Neuromarketing: Five cutting edge pricing strategies

By Stephen D. Forman (LTCA)

Long Term Care Associates, Inc.


One of the most fascinating fields to arise over the last few decades is called neuromarketing — the intersection of Madison Avenue skyscrapers and subatomic synapses of the brain. Using its tools, we can determine which emotional trigger words to sprinkle into our presentations, choose the best colors for our graphic design and even unmask which survey respondents are being dishonest — even if they don’t consciously know they’re doing so. (Telling the difference between what people believe and what they say they believe is a powerful ability.)

Neuromarketing has yielded other treasures, too. Among these are a variety of techniques for subtly — and subconsciously — impacting the outcome of the sales process. We’ll call these “pricing strategies” for our purposes, and today we'll look at five leading examples.

Anchoring

The most famous anchoring experiment is perhaps our clearest example. Professors Amos Tversky and Daniel Kahneman asked a group of subjects to guess what percentage of African nations were members of the UN. The catch? Those who were first asked, “Was it more or less than 10 percent?” guessed 25 percent, on average, while those who were first asked, “Was it more or less than 65 percent?” guessed 45 percent, on average. You see, the guesses were contextualized around the anchor.

The implications of anchoring are numerous. For instance, if you were to purchase a $29.99 iPhone cover as a standalone item, it might seem frivolously high-priced. But if you’ve just plunked down $299.99 on the iPhone itself, then throwing in the $29.99 case at the same time will seem pretty cheap. This strategy is used with LTCI riders all the time.

Sales often revolve around negotiations, and clever negotiators will use anchoring to their advantage. When setting the anchor around which negotiations will circle, it is considered a good tactic to always put your bid in first: the seller should bid high, the buyer should bid low. How many times in LTCI sales have we seen a myth-fueled buyer set his or her own anchor? Once set, people are irrationally tied to this price and can find it very difficult to budge.
Hyperbolic discounting

The fact that people prefer instant gratification over delayed reward is well-known, but there’s something more to it. We also tend to prefer guarantee over risk. Put the two together and you get what’s called hyperbolic discounting. In other words, the sooner an incentive is delivered, the smaller it needs to be. In experiments, individuals who were given a choice between $50 today and $100 in a year’s time usually preferred the immediate reward. But, when given the choice between $50 in five year’s time or $100 in six year’s time (still a year apart), people preferred the larger reward. Why? Because of the way we view the distant future, where size becomes more significant than timing. As one marketer puts it, “What can you deliver immediately to take advantage of our lack of patience, even if the value of the reward is less than you would have given in the future? What can you do to understand that our ability to appreciate time in the future is far from rational?”¹

In LTCI, carriers have cleverly responded by providing "immediate benefits," which the most successful producers are careful to promote.

Price perceptions

What is a $1,200 per year premium other than a $3.30 per day premium by another name? In other words, no more than the price of a latte to protect your family against the risk of an extended care event. Such examples of “perception equals reality” aren't limited to simple re-framing like this.

In fact, it’s common for people to gauge what things should cost through research. Deviate from your customers’ reference points of what your product should cost at your own peril. Consider, insurance carriers generally have had limited success marketing “bargain” LTCi (and STC) in tandem with an industry brand of marble security. We’ve discussed previously how our customers often bring wildly skewed perceptions to the table, which presents a dilemma: We clearly wouldn’t want to reinforce these.

Starbucks shows us the way out: Create your own category, one in which there are no prior reference points. In this way — changing the experience of coffee buying — Starbucks was able to charge $3/cup where others charged only $1.

In our industry, there is no reference for LTSS — the acronym favored by the government, universities and non-profits. The first carrier to own it can set its own price.
Three options

One of the most widely-known techniques of behavioral economics is the offering of 3 options to induce the selection of the middle choice. But does it work? According to researchers, it does. Why? Because it re-frames the conversation from a high-pressure “Should I buy?” into a low-pressure “Which option is best?”

In an experiment, subjects were presented a low-price beer ($1.80) and a high-price one ($2.50). Eighty percent chose the premium option when there were just two choices. Next, a bargain brand was introduced ($1.60). What happened when there were three choices? This time, 80 percent chose the middle, the rest chose the premium option, and nobody bought the bargain brand. Finally, the bargain brand was swapped for a top-shelf option ($3.40). Now, the $2.50 beer had become “the middle” and what do you suppose happened? Most chose it. Also noteworthy: A small minority continued to buy the top-shelf brand because some buyers will always pay for perceived quality, no matter the price. Remember this.

False consensus

As the name implies, we tend to assume that everyone else thinks just like we do. In a classic experiment, a group of students was asked to walk around campus wearing sandwich boards emblazoned with the neutral message, “Eat at Joe’s.” No reason was given. Of those who agreed, 62 percent thought other students likely to agree to wear the board. Of those who declined, only 33 percent thought anyone would choose to wear the board. It doesn’t matter how many ultimately chose to walk around wearing the sandwich board; the take away is that whichever group we’re in, we assume others think as we do.

This carries ramifications not just for the herd mentality of buyers and non-buyers, but also for the monitoring of our work. Just when we think we’ve created the ultimate ad campaign, it's wise to step back and ask ourselves objectively: Might we be the victims of a false consensus?

Some of the experiments upon which these principles were founded have themselves been accused of bias, since they were conducted using a select sample of willing, U.S. college students. Thus, their applicability to a “real” population may be called into question. However, there is a large and ever-expanding body of research which suggests that neuromarketing and behavioral economics are potent forces we are only now beginning to comprehend. Not only does it make sense to incorporate much of this cutting-edge research into our own sales and marketing messaging, but we would also be wise to appreciate how much is being catapulted at us.

Stay tuned for part two, when I reveal more top pricing strategies, including loss aversion, choice support bias, decoy pricing and charm numbers.

¹ Kelvin Newman, “Five Tricks our Minds Play on Us and What Marketers Need to Know”. 10/19/11.