Hi and thank you all for joining us for a pricing podcast with the Professional Pricing Society. My name is Megan Ford with the Professional Pricing Society and we're excited that you all are listening to us on today. Today's topic is going to be one for the books. We are excited to feature Dr. Florian Bauer and we're discussing behavioral pricing, shifting the paradigm from value based pricing to leveraging behavioral economics in B to C&B
to B pricing. Now Dr. Florian Bauer is a great friend of PPS and he's also a featured speaker at our upcoming global and European Virtual Pricing Conference this December. So learn more about this full lineup is going to be extremely exciting. Three days with exclusive content just for our European market with global presenters, workshops and the opportunity to
earn CPP credits. You can follow along the hashtag PPS Euro EU ro two one across all social media platforms to learn more or visit us directly at the AT the Pricing Society website, which is www.pricingsociety.com back slash European conference. You'll get more information there. We cannot wait to welcome you and all of your teams. Registration is now open. You can also learn more about Dr. Florian's offers and
contributions. He has several content contributions within our vault within our website. So go to our membership website and search Doctor Bauer for more of his pricing contributions. But today we're excited to talk about shifting the paradigm. So before we jump into interviewing Dr. Bauer, let's learn a little bit more about
him. Doctor Florian Bauer studied psychology and economics at the Technical University of Dormstop, the Massachusetts Institute of Technology, MIT and Harvard University before going on to complete his doctorate at TU Darnstock. Having spent four years working as a strategy consultant for Booz Allen Hamilton, he joined with three partners in 1999 to found the Bocatas A G Bocatas is an international consulting company focused on developing
and implementing behavioral economics based pricing and sales strategies across B to C&B to B Industries. Dr. Bauer is a sought after expert on pricing psychology and behavioral pricing and has authored numerous articles and books on pricing strategy and pricing research. He is also an Honorary Professor at the Technical University of Munich. We're excited to welcome you today. Dr. Bauer, thank you for joining us. Thanks for having me, Megan.
Hi. Yeah. So let's jump right in. First question for you, you know that you are speaking at our upcoming pricing conference. Thank you very much and your workshop is entitled was talking about shifting the paradigm from value based pricing to behavioral pricing by leveraging behavioral economics for B to B&B to C pricing. Can you tell us why pricing strategies powered by behavioral economics are much more effective than the value based approach? Yeah, sure. My pleasure.
Well, I mean stating that we want to shift the paradigm is a quite strong statement. So let's ask ourself what, when is it worthwhile to shift the paradigm to take a new perspective on pricing? What do we have to do? Well, generally speaking, I would say an approach is is ready to shift the paradigm if it provides better answers to the question why do people pay? Or for what do people pay? And exactly here behavioral pricing goes one step further
than value based pricing. What do I mean by that? What is the notion of value based pricing? When it comes to the question what do people pay for? Very clearly, if the answer is people pay for value. Within this paradigm, people do pay for objective value and subjective value. That is basically incorporated in the product and its features and it's basically the preferences of customers that define how much confronted with that value in these features and the products people are willing
to pay. And that's what we do in value based pricing. We measure people's preferences to predict their willingness to pay. Now, behavioral economics, or behavioral pricing, does not reject the idea that people pay for value. Not at all. People do pay for value, but people do also pay for how they make decisions, being predictably irrational. So within their decision making process, people make predictable mistakes that reflect nothing else than an additional potential for marching or
conversion rate. And in behavioral pricing, we do measure on the one hand the willingness to pay resulting from value, on the other hand the price acceptance resulting from the fact. That people are making predictable mistakes when they are buying something. So sometimes people are not perfectly informed about price or product, so some of the price acceptance results from that. Sometimes people want to avoid some cost, so some marching
results from from that. Sometimes people are influenced by the choice architecture in which they make a decision, so part of their prices acceptance results from that. So basically behavioral economics says that there are more sources of price acceptance than the ones result from product features alone. And this is what we do in behavioral pricing. We take all sources of price acceptance into account, no matter whether they result from the value people see in a product.
