EG129: choice architecture and pricing

At its core, pricing is a simple affair. Somebody, somewhere, wants to influence the buying decision of someone else, elsewhere.

As we live in a complex and complicated world, there is not much time or space available for details and nuance.?

That’s why sellers need shortcuts.

When they are selling software services to other companies, it’s even trickier, as there is nothing tangible to showcase and demonstrate value. It’s all virtual and conceptual.

So pricing is all about influencing buying decisions.

Buying decisions happen in a context. In B2B, the vendor has a very big influence and control over the context, if they choose to.?

On this topic, there is one corner of social sciences that deserves more attention than it typically gets: choice architecture.

Choice architecture is about understanding how the way choices are presented impacts our decisions.

Think of it like building a decision-making landscape. As a seller, you control the layout. By strategically positioning attributes, highlighting specific benefits, and using default options, you can guide your clients towards actions that benefit both them and your business.

Instead of bombarding clients with overwhelming options, present a curated selection, using tactics like:

• Defaults: pre-select the most beneficial option, making it easy to choose
• Framing: highlight positive aspects of certain choices, influencing perception
• Social proof: showcase how others engage with specific options
• Loss aversion: emphasize what clients might miss by not choosing a certain path, motivating action.

To illustrate what this looks like in the real world, let’s look at 3 scientific papers published in the last decade.

In 2013, in a paper entitled “Choice Architecture and Smartphone Privacy: There’s a Price for That”, Serge Egelman et al. tried to find out if consumers are willing to pay a premium for privacy.?

They looked at how choice architecture affects smartphone users’ stated willingness to install applications that request varying permissions. They performed two experiments to gauge smartphone users’ stated willingness to pay premiums to limit their personal information exposure when installing applications.?

The results suggest that many smartphone users are concerned with their privacy and are willing to pay premiums for applications that are less likely to request access to personal information, but that the choice architectures of the popular apps at that time did not allow for that.

In a paper from 2018, “Gamification in Management: Between Choice Architecture and Humanistic Design”, Sebastian Deterding et al. studied gamification in management and how it is informed by two contradicting framings or rhetorics: the rhetoric of choice architecture casts humans as rational actors and games as perfect information and incentive dispensers, giving managers fine-grained control over people’s behavior.

They looked at how this view aligns with basic tenets of neoclassical economics, scientific management, operations research/management science, and current big data-driven decision making.?

And in 2017, Christoph Ungemach et al. published “Translated Attributes as Choice Architecture: Aligning Objectives and Choices Through Decision Signposts”.

They demonstrate that expressing an attribute such as fuel economy in terms of multiple translations can increase preference for the option that is better aligned with objectives congruent with this attribute (e.g., the more fuel-efficient car for those with pro environmental attitudes), even when the new information is derivable from other known attributes.

We can use this frame to analyze one of the most critical parts of the sales process for software services: answering the big question - what is your hourly rate?

When they ask this, buyers are typically looking for a straightforward answer, along the lines of “here is our rate card, with the hourly rate of each role and seniority in our team”.

The problem for you as a seller is that once you answer with an hourly rate, you lose control of the sales process.

There is very little you can do after this to influence the buyers, their decision making process and the outcome.

If we believe that buyers in B2B software are looking for the lowest price, then answering with the hourly rate, hoping that it’s lower than the competition’s is a sensible approach.

But do you really believe that?

Think about your current customers? Are they all making decisions based on the lowest price?

What is the statistical probability that a buyer that you are trying to sell to is looking for the lowest price? Not very high.

Buyers are looking to pay a fair price for what they think they need.

It is your responsibility (and opportunity) as a vendor to:

• Influence the meaning of “fair price”
• To understand what the buyers think they need
• To determine if they actually need something else (sometimes this means they need less, so the price will be lower)
• And to convince them to buy from you, because you are offering what they need at a fair price

You can do this with choice architecture.

Whether you call it like that or not, everything you do in your sales process will have an influence on your potential buyer.

You can leave most of it to chance.

Or you can apply scientific principles and methods.