Pricing Strategies can explain that, thanks to Nobel Laureate Richard Thaler.

It’s snowing. John is walking fast to get back home. He wasn’t prepared for a snowy evening. John crosses his neighborhood store when he sees a sign — “40% off for Coca Cola”. He loves the drink but is he going to stop now?

It’s a sunny day. John is sweating like crazy. He had to walk uphill for the last 30 minutes. John doesn’t remember when was the last time he felt this thirsty. Suddenly, he sees a small store that is selling. The store owner sees him and understands he is in pain. He asks for 50% extra for a bottle. Is he going to pay?

He will likely purchase that bottle on that sunny day.

But why would he pay extra one day and, maybe, ignore a purchase on another?

It depends on his Transaction Utility. The utility he’d get from that overpriced bottle would be well worth it. He’d maybe curse the store owner later on but that wouldn’t stop him from purchasing.

What we are willing to pay for purchase depends on its functional benefit and its Transaction Utility. Transaction utility can strongly influence our pricing strategies. Let’s see how this works —

What is Transaction Utility

Whenever we make a purchase, we spend money to get something in return. We look to meet some needs. These needs are functional benefits and they generate Acquisition Utility. For example, Sarah was feeling hungry and she bought a Big Mac from Mcdonalds to fulfill her hunger.

However, when we make that transaction, we feel more than just a regular need. There are a few positive utilities we feel with the transaction — Positive Transaction Utility. We also feel guilty about spending money — this can be termed as Negative Transaction Utility.

Let’s look at an example

For example, Sarah just purchased a specialty burger. The store staff convinced her to upsize and get larger soda & fries. Sarah likes the burger and she was super hungry. She is feeling happy about this acquisition. She is enjoying the first gulps of the coke and occasional bites of the fries. But after a couple of minutes, she feels bad about consuming so much coke. The fries are also starting to taste salty. Her Positive Transaction Utilities include the taste of the burger, fries, and coke. Her Negative Transaction Utilities consist of the extra money she had to spend to get the upsize, her thoughts that the coke and fries are not good for her health, etc.

If she feels that the Positives outweigh the Negatives, she will feel ok with her purchase. Sarah would be willing to pay more in that case. If the negatives are too much, she might feel bad about the entire purchase. She might even feel that the product was overpriced.

How does Transaction Utility Impact Pricing Strategies

The examples I have used involve well-known products. For new products and services, the combination will define how much a consumer is willing to pay.

Sony has recently launched Playstation 5. The console was priced at $499 (for the disk version). But, scalpers purchased those consoles and are now selling at around $800. So, even if Sony priced it at $500, consumers are willing to pay $800 — a whopping 60% more!

If these consumers had waited 6–12 months, they would probably be able to get the console at its original price. They would get the same product. It is also likely that they can play most of the PS5 games in PS4 as well.

But they were going for better features, the ability to play games at higher resolution and meet the desire to have the console early. These desires — or Positive Transaction Utilities — outweighed the negative of paying $300 extra.

Could Sony have launched the product at $700? They know better. I am sure they have done their pricing analysis. A note here — Pricing analysis involves more than Transaction Utilities. So, their pricing must have considered all elements needed to maximize reach, revenue, and profit. Also, there’s the pressure from Xbox to keep the product around the current range.

What Impacts Transaction Utility?

Transaction Utility gets formed through many elements; including experience, demand, brand image, word of mouth, etc. Let’s look at some of the examples to see how they work —

Customer Experience & Brand Image: I Spent the Same Amount For A Coat But Felt Better

I was looking to get a custom Jodhpuri Coat. A vendor was promoting his store over social media and had what I wanted. I decided to drop by his shop and check out the product. He initially asked for BDT 17,000($200).

When I went to the store, I was a bit shocked. It was not in a good location. It was not even a shop but somewhat of a very small warehouse. I even wondered if the guys brought me there to mug me. The guy asked for BDT 10,500 ($123) for the product. I liked the product and the price was in my range. But I didn’t want to pay that much to them.

I came out and went to a renowned tailor. Guess what, I found the same fabric. The tailor quoted BDT 10,200 ($120)— very close to what the first vendor asked. The coat wouldn’t have some of the handcrafted designs I saw in that shady store. But I was still comfortable paying for it.

I was getting the same thing. In fact, I settled for a slightly worse version. But I was willing to pay more because the positives outweighed the negatives.

Demand, Scarcity, Word of Mouth, Environment, and Mood of the User also play strong roles in Pricing Strategies

• Demand & Scarcity: During the initial days of the COVID outbreak, people in Bangladesh were willing to spend BDT 4,500 per test in private facilities. After 6 months, they wanted to get the test done as cheaply as possible.
• Word of Mouth: Positive Word of Mouth directly converts to Positive Transaction Utility. That helps users overlook negatives and even high prices.
• The first two examples covered the impact of the Environment and Mental State of the user

Final Thoughts on Transaction Utility & Pricing Strategies

Transaction Utility is one of the multiple elements that contribute to the Psychological aspects of Pricing. I plan to write more on this topic

Even without the psychological aspects, pricing strategies are one of the trickiest parts of a business. With proper research and contribution from scholars, pricing has become more data-driven and accurate in recent days.

This article was first published on Medium