Understanding decision psychology could be the difference between winning clients or watching them go elsewhere.
In this podcast, Matthew Jackson of Simon-Kucher & Partners will look at the psychological side of presenting your offer and its pricing, and share insights on client buying behavior.
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Dallas Wells: Hello, and welcome to the Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today’s best bankers. I’m your host, Dallas Wells. Thanks for joining us. The title of today’s podcast is The Psychological Side of Pricing, and will feature Matthew Jackson from Simon-Kucher and Partners. I’ll let Matthew explain more about his firm in just a moment, but first I wanted to give a little background on how this podcast came to be. It has its roots in a Simon-Kucher presentation that we saw earlier this year called Product and Pricing Psychology for SME Lending. It had lots of fascinating insights, many of which we felt would have real value for commercial lenders as well. So we asked him to become the first participant in our BankOnPurpose webinar series. We’ll be hosting those webinars on September 20th and 21st, and we’d really encourage all of you to attend. We’ll have lots of good stuff there for you. We’ll have links to the details and that on the show notes for this episode. Those, of course, will be at PrecisionLender.com/podcast So this podcast will essentially be a sneak preview of what you’ll hear about in those webinars. So Matthew, welcome to the podcast, and let’s start with the easy stuff. Why don’t you tell us a little bit more about your firm and what you do there?
Matthew Jackson: Sure. So in brief, Simon-Kucher and Partners is a global consulting firm. I suppose what’s different about us is we are triple specialized. Functionally we focus exclusively on the issue of revenue growth, which is essentially looking at the price, volume, and what influences both. The secondary specialization is implementation, so we try, wherever possible, not to leave it at the PowerPoint presentation, and support until the recommendations are actually in the market, with the result that 80% of our recommendations are implemented. And the third area of specialization is everybody sticks to their industry. So I’m in the banking division, and my projects are exclusively on banking. There’s a reason for these three things. One is, in order to be of value you need to specialize, and in order to implement, you need to really understand the industry you’re focusing on.
Dallas Wells: That makes sense. So let’s start with a pretty broad question. What do you mean when you all say pricing psychology? What are we really talking about there?
Matthew Jackson: Yeah. I think there’s two aspects to it. One is what we talk about when we say value pricing. Often, a product design process begins by thinking, “What do we have?” And eventually you get to, “Okay, how do we fit that to the customer needs?” and then eventually you get to the price. The approach that we would recommend is starting up with the customer needs. If it sounds obvious, that’s because it is, but the reason we feel we have to say it is because it’s very often not what happens. What you get when you start with that is you understand what customers value, you understand how different customers value different things, and what you may well end up with is three different products which are differentiated. One is low price, one is middle price, one is a high price, and that allows you to maximize your revenues and your market share because you have something for everyone, and you’re not just competing in a commoditized fashion with everyone else in the market on price. And you can do this in all sorts of areas. That’s the first thing. The second aspect of pricing psychology is, I think once you’ve done all that, if you have a product which you know has features that customers value, and you have it at a price which you think they’re prepared to pay, the last thing you need to worry about is not just what customers value but also how they think. And this is a relatively new area in economics. The reason it’s important is because the economics that we tend to learn is more traditional, rational economics, and the kind of agents you see in the examples you get in textbooks are not really very much like our customers. The trouble is, because we as business people spend so much time in our MBA classes with these individuals, which are also called econs to distinguish them from the humans that you and I are, we start to assume that our customers think the same way. So one famous example is a general survey of opinion. It’s the day after a snowstorm. A vendor increases the price of snow shovels from $10 to $15, and the question to the survey group is, is this fair? Well, 10% of the general population think that that’s fair. The rest think it’s unfair. If you take MBA students, 85%. So we’re in real danger of getting too in love with the traditional economics that we forget how people actually behave, and that is behavioral economics is all about. I think the challenge is, and there’s been so much great work done in behavioral econ, how to apply that to business is more of a challenge. The economics world is only just beginning to come to terms with the implications of behavioral econ. It’s been a very fierce struggle, and in terms of how it’s supplied to business, we see a lot of opportunity for banks and indeed all sorts of businesses to capitalize on these findings, and that’s what we’re really talking about when we say pricing psychology.
Dallas Wells: Yeah, lots of good stuff in there, and a couple things that we’ve frankly struggled with as a firm along the way, and so we’ve tried to boil it down to just a couple of simple questions. So as we’re thinking about, in our software, what do we build next? What do we add to this? What features do we add? Our CEO, Carl, always brings it back to one question, ’cause you get way off in the weeds on how useful this little feature would be, and Carl will say, “Well, would anybody pay for this? “Would somebody write a check for that feature?” And it may sound a little crass to put it that way, but it does focus your thinking on, if it really does have value, if it really is meaningful to the customer, then they would pay for it, and otherwise maybe you’re just adding some complexity and noise to something that really isn’t providing a whole lot of value. And I don’t think enough firms think of it that way.
