Cognitive biases in pricing
Even the most experienced researchers give in to cognitive biases every now and then; after all, we’re all people processing our information as humans do. What we found is being reminded of our biases frequently helps to keep them in check. In the past, we’ve benefited greatly from having a cheat sheet of the most common biases in front of our eyes, in our workspaces. You may find, as we did, that going over this cheat sheet right before conducting or listening in an interview may do wonders for you.
Confirmation bias
Market validation and confirmation bias are close cousins. When product owners and marketers interview prospective buyers, they usually try hard to confirm what they already believe to be true about their buyers, users, and markets. Most times they are under enormous pressure to do so - as the visionaries or by the investors, etc. After all, it’s their conviction that led them to build a new solution; many even used to be in the shoes of their prospective buyers.
The challenges with confirmation bias are both the interviewer’s proximity to the problem and their stake in the solution. We, humans, sometimes choose to hear things that are related to what we already know; our brains work more efficiently that way. That’s also why we miss out on the opportunity to learn even when we are listening to a new piece of information. This is a major and potentially catastrophic mistake for the pricing researcher because by mistaking confirmation bias for market validation, one may end up building the wrong company!
By mistaking confirmation bias for market validation, one may end up building the wrong company!
Confirmation bias is one of the hardest to self-detect by the pricing researcher. We see confirmation bias in action particularly when our methods or frames drive the reactions that are consistent with our expectations or first impressions. Confirmation bias risks our opportunity to learn something new, particularly about the value of the emergent buyer needs and beyond the designed or intended ones.
Tips to consider:
- Conduct interviews in teams.
- Highlight what each team member took away differently from the same statement or content.
- Recruit non-customers, haters, and lost customers as well as prospective customers.
Priming bias
Priming is observed because people process information faster when there are related pieces of information - either in the questions or within the context. This particular bias diminishes our chances to uncover how value is experienced or realized by our buyers and users. This is where it gets really tricky in terms of pricing research. Because while we must identify the relevant reference sets that our respondents use for assessing the fair value of an offering, priming might anchor them in the wrong reference set and turn into “leading questions.”
Tips to consider:
- If your interview “feels” as if it’s going too fast or your respondents are arriving at conclusions too easily, pause and review your question structure; chances are you may be experiencing priming bias in action.
- Reframe respondents’ answers in your own word.
- Be comfortable with pauses. We tend to fill in the silences during an interview by prompting the respondent with potential options. This technique might cause priming.
Recency bias
We tend to think that trends and patterns we observe in the recent past will continue to take place in the future. Furthermore, we tend to over-emphasize the internal factors and underestimate the impact of external factors. When you’re conducting pricing interviews, especially while measuring the economic value of an outcome, aim to identify the additional inputs that influence how your respondents think about the trends and patterns they see.
Tips to consider:
- Repeat the question by adding “In the last month.” Prompt the respondent once more by adding “Other times, in the last year.”
- Ask “What would prevent [an outcome] to not result in this [said pattern or follow the said process]?”
Hyperbolic discounting
We tend to give more weight to things that are happening sooner than later. Therefore, we are usually tempted to say that we’ll do something when we actually won’t. In terms of pricing, what this means is that we tend to put more value on what we currently know and do than with what we would replace it. That also means that people undervalue a future benefit and over-value a current one.
People undervalue a future benefit and over-value a current one.
Tips to consider:
- Ask about the experiences in the past; avoid statements that begin with “Would you…”
- Avoid loss frames. People tend to over-value a benefit if there’s an imminent threat to losing it.
Mental models
The pricing research must uncover what’s working as well as what’s not working; after all your goal is to determine the value buyers and users put over the valuable outcomes. Discover the respondents’ thought processes and learn how they got to their conclusions. Also, inquire about how likely and unlikely others are to agree/disagree with the respondent’s conclusions and statements.
Tips to consider:
- Ask “What percent of your colleagues/peers have the same/similar experience or follow the same process?”
- Ask “What needs to be true for [an outcome/pattern to materialize] differently?”
Fortunately for researchers and product owners alike, we have developed quite a few tried and true methods for formulating pricing research that mitigates the risks of such biases. Feel free to reach out to learn more.
