Could the key to price optimization be found in our subconscious? Is the brain the path to setting and getting the best prices for your products? Retailers who want to know about the best retail pricing strategy should take a look at the research of German neuroscientist Kai-Markus Muller, described recently in Der Spiegel, Reuters and BusinessWeek, Is Your Coffee Too Cheap? Using Brainwaves To Test Prices. The research found that a person's brain waves are the highest when the subject believes that the price is the best -- and brain waves are the lowest when the price seems to be either too high or too low, leading to the suggestion that companies could one day use brain waves to find ideal pricing.
Billions of dollars are being spent today on the discipline called neuromarketing: From the way subjects' eyes move over ads to checking your tension level at airports in case you're a suicide bomber. Now it's brain waves that reveal how much you'd really pay for that cup of Starbucks coffee. If it's priced too cheap, the brain waves will tell retailers that you would have paid more for the product.
Here's the scoop:
This research came about because Muller believed that research subjects have only limited credibility when they are asked to honestly state how much money they would spend for a product (while their actual behavior will be different). Saying that "classic market research doesn't work correctly," Muller, who once consulted with companies to help them determine optimal pricing for their products, thinks that research subjects can't always be trusted to honestly state how much they'd be willing to pay for something.
On the other hand, the customer's unconscious defensive reaction based on certain waves can be "seen" with the help of electroencephalography (EEG). So Muller checked out brain waves which can't be deliberately switched off, in order to reveal something about how much consumers' are willing to pay for products.
Muller used Starbucks coffee as his example, showing subjects the same pot of coffee on a screen several times, but with different prices each time, while an EEG plotted the subjects' brain activity. The brain wave reaction was low when the subject believed the product was too cheap OR too expensive, but brain activity was the highest when the customer saw a price that seemed the best and most acceptable for the product.
A follow-up experiment by Muller involved placing a vending machine at the front of a university dining hall, where students could buy regular coffee priced at 70 cents, cappuccino priced at 80 cents, and a latte macchiato for which students could decide for themselves how much to pay (which turned out to average about 95 cents).
When subjects were shown similar products and prices in the experiment and their brain waves were measured, the brain "signaled its consent" for the latte macchiato at an average price of 95 cents -- meaning the brain agreed with the person's behavior (or vice versa) to determine the ideal price.
Bottom Line For A Retailer's Bottom Line:
One major implication is that even star companies like Starbucks are missing out on millions in profits, because, even with their already pricy prices, they are not fully exploiting consumers' willingness to pay.
And what are the implications for other retailers' price optimization? Are we in for a marketing revolution of determining pricing on the basis of laboratory brain testing? Shouldn't retailers charge more if customer brain waves say, "Yes"?
Would this be unfair advantage for the retailer? Muller thinks not, pointing to the fact that a large percentage of all new products disappear from shelves forever, most likely because of wrong pricing to begin with.
Again, scientists are developing all sorts of brain wave-based gadgets for today: Headphones with sensors that detect your emotional state, then choose music to fit your mood; an app to sense your state of concentration and determine whether to interrupt you or block incoming calls when you're in deep thought. So why not brain waves as the arbiter of pricing?
A retailer's bottom line, after all, is the importance of pricing "correctly" and not to leave any money on the table; now you can ask the brain and it will tell you it is so.
Graphics from Der Spiegel