Below is a summary of our interview with Melina Palmer. You can listen to the full interview using the embedded media player below or in your favorite podcast app (e.g., Apple Podcast, Spotify and Amazon Music).
In this episode of Pricing Heroes, we dive deep into the fascinating world of behavioral economics with Melina Palmer, the founder and CEO of Brainy Business, a consultancy dedicated to applying behavioral economics principles to business growth. Melina is also the author of three insightful books, including The Truth About Pricing, which is the focus of our discussion for this episode. With a background in marketing and brand strategy and a master's degree in behavioral economics, Melina brings a unique perspective on how businesses can leverage behavioral science to enhance their pricing strategies.
The Journey into Behavioral Economics
Melina’s interest in behavioral economics was sparked during her undergraduate studies when she encountered a brief section on buying psychology in a marketing course. This small but impactful introduction ignited a decade-long pursuit to find formal education in the field, culminating in her earning a master’s degree in behavioral economics. She explains, “I spent 10 years calling universities around the U.S., only to hear, ‘That’s not a thing; that field doesn’t exist.’” It wasn’t until she discovered a program focused on behavioral economics that she found the path she had been seeking.
Melina’s journey into behavioral economics began with her fascination with why people make the decisions they do. She shares a pivotal moment when she realized this field could combine her interest in psychology with her professional work in marketing. “When I found behavioral economics, it was like discovering the thing I had been searching for all along,” she recalls.
From Psychology to Practical Applications in Pricing
One of the key turning points in Melina’s career was a study conducted in Kenya aimed at increasing savings behaviors among locals. The study involved different interventions, such as text messages from children thanking their parents for saving for their education. However, the most successful intervention was a simple gold coin that participants could scratch off each week if they met their savings goal. This gold coin outperformed even matching funds in motivating people to save. “The coin outperformed everything—even matching funds,” Melina notes, highlighting the power of small, tangible rewards.
Inspired by this study, Melina extended the research for her master’s thesis, creating a similar experiment in the U.S. using refrigerator magnets as the reward mechanism. This approach led to an increase in both savings behavior and loyalty scores at the financial institution involved in the study. “It’s fascinating how a simple nudge, like a gold coin or a refrigerator magnet, can have such a profound impact on behavior,” Melina explains, emphasizing the importance of understanding the psychological triggers behind decision-making.
The Truth About Pricing
In her latest book, The Truth About Pricing, Melina emphasizes that pricing is not just about the number on the price tag; it’s about the value perception of a business’s product or services created before the price is even mentioned. She explains, “The truth is, it’s not about the price—it never is. It’s all the things that happen before the price is mentioned that matter more.” This insight is crucial for businesses looking to optimize their pricing strategies by focusing on the psychological aspects of buying decisions.
Melina argues that many businesses treat pricing as a necessary evil, often leaving it until the last minute and basing decisions on arbitrary factors like competitor pricing or simple cost-plus models. However, she believes that with the right approach, pricing can be a powerful tool for growth. “You can use science to have confidence in your pricing, to set numbers, and have a strategy where you can feel confident in talking about it,” she advises. The book helps businesses do just that, providing a step-by-step guide to creating a pricing strategy that aligns with consumer psychology and maximizes profitability.
Value vs. Quality in Pricing
Melina stresses the importance of choosing whether your brand is built on value or quality. For instance, luxury brands like Hermès and Supreme leverage scarcity and social proof to create value that goes beyond the functional benefits of their products. “People pay tens of thousands, even hundreds of thousands, of dollars for a Birkin bag—not because it’s functionally superior, but because of what it represents,” she explains. The brand’s exclusivity and the social status it confers to its owners make the high price tag acceptable, even desirable, to its target market.
On the other hand, brands like Costco excel by offering value through consistent low prices, even losing money on key items like rotisserie chickens to build customer loyalty. “Costco is a master at reinforcing its value proposition. They lose millions on certain items, like their rotisserie chickens, to maintain customer trust and drive foot traffic,” Melina notes. This strategy of emphasizing value helps Costco create a strong, loyal customer base that trusts the brand to provide the best deals.
