Impact Pricing Blog

I Hate Loss Aversion

I just got an email from Starbucks Rewards with the headline, “Some of your Stars are expiring.” My first reaction was to figure out when I could go to a Starbucks to “spend them”.  

Then I started thinking. I don’t go to Starbucks very often. I only got the app on my phone to make it easier to pay when I do go. I was considering arranging a trip to Starbucks to probably save $3.25. If someone offered to pay me $3.25 to go to Starbucks I wouldn’t go, unless I was already planning to go.  

In other words, I was about to act irrationally. I was about to be influenced by a tactic explained using behavior economics. 

Loss Aversion: Starbucks clearly takes advantage of loss aversion, which typically means losses are more powerful than gains. Earning these stars didn’t feel that important, after all they were given to me for doing what I normally do, drink coffee. But taking them away felt painful. I certainly wouldn’t go to Starbucks to earn points, but I almost chose to go to avoid losing them.  

Endowment Effect: This tactic also takes advantage of the endowment effect. Before we own something, we tend to value it less than after we own it. Think of the value before you own something as how much you are Willing To Pay to own it. After you own it, think of value as how much you are Willing To Accept to sell it.  Research shows that your Willingness To Pay is less than your Willingness to Accept.  

I HATE the fact that even though I understand these tactics taught by behavioral economists and practiced by companies, they still influence me.  

But let’s look at the bright side. If WE as people with a keen eye toward pricing have a hard time mentally combating these tactics, so do our buyers. This means we can influence buyer behavior through behavioral economics. You may not be able to sell ice to eskimos, but assuming your product has value to your buyers, you can probably increase your win rates by presenting pricing carefully and creating programs that help build loyalty.  

I wish I could stop falling for these tricks, but I can’t help myself. Neither can many of your buyers.  

Tags: pricing, pricing skills, pricing strategy

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