By: Magnus Fasth
April 06 2017

The importance of mental accounting

The specification was almost completed. After hours of explanations and presenting a state-of-the-art tipper truck was being specified and visualized within the new and shiny CPQ-tool.

 

- This is the ultimate tipping truck, said Bob. It's exactly what I wanted.

- I think it will sum up below the budget you mentioned, said Sue. Let me get back with a price tomorrow.

 

Sue almost pressed the button to send Bob the offer. The price summed up to 100. Just remember the number 100 and keep in mind that budget mentioned above was 120.

 

When Sue did a final review of the order she realized that they could have included the popular multi-angle rear mirrors. The only problem was that it would raise the price another 10. If she added it as an option Sue knew it would backfire and this would typically be Bob’s reaction:

 

- How dare you charge me 10 for that mirror?! It’s a rip-off. In the spare catalog, it only costs 2!

 

What Bob didn’t realize was that that particular mirror would require significant changes to the truck's configuration. The order summary would differ in no less than 14 different places! All in all, that added up to the higher price of 10. From a "total cost of ownership" point-of-view, the new price would still make sense. However, this is usually a difficult message to get across.

What Sue understood was that even if the new option provided a much better handling of the truck, Bob would perceive it as far too expensive. In the end, Sue could never sell this option if she just added it as an option reflecting the real price tag.

 

What is going on here? Why does it matter how the price for this fantastic mirror is added to the quotation?

This is an example of what is called mental accounting: the fact that we tend to split things we buy into different accounts. Mental accounting is exactly what was happening with Bob and his tipper truck. Indeed, in our mind the truck is one account and the additional benefit of an option is another. The truck is not price sensitive if we’re not maximizing the budget, but the option sure is.

 

So, what tactics did Sue use for the pricing?

She knew that simply putting the price increase as an option would be seen as a scam by Bob. She knew better than that. Instead, she put part of the additional price on the truck, increasing its price but keeping the mirror price seemingly low. This way, she kept the mirror option attractive. So, the final price was 109 for the truck and 1 for the option. Playing the game this way, Sue sold a better truck, at a higher price, to a happy customer. Bob still got a price below budget and added the mirror option at “half price”.

 

What’s the lesson learned here?

Make sure to have the flexibility to manipulate the price and when you do, make sure your reps understand the basics of mental accounting. Sometimes options turn out to be unreasonably costly. And to be able to close this kind of deal, you must have a CPQ-tool at hand to package your offer in a way that sounds and looks better.

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