Behavioral Economics: The Psychological Side of Pricing, the Secret Sauce to More Sales with Gerald Smith

Gerald Smith is a Professor of Marketing at Boston College. He's been a Pricing Consultant with Strategic Pricing Group and Monitor Group since 1987. Gerald is the author of a relatively new book, "Getting Price Right: The Behavioral Economics of Profitable Pricing".

In this episode, Gerald discusses the power psychology holds in pricing in relation to behavioral economics as he talks about the soft side of pricing alongside the importance of framing.

Why you have to check out today's podcast:

• Find out what the hard side and soft side of pricing are all about, and why the behavioral side of pricing is more powerful than the logical side
• Understand why companies do framing, as well as why a frame of reference is important in pricing
• Discover why there's power in psychology when talking about behavioral economics

"Ask yourself and ask your pricing team, what do customers get and what do they pay for what they get? And say, is everybody in the industry doing it the same way?"

– Gerald Smith

Topics Covered:

01:39 – The start of Gerald's pricing journey with Thomas Nagle and Reed Holden

03:08 – Gerald talks about his dissertation in relation to his new book, Getting Price Right

04:33 – The behavioral/soft side as potentially more powerful than the logical side

06:39 – The main point of Getting Price Right – the psychology of the sellers, the people that really set price

09:11 – Talking about the dominant pricing bias of salespeople giving discounts all the time

13:07 – Pricing strategy vs. pricing orientation

15:15 – Framing as one of the foundational theories of economics

18:09 – Discussion about Apple's pricing slogan and the company having huge margins

22:45 – The power of behavioral economics – psychology; analysis vs. gut

24:12 – Talking about frame of references and setting price metrics

27:45 – Gerald's piece of pricing advice for today's listeners

Key Takeaways:

"We always think of pricing as a hard skill, as a quantitative skill. My students say to me, 'Professor, tell me the formula for setting price.' And I say, 'No, no, no, folks.' I mean, pricing is a soft skill that also brings in hard skills, for sure, so there are both skill sets." – Gerald Smith

"Sellers are also psychological and absolutely driven by psychology." – Gerald Smith

"One of the very dominant biases in pricing is that people have a tendency to discount price all the time. It's very irrational, and it, in fact, violates the principles of both psychology but especially economics, because economics says that people should rationally maximize the profits of the outcomes that are before them. And in the case of many people that apply this kind of discounting bias, they don't focus on the profits; they focus on the sales, and sales are not profits." – Gerald Smith

"Salespeople that work for somebody else are more likely to discount, but salespeople that do their own thing are less likely to discount. When they're selling their own place, they want to make sure that they maximize their profits if they can, but if they're selling for somebody else, they're happy to take that deal. That's because they get paid a commission on the deal. It is endemic to the world of pricing that people do this." – Gerald Smith

"Psychology is powerful. Analysis is terrific, but psychology is absolutely vital." – Gerald Smith

"Consumers or buyers give, but they also get. And so, if I can change what they get and what they give, then that can be very powerful." – Gerald Smith

People / Resources Mentioned:

• Getting Price Right: The Behavioral Economics of Profitable Pricing: https://www.amazon.com/Getting-Price-Right-Behavioral-Profitable/dp/0231190700
• Freakonomics: A Rogue Economist Explores the Hidden Side of Everything: https://www.amazon.com/Freakonomics-Economist-Explores-Hidden-Everything/dp/0060731338

Connect with Gerald Smith:

• LinkedIn: https://www.linkedin.com/in/dr-gerald-smith-91b8383
• Email: gerald.smith@bc.edu

Connect with Mark Stiving:

• LinkedIn: https://www.linkedin.com/in/stiving/
• Email: mark@impactpricing.com