Melina also touches on the importance of understanding what your customers truly value—whether it’s the prestige of owning a high-end product or the satisfaction of getting a good deal. “Every business needs to decide: Are you a value brand or a quality brand? And how does that align with what your customers care about?” she advises, underscoring the need for businesses to align their pricing strategies with their brand identity.
Practical Advice for Pricing Strategy
Melina offers practical advice for businesses struggling with pricing. One key takeaway is the importance of confidence when discussing prices with customers. “The way you present your price can make all the difference. If you sound hesitant or apologetic, customers will pick up on that and push for discounts,” she warns. Instead, she recommends presenting prices confidently, as though stating a fact, to instill trust and minimize pushback.
She also talks about the concept of creating a “wingman” product—also known as an anchor price, which entails setting a higher-priced offering that makes the desired product seem like a great deal by comparison. “If your best offer is $10,000, create a $19,000 package that includes additional services, making the $10,000 option look more attractive,” she suggests. This strategy, often used by brands like Apple, can significantly increase sales of the primary product by framing it as the best value.
Melina emphasizes the importance of not only setting the right price but also presenting it in a way that feels reasonable to the customer. “It’s not just about the price itself, but how it’s framed in relation to other options,” she says. By strategically anchoring prices and creating comparative options, businesses can guide customers toward the choices that are most profitable.
Behavioral Economics in Action: Case Studies
Melina shares various case studies that illustrate how businesses can use behavioral economics to enhance their pricing strategies. One particularly striking example is Supreme, a brand that has mastered the art of scarcity and brand prestige. “Supreme can sell a Pyrex measuring cup for $25, five times its usual price, simply by adding their logo and creating limited availability,” Melina explains. This approach not only drives demand but also creates a secondary market where these items can sell for hundreds of dollars.
She also highlights Costco’s strategic use of loss leaders, such as their $1.50 hot dog and soda combo, which has remained the same price for decades. “Costco loses money on these items, but they serve as powerful tools to build customer loyalty and drive traffic to the store,” she notes. By understanding and leveraging consumer psychology, Costco has created a pricing model that consistently reinforces its value-oriented brand.
Melina’s insights offer valuable lessons for any business looking to optimize its pricing. Whether it’s understanding the power of scarcity in Supreme’s product launches or leveraging social proof in pricing strategies, these examples demonstrate the effectiveness of applying behavioral economics principles to real-world business challenges.
Addressing Dynamic Pricing and Surveillance Concerns
Melina also discusses recent concerns around dynamic pricing and surveillance pricing. She explains that while dynamic pricing can be effective, it’s crucial to frame it in a way that customers perceive as fair. “People don’t like to feel like they’re being gouged, so how you present dynamic pricing matters,” she advises. For instance, instead of raising prices on hot days, a company could frame it as offering a discount on cooler days. “It’s the same pricing structure, but by reframing it as a discount rather than a surcharge, you can avoid negative customer reactions,” she explains.
Regarding the recent FTC concerns about surveillance pricing, Melina highlights the importance of transparency and customer empowerment. “If customers feel like they’re being watched and manipulated, they’ll lose trust in your brand. Instead, offer them a choice to opt into a loyalty program that tailors discounts to their preferences,” she suggests. This approach not only mitigates concerns but also turns what could be a negative into a positive customer experience.
Melina’s advice underscores the importance of framing and transparency in modern pricing strategies. “You can’t change the way the brain works, but you can guide it towards the decisions you want by understanding and respecting your customers’ perceptions,” she concludes.
Whether you’re a seasoned pricing professional or just starting to explore the field, these resources provide valuable perspectives on the intersection of pricing, psychology, and business strategy.
Recommended Resources
Melina recommends several resources for those interested in pricing:
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Using Behavioral Science by Nancy Harhut
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Mixed Signals by Uwe Gneezy
Connect with Melina
To learn more about Melina Palmer and her work, visit her website at TheBrainyBusiness.com, where you can find her books, podcast episodes, and information about consulting services. You can also connect with her on LinkedIn or on other social media platforms as @TheBrainyBiz on Twitter, Instagram and YouTube.
