The Science and Psychology Behind Pricing

Author: Rob Quirk
Posting date: 1/31/2019 11:00 AM
Toys ‘R Us toppled. Sears was saved. Both of these businesses were once retail giants. What happened? Perhaps pricing had something to do with it. But, how does one determine price? 

Remember when you hosted garage or yard sales with your family and you spitballed a price for your sister’s doll or the coffee machine that was suddenly old now that your family had the latest model? Well, it turns out there’s a little more to Pricing Analytics than writing a number on a label and hoping someone will agree to pay it.

We spoke with our own Jenni Kavanaugh, a Managing Consultant who heads up Marketing & Insight function in New York, to find out the science behind pricing. What does it entail? Who makes a good Pricing Analyst? And how does not knowing your customer affect your bottom line when it comes to a Pricing Strategy?

So, What Exactly is Pricing Analytics?

Pricing Analytics doesn’t seem like something you would need. But, from a company’s perspective, when you price something, it has to be at the optimal price point to make enough return whilst ensuring that demand doesn’t go down. This is where Pricing Strategy comes in. Unfortunately, it can’t come out of thin air, it has to come from somewhere data-driven.

It’s actually about more than price. Other factors in pricing include the type of product, where the demand is, and what people like about the product. 

At What Table Does the Pricing Analyst Sit?

The Pricing Analytics function usually sits in a marketing team, or with a marketing analytics team. The role is an extension of marketing because pricing is directly correlated to promotion and then to things like loyalty and coupons. It’s all derived around what’s going on with the price point. Marketing & Insights play a key role because they encompass pricing, products, loyalty, and transactions which all come together to tell us, ultimately, how customers engage with our brand. These elements tell us how customers engage with any brand.

Where does Pricing Come From?

Understanding purchase behaviors and your company’s target audience affects the demand for the product which also affects its price point. The question is how do we figure out what to give, how to give it, and at the most optimum price for the customer? How do we answer these questions and balance optimal pricing for our customer as well as for our bottom line?

The easiest example to use is that of a retailer. How do they set the price? First, they need to answer the question, “Who are our customers?” To do this, they must conduct a bit of historic analysis. In order to dig into their customer histories, they would first need data. The data would need to be collected and analyzed before they’d need to bring in a Pricing Analyst.

A company’s data team would first need to ask questions such as “What are our competitors doing?” or “What do you think is the average price for this?” Though a price point might start off at $5, it could change depending on the answers to these questions and what the data says.

Once your customer base is established, and you’ve got people buying things, you need to then segment them – what we call ‘slice and dice’ – into different demographics to help you determine their purchasing behaviors. It’s all correlation using the customer audience database because what works in New York, won’t work in Chicago, and what works in Chicago, won’t work somewhere else. Ultimately, pricing is looking at what has happened and trying to make sense of why people do what they do, and based on that try to set your prices accordingly.

What are Some Things to Look at When Segmenting My Customer Database?

Here’s a quick checklist as you ‘slice and dice’ your own segmentations. Your goal is to understand what makes your customers buy what they buy. It’s a starting point. You can divide demographics by:

  • Gender
  • Age range
  • Location
  • What is being bought?
  • How much of it are they buying?
  • At what price point are they buying your products? 

Historic customer data is geared toward the perspective of everyday items. But, what about luxury items or new items people have never bought before. What do you when there’s no historic data from which to base your price strategy?

What are some trends you’re seeing?

Pricing hasn’t been too big in the U.S. as a separate function within business. Traditionally, it’s been ensconced in other titles such as Customer Analyst, Loyalty Analyst, or Buying Behavior Analyst. However, since retail isn’t doing so well here, at the moment, Pricing Analytics and understanding customer behaviors has risen to the top of the chain of importance, which makes the role quite a valuable position to fill.

Over the last couple of years, there have been very few Pricing Analyst roles, but it’s important to take note that demand is growing. 

More often, businesses who have filled the Pricing Analyst role are more focused in qualitative companies such as Consumer Packaged Goods (CPG) companies. Think Coca-Cola or Heineken. Now they’re in stores, they need to understand how to price their products to the supermarkets to make sure they retain those vendors. In these types of companies, you don’t necessarily see someone in the role of Statistical Analyst, but when it comes to historical data, consumer behaviors, and the growing demand for pricing strategies, the roles are beginning to shift. The idea of having your own pricing team is becoming more and more prevalent.

Who Would Be Most Suited to the Role? 

The Pricing Analyst sits within Customer Behavior. Often the role is best for those who have been involved in pricing before, or perhaps Product Analytics – these often go hand-in-hand. Product and Pricing or Loyalty and Promotion. They’re all linked together because they all involve pricing. 

Technical skills can take you in multiple directions. But, if you sit in a Customer Analytics team and you study customer behaviors, then you could do something like Pricing. It’s the same core concepts, the same methodology that might operate slightly differently.  Or, if someone has worked on any behavioral or customer environment and have experience trying to change or improve behaviors, it’s a good place to start toward a Pricing role. 

Ultimately, you have to have the understanding of how customers behave before you can apply it to pricing. If you’re coming straight out of university, you want to go into a team where you get the broadest capabilities in which you might have touched on a lot of things, but you’re not an expert in one. That’s the best way to enter into it. 

Demand is growing for Pricing Analysts. If you think this might be right for you or if you’re interested in Big Data & Analytics, we may have a role for you. 

We specialize in junior and senior roles. Check out our current vacancies or contact one of our expert consultants to learn more. 

For our West Coast Team, call (415) 614 - 4999 or send an email to

For our Mid-West and East Coast Teams, call (212) 796 - 6070 or send an email to

Related blog & news

With over 10 years experience working solely in the Data & Analytics sector our consultants are able to offer detailed insights into the industry.

Visit our Blogs & News portal or check out our recent posts below.