Matthew Jackson: Well yeah. I said before, it sounds like a banal question to say, do customers value it? Would they buy it? But it’s a really a very difficult question to answer. And as I say, because we tend to think of customers making decisions in a certain way, we’re much more likely to get it wrong than right. So to take one example which is, it goes directly against what should happen, we would never think this would happen, but I heard it recently. Again it’s a group of MBA students, so these are the guys who understand economics, and they took three groups of them, and this particular group of students were on their way to Bangkok for something related to their studies. Terrorism had been in the news recently, and they were divided into three groups and they were each asked what they would be prepared to pay for insurance for their trip. The first two groups were offered the same product, the third group was offered a slightly better one, but they all were prepared to pay different prices. The first group $21, second group 14, and the final group seven, so the group with the most valuable product was prepared to pay the least. So it’s not really a question of value here. It’s a question of how these products are being presented. So the explanation for this, these results, is quite interesting. The first group were asked a question, two questions actually. How much would you be prepared to pay for terrorism insurance on the flight out? And separately, how much would you be prepared to pay for insurance on the way back? The second group were asked, the same terrorism insurance, how much would you be prepared to pay for those flights together? The third group were asked, what would you be prepared to pay for just travel insurance? So travel insurance covers terrorism and indeed all other hazards, not only on the flights but also in between, at the hotel and on the trip. So objectively speaking, this was the product with the highest value. It included terrorism and everything else. And this was the one that people were prepared to pay the least for. So it’s not a failure of value. The person who designed the travel insurance had put together a product which had, objectively, more value than these competing products that the other two groups were offered. But the reason the first group were prepared to pay more was because it was more coherent. They could picture it much more easily, because they were asked first to think about the flight on the way out, and then to think about the flight on the way back, and they could clearly visualize the danger, the consequences, and therefore the willingness to pay increased. Now if this is true, coming up with a product that people are in theory prepared to pay for is only half the battle. You need to think about this final mile in terms of how you present the features, how you frame the price, and how this conversation between the salesperson and the customer happens. So a lot of the time, the battle can be lost in this final mile, and that’s where the psychology comes into play.
Dallas Wells: And banks are obviously, and understandably, they’re very much about hard numbers and the math when it comes to pricing, and frankly that’s one of our struggles, is they wanna make it all about the numbers and less about the actual delivery and getting that number on the books by being able to sell it. So do you get push back from banks on this concept?
Matthew Jackson: Well this is really important, because if you start to think about this issue and the potential opportunity there you think, “Well, why isn’t everyone doing it? “Why isn’t it already common practice?” And there are good reasons, as you say, behind it. I think, in my experience, when we start talking about psychology, people are very open to it, because we all intuitively know that it’s true. I think the challenge comes later in the process as the meeting with the board comes closer and closer. And if you don’t have analysis numbers and so on, which is what boards are used to seeing, people start to get nervous. So we think it’s ideal to take an analytical, with hard numbers, approach, but also marry that with the psychology. Very often, the people not doing one or the other, and so data is very, very helpful in identifying problems, and it’s very, very helpful in analyzing how well you’ve done. What we would caution against is expecting data to do the whole job for you, because at some point you need to step in and think, “How is this actually gonna play?” And I think the trouble is, what could happen if you try a new approach which is psychologically based as well as analytically based is, when you get to this board meeting people sort of chicken out. What we would recommend is if you’re gonna implement some of these solutions, if you can get past a launch and learn checkpoint where you see what the effects of some of these measures that you can take have, then the board meeting is no longer a problem because then you’ve got data. You can say, “Well look, “demonstrably more cross selling is happening now. “Increased penetration is happening now.” So it’s really a case of just taking the step to launch something, I think, which is the main challenge for corporations, and then the data and the worries should take care of themselves.
Dallas Wells: Yeah, once you have something to measure, then you’ll have some data to see if you’re on the right track or not.
Matthew Jackson: Precisely, yep.
Dallas Wells: So there’s been lots of concern in all of banking, including in the commercial lending world that we live in about the commoditization of all the offerings, where everybody seems to be offering the same thing. And we hear bankers sometimes say, “Well our money is just as green as everybody else’s.” Kind of boiling it down to its very essence. But you all have some pretty interesting examples of places where companies have broken out of that commoditization trap. Any of those that you could share with us?