Or from the fact that they make decisions in a certain way. So basically we look at 2 dimensions. What do people want? What are the preferences? What do they pay for in terms of value on the one hand. On the other hand hand, it's how do people make decisions? What kind of predictably irrational mistakes do they make, and how does that translate into additional margin
and conversion potential? So when we develop a pricing strategy, we do not try to measure or quantify willingness to pay a loan, but we rather want to understand what is the role of the price in the customers decision making process And that's much better described rather than in one KPI in a more complex understanding. When does the price play a role? How do people compare? How do they come to a
conclusion? And once we understand the role of the price in the customer's decision making process, we can also tackle another issue, another very traditional issue, classic issue in value based pricing, which is the clash between pricing and sales. Very often when you develop a pricing strategy using the classical tools of value based pricing, for example a conjoint analysis in which you want to. Quantify the willingness to pay based on understanding how
people value certain features. You end up with an analytical result predicting that people should be willing to pay a certain price. You take that price, you write it in the price list, and then you go to sales. Tell your colleagues this is the price you should go out and get. Very often sales comes back and said that's it says that this is impossible. We need some more discounts to execute this pricing strategy because the price is too high.
And then there's a big argumentation going on between pricing and sales pricing arguing with a very analytical process that this is the way we derived our price. We measured people's willingness to pay and that's why they should be willing to pay that and then Sales says. But that's not reality. And there's not much support coming for each of the other side.
Now when we look at pricing from a behavioral perspective, we develop a pricing strategy out of understanding the role of the price in a customer's decision making process.
This not does not only give us a better pricing strategy, taking advantage of more sources of price acceptance, but it also helps us. To develop tools and techniques to better execute a pricing strategy for sales, so we gain a better understanding how we can proactively support our sales colleagues in being more successful executing the pricing strategy because our understanding is much more holistic on the customer's decision making process rather
than quantifying partial utilities of features of products. Which is traditionally done in value based pricing. So, in a nutshell, behavioral pricing goes one step further, considering more sources of price acceptance without neglecting the fact that people do naturally also pay for value, but not only.
And we need to go and come to the conclusion that we should be less product centered, less feature centered in our pricing and sales approach and try to understand that we are not selling products, but what we do in pricing and sales, we want to manage customers decisions and that is basically the notion of the behavioral pricing. Thank you Dr. Bauer. We've got a few more questions. So let's talk a little bit more about the customers decision around strategies and
motivations. Well, when we look at how customers make decisions, then what we found is that, you know, the classic take away if you read behavior economics books is what I just said. People make predictable mistakes when they're make decisions. That's quite interesting, but not very helpful from a practical perspective.
From a practical perspective, we have to better understand how do people make decisions on the one hand and on the other hand we have to understand if there are differences between different customers in kind of what decision strategies they follow. And based on this, we like 15 years ago we did a huge international study in which we wanted to segment people in respect to how they make decisions.
That is not in respect to what they want like in traditional marketing segmentations, but we wanted to apologize people in respect to how they make decisions. So exactly those two dimensions looking at the second dimension. We found that there are five distinct types of how people can make decisions. None of them is rational, but all of them are different in how irrational or in what respect they are irrational. So on the one hand, the first type we found is is the bargain hunter.
Everybody knows the bargain hunter. The bargain hunter is somebody who actually buys a discount rather than the product. He wants to be the winner in the negotiation and so on. So we need to be prepared to sell totally different and price totally different for this type than for another type. So for example the second type
is the risk avoider. The risk avoider is a customer or decision making strategy that is also looking at the price and comparing the price like the bargain hunter but result or based on a totally different. Motivation. The risk Avoid is not seeking the lowest price and the biggest bargain because the risk avoid is a little bit skeptical about
two two big discounts. The risk avoid is much more interested in fairness and transparency, and the motivation in his decision is to not being ripped off. So rather than finding the lowest price, they seek fairness and transparency to make sure that they get. And a fair offer at the end of the day, a totally different decision strategy compared to the bargain hunter. The third type is the price acceptor.
