance of the item based on these key features and their importance for the customer.  Setting price will be a function of understanding these calculations for different groups.

• Local Comparison:  As we have set out, this will be based on the items ‘on the shelf’ and the way people process information ‘in the moment’.  This is most relevant to low involvement items where choices are often made with little consideration.  Setting price requires a close examination of price points and pricing presentation (e.g., discounts) of other items available in the context where the decision is taking place.

• Image Mind:  Price sensitively will be driven by the reputation / favourability of the item – and as such, along with Ideal Point, it is much less price sensitive.  Setting pricing is a function of the positioning of brand relative to others on key image attributes.

Conclusions

So what do we do with this theoretical underpinning?  We can use it to understand what sort of ‘pricing game’ any particular item falls into.  Using some simple questioning we can assess which of the minds is in operation and should therefore shape the pricing strategy.

From this point we can then undertake research to identify the necessary information to inform strategy.  For example, we may well need some initial qualitative research around ‘Ideal Point’ evaluation to understand the way in which different groups may be thinking about and valuing different dimensions of the item.   While qualitative research will help to identify what these dimensions are, surveys can then help to quantify them.

Each of the mindsets has different research implications and consequences for the way to set pricing.  Following this, it is then possible to undertake testing of the different pricing options / price points and strategies to assess the potential opportunities for effecting behaviour change.