Pricing is fundamental to your business. It also has an enormous influence on Customer Experience outcomes. You should understand Mental Accounting as it pertains to customer behavior before you set the price and before you ruin how your customers feel about your experience. This was a great topic of discussion in our recent podcast.
So, What is Mental Accounting?
We all participate in one form or another of Mental Accounting a term that describes how we mentally divide our money into different accounts for specific purchases. We use subjective criteria to establish different categories of spending for ourselves. We then allocate our available funds to the different groups. For example, if some of you reading this are saving for a particular purchase but also carrying debt on a credit card, you are participating in the form of Mental Accounting. This video from Sanlam Investments explains it well (and in under a minute):
Mental Accounting is why customers will make strange buying decisions from time to time. It is also why your pricing sometimes makes them angry.
Airlines Run Mental Accounting Too Often in the Red
People often feel tricked by low prices that have many add-on charges after the initial purchase. Their mental accounting has already debited the purchase price and considers the line-item complete. When they discover there are additional charges it wasn’t expecting or thought were included, people feel irritated. This T-Mobile ad is an excellent example of how mental accounting and other costs can affect your customers.
The airlines’ industry as a whole is another excellent example of how not to structure your pricing. Airlines’ pricing often irritates and disappoints customers. Carriers entice customers with low fares, and then, after customers have booked, airlines charge “extra” for things, e.g., checked bags, assigned seats, food. For even the most basic airline experience on many of the carriers, passengers are facing at least three surcharges before they have arrived at their destination. These surcharges feel annoying, a far cry from the happy and pleased emotions airlines should be seeking.
Speaking of annoying, Ryanair, for those of you who aren’t familiar, is a discount airline in Europe infamous for its less than stellar Customer Experience. Despite my low opinion of this airline, I still interact with them from time to time. In a recent transaction, I discovered Ryanair charges you to use a credit card. I wasn’t keen on booking that flight. How else is a person going to pay for an airline ticket in 2018? Money order? Cashier’s check? My prize sheep?
I would rather have seen the total price for Ryanair include the credit surcharge in their published price rather than see it listed as a surcharge. It upset my mental accounting of what the flight cost, which irritated me and made me wonder what Ryanair would charge me for next. (The CEO once joked about charging for using the loo. At least I think it was a joke.)
Customer expectations play a part in mental accounting also. I fly a lot, so many of the charges I described, credit card surcharge notwithstanding, are part and parcel of the flight experience to me. If I don’t want to pay extra, I can limit what I bring to fit within the carry-on guidelines or bring my own food. However, I always expect to have a seat-back tray table available to me to work on my laptop (after 10,000 feet, of course). However, that shouldn’t be a problem, right?
Wrong. On our recent podcast, we discussed an airline whose seat-back tray tables were too small for a laptop. The airline rented them a more substantial table top to place on the small one!
Now, it wouldn’t break me; that seat-back table topper rental probably wasn’t more than $10-$15. However, the tabletop rental wasn’t part of my mental accounting for the budget I allocated for the flight based on the fare I paid. I would be hacked off about it.
So, how much does it cost to ask a passenger to pay for what they consider part of the fare? In some cases, it isn’t a dollar amount as much as it is a pass/fail system. In other words, I would remember the rental of the table top part of my experience before I booked a flight the next time. Would it be the reason I didn’t book it? Maybe or maybe not, but that negative experience would not be helping that airline when it came time to choose.
Avoiding a Red Ledger in the Accounting of Customer Experience
So, when it comes to mental accounting and setting your price, there are two things you can do to keep your customers happy and in the black.
- Research what is essential to customers in your experience. Now, to be clear, I don’t mean a shallow survey or a quick question here or there. You need to dig in and understand how your experience performs in relation to their expectations and their idea of what your product or service should cost.
- Price your product in a way that won’t challenge their mental accounting ledger. Customers have a budget in mind when they buy something. Sometimes they come in with a number; sometimes the market presents them a number. However, once that budget establishes, do not increase it after people make a buying decision. Over and over again, research has shown that people want to know the whole price in the beginning. Anything else irritates them.
We all use mental accounting from time to time. It comes into play when we make buying decisions, and it helps us evaluate how we felt about our Customer Experience. Pricing is an area that affects your Customer’s Mental Accounting. Be sure you understand what they expect and price your product or services in a way that puts deposits in your brand loyalty, and doesn’t withdraw all the goodwill you have worked so hard to build.
What are some other ways pricing can work with customer’s mental accounting? We’d love to hear your insight in the comments below.
If you enjoyed this post, you might be interested in the following blogs and podcasts:
Colin Shaw is the founder and CEO of Beyond Philosophy, one of the world’s leading Customer experience consultancy & training organizations. Colin is an international author of six bestselling books and an engaging keynote speaker.
Follow Colin Shaw on Twitter @ColinShaw_CX and the Intuitive Customer Podcast.