The price acceptor is a customer that has maybe a certain budget in mind, but looking at the product and diving into the features and understanding what different options they have. They might be willing to expand their budget if it's explained in the right way, and if it's individual in the sense that it better fulfills their need. The 5th, the 4th type is the routine buyer. The routine buyer is somebody who always buys the same brand, always buys the same product,
does not really compare. Price does not even know the price in many situations, but always picks the same product and the last type is the indifferent buyer. The indifferent buyer is a customer that in this very situation, he makes the decision, doesn't really care about the product, know the price, he just cares about having a very quick. And easy to get solutions. So think about you. You drive your car on the highway. You ran out of gas.
In that situation, you don't start to compare prices as different stations. And you're not looking for a certain station, but you just go and fill fill up your car without considering how much it costs. That's an indifferent buyer situation. So we have these five types of decision making that we need to distinguish and that's for example is one of the things we support sales with to identify who is in front of them and how they, what kind of strategies they should pursue in order to
execute the pricing strategy. Thank you, Dr. Bauer. That was very thorough. A follow up to that would be, is behavioral pricing really still are also relevant when it comes to B2B? Aren't B2B decisions much more rational? Well, that's a question I'm I'm often asked because it's assumed that if people make decisions in their company, they are much more rational, rational than if they would do it at home, which is not the case. And there are several reasons for that.
First of all, the kind of insights we have from behavioral economics. Are not falling from heaven. They're not just pure mistakes people make out of not thinking enough. But the insights behavioral economics showed us or brought us are based on the fact that our decision apparatus, our cognitive system, our motivational system, is shaped by evolution. And evolution never brings up perfect solutions.
It just brings up. Sufficiently good or sufficiently for sufficient for survival solutions, so to say. So our decision apparatus is not attuned to utility maximization. That's a purely academic idea that has nothing to do with rationality. But if our decision apparatus is designed that way. We will be a we will not be more rational if we do B2B decisions than if we do B2C decisions. That's a very fundamental theoretical answer. I can give you a much more practical answer to your
question. Just think about the motivation you have as a B2B customer. You always have two motivations. You want to find the best product and price for your company. But you also have the motivation of not risking your career, and those two motivations go not hand in hand necessarily. So you probably know the sentence. No one ever got fired for buying IBM. This is definitely not displaying A rational decision strategy, but something that very often takes place in companies.
That's how people decide and that's the kind of decision strategy. By the way, translated in our five Crips types, which I was just explaining, that's the risk avoider strategy. No one ever got fined for buying IBM. And the third answer to your question is many decisions in companies are group decisions. They're not made by one single decision maker, but they're made by different roles in the company.
And group decisions per se do not tend to be more rational, they rather tend to be less rational. So taking that all together, I would even argue that B to B decisions very often are even less rational in terms of being utility maximizing than B to C decisions. So behavioral pricing is as well applicable for B to C. At least as well As for B to B. Thank you. We've got only a few more questions. So I appreciate this fabulous interview.
What do you think are the key SuccessFactors if someone wants to leverage insights from behavioral economics within pricing and sales? That's a very good question. If you listen to presentations today on behavioral economics or also behavioral pricing, very often they exhaust themselves in a long list of academic experiments, presenting you with one academic experiment after the other. And it seems to be very easy to copy and paste this academic
experiment. To your pricing and sales strategy and that's a mistake and that's a big risk. So the key success factor is not to copy and mistake the copy and paste the academic insights from some some academic book to your marketing practice. But the success factor is to understand the underlying implication that has for pricing and sales. And that actually is what we spent the last 20 years of distilling. Out of these thousands of experiments, what do they mean
for pricing and sales? And based on that, we developed a framework and a procedure to make sure we take advantage of these insights without making the mistake of copy and pasting academic experiments to your pricing strategy. Another success factor is the fact that you should not try to factor in this behavioral pricing at the end. So basically I saw a few charts from basically saying what's the
pricing process. So they do a lot of really pricing work and then at the end you can add some behavioral pricing that's the wrong way. We have to start developing a pricing strategy based on understanding the role of the price in the customers decision making process. That is nothing you can factor in later on if you do so. It's a little bit like building a rocket and checking it if it abides the law of physics shortly before you launch it,
that's not the right way. So if you want to take advantage of behavioral pricing and the additional sources of price acceptance and the potential of higher margin and conversion rates, you better start developing your pricing strategy based on these insights and not try to add them at the end. So basically what we do in behavioral pricing is answer the same questions as we do with other pricing approaches.
