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Wednesday, July 30, 2014

Scatterbrains? Not Here: Science Connects Millisecond Brain Response to Ridiculous Pricing

Envision a near future when chief procurement officers (CPOs) will set bid prices by evaluating the neuronal mechanisms, i.e., brain waves, of suppliers — assuming, of course, that they cooperate. It would be a giant step forward in procurement.

Credit: Salvatore Vuono at FreeDigitalPhotos.net

Credit: Salvatore Vuono at FreeDigitalPhotos.net

The idea of basing pricing on brain waves is the vision of German neurobiologist Kai-Markus Müller, who has experience as an international marketing consultant.

Müller’s work, reported in the Oct. 10 issue of Germany’s Spiegel Online, taps neuronal mechanisms deep within the brain that assess proportionality and send signals in the form of an “unconscious defensive reaction,” as Spiegel writes, when an individual perceives something as out of whack — for example, an over- or under-priced product. These signals are transmitted as brain waves, which are detected by an electroencephalogram (EEG).

Müller used this technique to study prices charged by a Starbucks in Stuttgart, Germany. His conclusion: Despite its upscale image and pricing, Starbucks leaves millions of dollars (or euros) on the table by charging too little for its coffee.

In a study he conducted, Müller discovered that participants, hooked up to an EEG machine, were willing to pay up to 36 percent more than what is already being charged for a Starbucks coffee. He did this by showing test subjects individual images of Starbucks coffee pots with different prices on them. Some prices were as low as 10 cents, others as high as $13. The subjects’ neuronal mechanisms rejected, in milliseconds, prices that were disproportionate or unexpected. Brain waves showed consent, however, to a price range that was much higher than the current range.

A second test, sans EEG, in which students at the Munich University of Applied Sciences paid a cafeteria vending machine what they thought would be fair for a cappuccino, produced an average price that was within the range of what the brain waves of previous test subjects consented to for Starbucks coffee.

A third test, in a laboratory, produced a similar result.

Müller believes that this “feel good” testing is revolutionary and has applications. Consumers and businesses might find the methodology bizarre, at least initially, but Müller counters by noting that based on his experience in marketing, most conventional market research is irrelevant for pricing and other vital product considerations.

Could this work in procurement? Probably not. But it raises a legitimate question: Are CPOs leaving money on the table in dealings with suppliers by not pursuing innovative (and out-of-the-box, perhaps) ways of negotiating prices?

Müller’s work is revolutionary — the first of its kind, he maintains. And if it really works, it may yield benefits for many companies. We’ll know if Starbucks — or its competitors — raises its prices 36 percent.

 

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