Buyer behavior has been a hot topic of research for various behavioral economists. In his 2003 research, behavioral economist Dan Ariely brilliantly uncovered that people are ”Influenced by anchors in their valuations of goods and experiences.” In what he coined as “coherent arbitrariness,” Ariely suggested that when it comes to price perception, buyers are primarily sensitive to relative differences, not to absolute prices.
"Buyers are primarily sensitive to relative differences, not to absolute prices." - Dan Ariely
Author William Poundstone further explains in his book “Priceless,” that buyers’ value perceptions work in similar mechanisms to the sensory perceptions such as audio, visual, and olfactory senses: “[When it comes to prices] people are acutely sensitive to differences and not so sensitive to absolute values.”
What do five senses have to do with purchasing decisions?
It turns out, a lot! Buyer behavior in judging the fair value of an offering works very similarly to how we use our five senses. To estimate the weight of an object, we use our muscle memory of what something is ought to weigh, in relation to what a known quantity of weight felt on your muscles at some point in time. Another example is your morning coffee or tea. If you find your morning drink to be too hot for you to hold, is it 160 degrees, or 185? Does it even matter? What matters is that its temperature is above your tolerance for heat. Willingness to pay works similarly because in essence your willingness to pay for an offering is relative to what it ought to cost, it's anchored on a reference tolerance limit, and doesn't depend on an absolute number or measure.
If value perception is relative then, differentiation is key
Differentiation is the “result of efforts to make a product or brand stand out as a provider of unique value to customers in comparison with its competitors .” If buyers judge the fair value of an offer in relative terms, then differentiating between offers becomes highly essential for influencing buyers’ perception of value.
3 levers of differentiation
Differentiation is key to achieving the following three business goals:
Positioning your offering competitively
Influencing your buyers’ perceived value of your offering
Elevating buyers’ willingness to pay up to your target price level.
Got it! But how do we build for differentiation?
Well, we put together a whole e-book on that. Download our Pricing E-book and work through the case study of two enterprise software solution providers as they implemented value-based product management, developed highly differentiated solutions, and priced them with significantly higher margins.
PI's Pricing E-book will walk you through the steps of value-based product management. We’ll demonstrate various examples of “quantifying and justifying value” while working on the case study of two competing enterprise business intelligence solutions.