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How to Use Pricing Psychology to Differentiate Commodities

Posted by PriceBeam on February 2, 2017

A commodity essentially has the same physical attributes as other products on the market, and thus the sole differentiator is the price. While many products may appear to be commodities, there are only very few actual commodities out there! Most products can be differentiated, although with some it is easier than with others. One way of doing this is by using pricing psychology!

This article concerns those products where the differentiating factors can be hard to spot. When the factors are not very apparent, most companies compete solely on the price, and thus the prices in such market tend to be very similar. And this “similarity” is something you should avoid at all cost!

Consumers punish similarity
When consumers face two or more products that they perceive to be similar, they are more likely not to purchase either product due to “choice overload”; that is, the decision-making process becomes so complex that the decision is eventually deferred or dropped.

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How do you stand out?
Research shows that humans are more likely to pay attention to differences in quantitative attributes (i.e. price) as opposed to qualitative attributes (i.e. color). Price is, therefore, one of the strongest, most notable differentiators, and the best way to stand out from the competition.
In an experiment conducted by Yale University, the effects of such differentiation were measured by observing buyers deciding between two packs of gum. In scenario 1, both packs cost the same, while in scenario 2, a small price increase to one of the packs was introduced. The results were clear; the similar prices in scenario 1 increased choice difficulty and caused more buyers to defer (or drop) their purchase. In scenario 2, the choice difficulty was lower and consequently, 77% bought one of the packs as opposed to 44% in scenario one.

What this tells us
You might not find it incredibly complex to decide between two small packs of gum, but nevertheless, the effect of the choice overload is great enough to decrease the purchase percentage by 33 percentage points. It is a testimonial to the risk aversion that is deeply embedded in many buyers; if you can’t decide between two products, your fear of spending money on the wrong, less favorable option makes you keep your wallet in your pocket.
If you operate in a seemingly homogenous market, you don’t want to give your potential customers any reason to defer their purchase because they can’t distinguish you from your competitor.
By introducing a small price increase, you stand out while leaving your competitors to inflicting choice overload on the customers.

Read more about pricing psychology, and learn how to use it in your business.

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Written by PriceBeam

PriceBeam
PriceBeam posts regular guides, articles and news related to pricing and strategy. Go have a look!