We rather have more dimensions we look at and more levers to skim margin and increase conversion rate. And that's why it makes a lot of sense to follow this approach from the very beginning of designing a pricing strategy. Great answer our final question today. What are the typical projects that you're working on and how does your approach differ from that of others?
Well, basically the typical projects we are working on are the typical projects everybody's working on in the pricing world. So it's about pricing new products, managing price increases, developing price and product portfolio, managing the change of price models from selling a product to managing subscriptions. We work on discount management, we work on incentive system for sales. So all these things that have to do with pricing and sales we
work on just as everybody else. The, the main difference is, as I just said, we take into account more dimensions when we look at that because we understand that it's not only about value, it's about managing decisions of our customers, it's about managing decisions of our sales team when we design an incentive system, for example. So we look at these two dimensions, what do people want and how do they make decisions? Let me give you a concrete example.
So let's assume you have a product that is new, that's very innovative. The traditional approach of value based pricing is basically saying going out and researching what do people value in terms of the features of the product, how much would they pay for these features. Now the behavioral issue with an innovative product is that people don't know how much they pay for a certain product. If it's really innovative. Just think about when the first
iPad was presented. Nobody had to, you know, that was a new product that did not exist before. There was no willingness to pay. You could measure because it was totally new. People had no experience with
that. So the challenge from a behavioral pricing perspective is rather to help people developing a price acceptance while they understand what this product can do. Now Steve Jobs did a tremendous job as you can actually see on YouTube when he was presenting this iPad because when he presents presented this iPad, he was saying okay, what kind of features this had and so on. And he was talking about that they did very good developments
and they try whatsoever. So they were talking about he was talking about product development. And while he was talking in the back of his presentation, there was a huge screen just showing $999 as a number, as a price. He did not refer to that very much, but at the end of his speech he said OK, this is our wonderful product. I just explained to you now our question, what was what should
we price it at? And then he was talking about the fact that they invested very much in efficiency and so on. And in the end he said, and you know what, it's not 999, it's just 499. And the 999 in his back disappeared and 499 came up and everybody was applauding. In this very moment, he presented this 999 in his back.
He was creating price acceptance because people were thinking, not knowing what this product is really about that they why they should be willing to spend 999. So they were already going through part of their decision making process. And when he said it's not 999, it's only 499. People actually already bought this product and that has
nothing to do with features. That has to do with creating price acceptance in the customer's decision making process, for example in this case, by working with price anchors. So it is not about defining prices based on understanding the value of features, it's about developing a pricing strategy on the basis of understanding the role of the price in the customer's decision making process. And that was just one example. That was an excellent example. We want to thank you so very
much for your time today. You were an outstanding contributor and we want to invite everyone that is listening to learn more about Doctor Florian Bauer by visiting the Professional Pricing Society website because he is a featured speaker during our European conference as we've mentioned before and he has additional resources that you can find
within our membership vault. Also visit the Volcatas website, Volcatas AG on behalf of everyone in the Professional Pricing Society. We wish to thank you all. Thank you again. Bauer for joining us. It was a great interview. Any final words? No, thanks a lot. I'm looking very much forward to have a lot of people joining for our workshop where where we have the chance to dive much deeper into the topic. Yes, Sir. It's gonna be a great time.
All right, everyone. We'll see you at the PPS Euro event. Hashtag PPS EUR O2 one across social media platforms. And until next time, keep listening and happy pricing. Thank you, right.