February 9, 2015
Should you start your sales pitch with the lower price and then up-sell the features to a higher price or should you start with the higher price and then back off on the options? Understanding Behavioural Economics will help with this decision.
The discussion below has been taken – with approval – from “The Behavioral Economics Guide 2014” (PDF). This is the second post that has taken information from this document of over 100 pages.
Testing may be the way for you to determine what is best for your product.
Think about the last time you purchased a customizable product. Perhaps it was a laptop computer. You may have decided to simplify your decision making by opting for a popular brand or the one you already owned in the past. You may then have visited the manufacturer’s website to place your order. But the decision making process did not stop there, as you now had to customize your model by choosing from different product attributes (processing speed, hard drive capacity, screen size, etc.) and you were still uncertain which features you really needed.
At this stage, most technology manufacturers will show a base model with options that can be changed according to the buyer’s preferences. The way in which these product choices are presented to buyers will influence the final purchases made and illustrates a number of concepts from behavioural economic (BE) theories.
First, the base model shown in the customization engine represents a default choice. The more uncertain customers are about their decision, the more likely it is that they will go with the default, especially if it is explicitly presented as a recommended configuration.
Second, the manufacturer can frame options differently by employing either an ‘add’ or ‘delete’ customization mode (or something in between).
In an add mode, customers start with a base model and then add more or better options. In a delete frame, the opposite process occurs, whereby customers have to deselect options or downgrade from a fully- loaded model.
Past research suggests that consumers end up choosing a greater number of features when they are in a delete rather than an add frame (Biswas, 2009).
Finally, the option framing strategy will be associated with different price anchors prior to customization, which may influence the perceived value of the product. If the final configured product ends up with a $1,500 price tag, its cost is likely to be perceived as more attractive if the initial default configuration was $2,000 (fully loaded) rather than $1,000 (base).
Sellers will engage in a process of careful experimentation to find a sweet spot—an option framing strategy that maximizes sales, but set at a default price that deters a minimum of potential buyers from considering a purchase in the first place.