Friday, March 02, 2012

Click Here if You “Like” Behavioural Pricing

Imagine, sometime in the not too distant future, scanning the contents of your supermarket trolley. The self-service register totals your purchases to £175.25, and then asks you to scan your Facebook Card (Tesco Clubcard was wound up a couple of years before this). The electronic voice from the cash register now asks you “How would you like to pay for your £214.89 of groceries: cash or credit?”.

If recent sensationalism[1] is to be believed, this is what retailers will start to do: charge you more because you’re a Facebook fan or Twitter follower of certain companies and brands.

Retailers everywhere could be excused for paying attention. Most of them are doing it tough at the moment for a whole host of reasons which (in Australia) includes a slow down in demand, the high Australian dollar, and the exodus of consumers to online shopping sites, just to name a few.

To all the retailers reading this, we apologies for being the bearer of bad news, but we just cannot see this happening. Let us explain why:
  • What does “Liking” on Facebook really mean? It means someone has clicked a button, that's all, and probably moved on. It does not indicate a preference for one product over another, and it certainly does not involve any sort of sacrifice, financial or otherwise;

  • It assumes that companies will have an information advantage over consumers. Yes, one or two retailers may have made some gains in this area (Amazon springs to mind), but so far, the internet has been better used by consumers to find out what’s going on in marketers minds, rather than the other way round;

  • History is not on behavioural pricing’s side either. Speaking of Amazon, remember their failed DVD pricing experiment, where they tried charging customers different prices (-30%, -35% & -40%)? Consumers didn’t take too kindly to that and despite the cost being small (an average refund of $US3 paid to 6,896 customers), damage to goodwill was far greater;

  • The claim that the behavioural pricing revolution will happen this year is just over-hyped sensationalism. Airlines have taken 40 years to master the art and science of passengers sitting next to each other (and talking about the differences in fares paid

Yes, the Digital Buzz Blog did publish figures that said that the average annual spend by a McDonald’s Facebook fan was $159.79 more than a non-Facebook fan ($310.18 vs. $150.39 respectively), but it did not report that this was due to higher pricing. It could be explained by larger and/or more frequent purchases.

Retailers should not misinterpret “Liking” or “Following” as a signal to charge customers more. Nothing could be further from the truth. Behavioural Economics (not to be confused with behavioral pricing, as it has more credibility) has taught us that the pain of a loss is approximately twice as potent as the pleasure of a gain (a discount). And according to a late 2011 report from The E-Tailing Group, 63% of consumers ‘Like’ a retailers Facebook page for the possibility of getting a deal or a discount. Consumers are not going to sign up to pay more!

So what’s going to happen? We think there are a number of scenarios and implications for retailers:
  • There will be a clash of paradigms: in the one corner will be companies that continue their price-based strategy, using services like Groupon & Living Social, and making sure they have the most competitive prices in Amazon’s PriceCheck App and their ilk. In the other corner will be companies that adopt behavioural pricing technology. That's going to be a battle worth watching.

  • If and when large organisations adopt behavioural pricing technology, should small retailers (SMEs) be worried? We don’t think so. Not adopting behavioural pricing will give you a competitive advantage, but the big guys may not allow that to go unchecked for too long.

If the activities consumers participate in online results in a lighter wallet or purse, it will not be long before consumers change their behavior. The basic fundaments of pricing will be the same as they are today.

1 comment:

Zoë Wundenberg said...

Really interesting look at the potential cross over between Social Media and the retail world.

I completely agree that most people sign up to a Facebook Page to save money and I cannot believe that people would 'like' a page if it meant paying more for the goods you love.

I would have thought a more logical response would have been to charge less for those who like the page thus driving the page membership up resulting in a broader audience to directly market your products/services too?

Thought provoking insights, Jon. Thank you!