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EG44: biases and how they affect our pricing decisions

Written by Emanuel Martonca
on April 11, 2022

Anchoring is one of the most easily recognized and explained of all the biases that affect our decision making.

But it’s far from being the only one with a significant impact on pricing decisions.

And while anchoring is typically discussed as a tool to influence the buyers when they judge the price of services, we should also consider the biases that influence the sellers.

What follows are 3 biases that have influenced me in the past, when I was in the position of selling software development services. Hopefully you can learn from my mistakes, without repeating them.All definitions are from this Wikipedia page with the list of cognitive biases. https://en.wikipedia.org/wiki/List_of_cognitive_biases

Overconfidence Bias

Definition: Overconfidence effect, a tendency to have excessive confidence in one’s own answers to questions. For example, for certain types of questions, answers that people rate as “99% certain” turn out to be wrong 40% of the time.

This can easily affect you when you estimate the chances of getting a new project. 

Whether consciously or subconsciously, people tend to overestimate the likelihood that any new opportunity they have will result in a new contract.

The negative effect of this is the tendency to underestimate the effort needed in the sales process. It will also negatively affect their price calculations.

Availability heuristic

Definition: The availability heuristic (also known as the availability bias) is the tendency to overestimate the likelihood of events with greater “availability” in memory, which can be influenced by how recent the memories are or how unusual or emotionally charged they may be.

Information about the competition can easily trick you into making wrong decisions.

If you hear that companies are hiring software developers with higher and higher salaries, you might be led to believe that those companies will also increase their prices. This could be true. Or not. 

The other side of the coin is also possible. If you hear of another company in the same city as you selling the same types of services for 60% of your hourly rate, you might feel pressured into lowering your prices or giving higher discounts in negotiations.

Both of these assumptions would be valid if they were the result of a structured, statistically relevant approach to gathering data about your competition.

But not if it’s the result of one random data point that you heard the day before making your decision.

Bandwagon effect

Definition: Bandwagon effect, the tendency to do (or believe) things because many other people do (or believe) the same. Related to groupthink.

The choice of hourly billing as the preferred pricing metric certainly falls under the bandwagon effect.

There are some scenarios and contexts where billing by the hour is optimum. 

If it’s a decision that results from a deliberate analysis, based on careful consideration of all pros and cons, great. It means it’s the right way to invoice your services.

But if you are billing by the hour just because most other companies do this, it might be a topic worth revisiting.

WHAT THIS MEANS FOR YOU

The first step in solving any problem is accepting there is a problem.

Just by identifying the biases that affect your decision making you will already be a long way towards reducing their negative effects.

You only need to spend some time on this, from time to time. 

How about 5 minutes per day, every day?

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