Matthew Jackson: Yeah, I think the honest truth is, banks are not top of their class in terms of de-commoditizing. And I think the best examples often come from outside banking. We can come to banking in a second. But the classic example, if you’re thinking about this argument where a commodity we can’t price the value, we just have to price with the competition, think about water. You can fill up a bottle of water at home for less than a cent. If you walk down to the convenience store you can get a bottle for maybe 80 cents. You go to a high end supermarket suddenly you can be paying seven dollars a liter for some Norwegian import, and the bottles of water up there, like, I think the 90210 9OH2O brand is $100,000 liter. So that is a clear example of how you can de-commoditize. And what are you doing there? You’re thinking about what the customer wants. Somebody who buys Norwegian imported water doesn’t just want to satisfy their thirst. They are objectively buying the same thing that you get out of your tap. There’s two hydrogen molecules and one oxygen. But what they’re getting is something else. So in order to get out of the commoditization trap, you need to think to yourself, “What is this product delivering my customer “besides what it says on the label, “what it says on the ingredients?” ‘Cause it says the same thing for all those different things. There’s maybe some variation of purity and minerals, but not at the order of magnitude that justifies the change in price. So again, it comes back to getting into the head of the customer. In banking, I think one example that springs to mind is a project that we did for a bank in North America. I think one of the banking equivalents of water is mortgages. If you speak to any mortgage department in any bank in the world, I’m pretty sure they’ll tell you a variation on the same story that there’s a huge amount of price pressure in the market. Mortgages are a commodity. Customers only care about the rate. Well, through following the same processes, evidently the 9OH2O producers did, you can see that that’s not true. One interesting thing is it’s good to think about is maybe a couple of months after somebody has bought a mortgage, ask them if they can remember the rate. Very often people can’t. So it’s clearly not the rate is objectively so valuable to them. But if you think about what else somebody is buying with a mortgage, they’re not just buying a loan. They are buying a future. They’re also concerned about not having that future impinged in negative ways by concerns, worries. So there are things that you can do with a mortgage, features you can add, to make it more convenient, flexibility on repayments for example, and that can command a higher price if you set it out to the customer in way that that value is obvious. There are things that you can do to make mortgages potentially more rewarding. You can introduce cash back, for example. You can do all sorts of things to differentiate a mortgage and thereby demonstrate to the customer, if you really just want price, you can go for the cheapest mortgage we have, which has none of these features. If you value these features, then you can have these features for an additional 10 BPS, 20 BPS, 30 BPS. So can banks do it? Absolutely.
Dallas Wells: Okay, great. And so one of the things we talk to banks a lot about is the ability to offer more choices for, and this is specifically talking about commercial deals, but more choices on deal structures, and that’s kind of related to what you were talking about there, some options to alleviate fear or help them achieve some solution other than just the money where it gets beyond just the rate, just the price for it. Is it possible to offer too many choices? Is there some danger of confusing and losing some of that value proposition there if it’s too complicated?
Matthew Jackson: Right, again it comes down to psychology. I think it’s important to know although it’s not possible to offer too many choices, it is possible to present a customer with too many choices. What’s the difference? Well, again, let me take a related example. If you take a company like Western Union or MoneyGram and take one of their services like cash to cash transactions, that is putting money down on a table in one country and getting it picked up in another. So it’s the same basic service, but they have maybe tens of thousands of different price points, depending on which country you’re sending from, which country you’re sending it to. So if you think about the different ways to present that you could give a customer a phone book, essentially, with literally all the prices listed down. That would be the most basic way of telling them all the choices that they have, or you could do what they do on the website, which is just ask a customer, “So which country are you sending it from? “Which country is it to?” and then it’ll find the right price for you. So in that case you’ve got a huge amount of choices that a customer has, you just don’t present them with all the choices. You ask them two questions and then you tell them what they need to know. So it sounds very simple, but a lot of the time we create these choices but the way they’re presented is such that a customer just simply can’t process them, and all it would take is a few simple questions or a few simple nudges to guide a customer to the product that’s right for them. So we should create more choices, but we also know that our customers have a budget of cognitive strain that they can put up with after which they start making decisions based on heuristics like, “What’s the cheapest offer you have?” And that’s not good for anyone.
Dallas Wells: Well Matthew, I think that’s good stuff there and good stuff for a good place for us to wrap up for the podcast here. So thanks again for taking the time to do this. I really appreciate it.
Matthew Jackson: Pleasure, Dallas. Thank you.
Dallas Wells: Yeah, so we’ll stop there. I think that was a good preview for the webinar. Again, that’s coming up next week on the 20th and 21st where you’ll get more insights like this, lots of good stuff there, good tactical things that you can take back and use from Simon-Kucher. So we’ll get you details on where you can sign up for that at PrecisionLender.com/podcast in the show notes for this episode. Or you can always find episodes and details on all the other things that we’re talking about. So thanks for listening. Until next time, I’m Dallas Wells, and you’ve been listening to the Purposeful Banker.