The psychology behind pricing and how to keep consumer interest in a recession

Guest post by Kai-Markus Mueller

During times of inflation or recession, businesses may find it challenging to maintain their sales. Consumers tend to become more financially conscious and less likely to spend money on products and services. To overcome this obstacle, businesses need to understand consumer psychology and cater to the right customer segments.

Pricing, psychology and how to keep consumer interest in a recession

One approach to understanding consumer behaviour is Maslow’s pyramid, which consists of five needs: physiological, safety, love/belonging, esteem, and self-actualization. Maslow’s theory suggests that individuals must have their lower-level needs satisfied before they show interest in fulfilling higher-level needs. As such, products that cater to needs higher up on the hierarchy are more likely to be negatively impacted during a recession. Therefore – if possible – it is advisable for companies to diversify their portfolio in order to offer products from each level of the hierarchy.

However, the customer segment which a company targets is just as important as the product itself. Cost-conscious consumer segments are more sensitive to recession and inflation. In contrast, companies relying on sales to the wealthy population segments are less affected by economic downturns. For example, despite high inflation rates, expensive skiing vacation resorts in the Alps experience strong demand after the Corona restrictions have been lifted. On the other hand, restaurants serving budget meals to cost-conscious consumers need to be aware of the impact of an economic recession as eating out is considered a treat that satisfies higher levels of needs.

In either case, consumer psychology, particularly behavioural pricing, provides companies with tools to remain profitable. Take choice architectures, which are a set of strategies used to influence decisions by presenting customers with options. For instance, presenting customers with three different products that are slightly different but priced similarly can help them evaluate the products and make a decision quickly, easily, and without post-purchased dissonance.

Anchoring is another pricing strategy used to make a product or service seem more attractive. In the business context, an anchor is a number which businesses artificially yet purposefully set to bias perception. This technique is commonly used to create the perception that customers are getting a good deal by comparing the product or service to a more expensive option.

Another nugget from the fascinating world of behavioural pricing is the psychologically deeply engrained hyperbolic discounting, a fancy term for the fact that spending tomorrow hurts less than spending today. In times of recession there are particularly interesting use case scenarios for selling items and having consumers pay later, e.g., in rates.

However, psychology also teaches us what not to do. Businesses should not reduce prices as discounts induce different spending behaviours. There is a substantial risk that consumers will adjust their spending behaviour and may stick to the newly learned behaviours. For instance, many academics have learned to live on a student budget, and changing such behaviour once they earn more requires tremendous marketing effort.

To summarize, businesses should maintain a three-pronged approach to maintain profitability in hard economic times. They need to examine the purchasing motives for their product or service, they need to analyse their customer profile, and they need to dive into consumer psychology to establish perceived win-win purchasing scenarios.

Kai-Markus Mueller is Professor of Consumer Behavior at HFU Business School and Director of Pricing Research at Neurensics. His new book The Invisible Game – The Secrets and the Science of Winning Minds and Winning Deals is published by WILEY.

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