Memecast #45: Reference Prices

There's a concept in economics, behavioral economics, called reference prices. And reference prices really say our customers have some expectation about what they think they're going to pay.

And if our price is below that expectation, they get a good feeling they're getting a good deal.

And the fact that they're getting a good deal provides them an incentive or the good feelings that say I'm actually going to buy.

Richard Thaler broke this up into two different types of utility. There's transaction utility and there's functional utility.

The functional utility is the utility that someone gets from our product. It's the reason they're buying it. But transactional utility is the feelings you get when you're going to buy something.

And if you walk into a store expecting to pay $20, and you find it on sale for 15, you're thinking, Hey, that's a really neat deal, I'm going to buy that. Or you're more likely to buy it.

"We should be paying attention to our customer's expectations." - Mark Stiving

If we have a way to control expectations, to raise expectations before they actually buy, and then we give them a price that's below those expectations, it makes it more likely they'll pull out their wallet and buy from us.

We hope you enjoyed this podcast. If you see have any questions or feedback please email me mark@impactpricing.com.

Now go make an impact.

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