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In today’s rapidly evolving marketing landscape, understanding consumer behavior is paramount for crafting effective strategies.
Ever wondered why some ads work and others fail? It’s all about psychology!
Psychophysics, a branch of psychology, holds the key to decoding the intricate relationship between physical stimuli and consumer perceptions.
At the heart of this exploration lies the renowned Weber-Fechner Law, a psychological theory established over 250 years ago by G.T. Fechner.
This blog explores more on the potential of psychophysics in shaping marketing strategies and the application of Weber-Fechner Law in marketing.
The evolved 4Ps: Integrating psychophysics for marketing
One of the salient methodologies in marketing is the 4Ps method.
It is called 4Ps because it claims that through a suitable alignment of the four variables Product, Price, Place, and Promotion, almost any marketing goal can be achieved.
While each element plays a crucial role, price stands out as the sole factor directly impacting a company’s profitability. Price decisions extend beyond the marketing domain, involving key management functions such as Production, Accounting, Finance, and Sales.
When it comes to pricing none of these management functions (or company departments) can go without consulting the others because if you want to set a price you need to know the cost of production and the expected demand of the product.
If you know them, the easiest way to determine a reasonable price is through the so-called cost-plus pricing method:
The company “just” increases its production up to the point where marginal revenue is equal to or greater than the additional cost of production and then picks a price determined by the demand curve.
This method is well known and practiced a lot because it is easy to calculate and does not need much information, or data respectively.
The crux is, that this procedure is not specifically strategic, right? It also seems to be very static.
For an instance,
- What if you have determined a price through cost-plus pricing and you want to tap into a new market and need to offer discounts for that purpose. How would you know how much you need to reduce the price so that your target market perceives the reduction as interesting?
- Or, what if your business goal is to gain market share by offering bargains? Would a reduction of 15% be enough so that your target market considers the reduction as being a bargain?
For those and similar questions insights from “Psychophysics”, a particular branch of psychology help us to find appropriate answers.
From pricing to psychophysics
Simply put, psychophysics studies the relationship between physical stimuli, such as Smelling, Sounds, changes in Temperature and the like and the (Psychological) sensations and perceptions they induce.
One of the oldest and probably most famous outcomes from psychophysics is the theory of perceived quantity.
The Weber-Fechner law in marketing
Named after the 19th-century German psychologists Ernst Heinrich Weber and Gustav Theodor Fechner, this law asserts that the perceivable change in a stimulus, known as a just noticeable difference (JND), remains a constant ratio of the original stimulus. This implies that larger stimuli require greater changes to be noticed, and smaller stimuli require smaller changes to be noticed.
Weber’s Law is the initial part of the Weber-Fechner Law. It suggests that the ratio of the change in stimulus to the original stimulus is constant.
Via his experiments, G.T Fencher was able to determine that:
- pairs of stimuli can only be perceived if a subjective minimum difference in those stimuli are given, and
- the ratio between the initial stimulus and the amplified stimulus is constant
For example, consider you are holding two identical glasses, one with each of your hands, filled with the same amount of water. Close your eyes and if someone slowly pours water into one of them, you won’t notice the difference in mass until your individual threshold has been reached.
Moreover, the proportion of the masses of water is constant.
Meaning, that if we repeat the same experiment, but this time using buckets instead of glasses the ratio of the masses of water reached at the moment you would be sensing a difference would be the same ratio we would have determined from the experiment with the glasses, even if the total amount of water extensively differs.
Mathematically we can write this constant ratio as
, where “delta I” refers to the individual threshold increase of stimulus, “I” for the initial stimulus and “k” for the constant ratio.
I believe most of you are now starting to grasp where this amounts to in terms of the article’s topic. Let’s see if I am right.
As per Mr. Fechner, the Weber-Fechner law can be applied to any physical stimulus, right?
So why not apply it to a visual one, for example for price information in an ad or price information next to a product in a store?
If we, for example, conduct a scientifically valid experiment via a survey where we interview customers who are part of our target market, presenting them with several price reductions and ask them to decide whether they perceive the single price reductions as “interesting” we can detect the target segment’s threshold.
The same applies to the above-posed second question.
By conducting a randomised experiment, we can deduce the population’s threshold (the one from our target market) from the sample threshold (the subset of those target market members that participate in our experiment).
This example shows how exciting marketing can get, particularly if you combine it with other sciences such as mathematics or psychology.
Summary
In marketing, companies often utilise the Weber-Fechner law to price products. A marginal price increase on a low-priced item is more noticeable than the same increase on a high-priced item. Therefore, companies use different strategies for pricing low-priced and high-priced products.
