HR Decision Making Through the Lens of Pricing Psychology

I was reading an article on the Conversion XL blog, Pricing Experiments You Might Not Know, But Can Learn From and the insights shared were fascinating.  I started thinking about how these concepts can be applied to HR.

Here are some of the basic premises from the post:

• What people say and do with regard to pricing are two different things
• When given 2 options, people find it hard to distinguish between the 2
• When 3 options are given, it is easier for people to compare the options
• The Anchoring Theory suggests that if you give someone a number as a starting point, they will use it to estimate an unknown quantity

If we are to take each of those concepts and apply them to employee behavior in an organization, there are many hypotheses that come forward.

What You Say vs. What You Do

According to the article, what people say they will pay and what they actually are willing to pay for something are often two very different things.  Take for example, buying a car.  We all know that there is some range of stated pricing on new cars.  Since car buying is actually about negotiating a price, though, depending on your negotiation skills, the value of any trade-in vehicle, and other variables, you may drive away paying far less (or more) than another person who just bought the same car.

In the workplace, leaders know that what employees say they are going to do and what they actually do are often quite different.  It’s not that a majority of employees are trying to be deceptive, it’s just human nature.  Sometimes they over-promise, sometimes schedules change, and sometimes they truly have no intention on delivering what they say they will. The lesson is that just because someone says they will do something, it’s not necessarily true.

The 2-Option Approach

The idea with pricing is that if you offer two options, you would think it would be easy for someone to make a decision between them.  This does not prove true, though, because people often have a hard time distinguishing between them.

I have seen this come into play many times in the HR world.  Think about how many benefit plans your organization offers.  I have worked at places that offer two and it can be challenging for employees to choose.  In this case, they often just keep whatever plan they chose when they began employment.  Even if you throw an active open enrollment in the mix, it is still hard to compare.

The 3-Option Approach – The Decoy

The way to make the decision-making process easier is to add a third option.  In the article, the example used is choosing between a trip to Paris with free breakfast (Option A) and a trip to Rome with free breakfast (Option B).  Both cities are wonderful and have many good attributes, so people had a hard time choosing between the two.  When a third option was added, a trip to Paris without breakfast, it was much easier for people to choose and a majority chose Paris with breakfast.  The reason it works is that you offer a third option that is fairly similar to one of the choices and it makes that option stand out.

Go back to our benefit plan example and if you add a third benefit plan that is similar to one of the original two, employees should actually have an easier time deciding.

Anchoring Theory

The last thing I found intriguing was the idea of price anchoring.  The theory was developed by two psychologists, Tversky and Kahneman, in the 1970s. The theory is that if you give a person a number – any number – and then ask for a cost estimate of something, the person will use the number as a starting point for the estimate.

In HR, this could come into play in hiring and forecasting.  If you have a group of managers who are asked to forecast their hiring needs but they are not sure where to start, by giving them a number (maybe from prior year, from another division, etc.) you may be doing more harm than good.  It could influence their thinking in such a way that the number they decide to go with is close to the number provided.  This is one reason it’s helpful to use HR technology to provide many points of business data to leaders.  By using real data, decisions will be clearer and more fact-based.

Feel free to challenge the ideas or tell me you agree.  What have you seen in your organization?