2. Part 1 - Pricing and Sales through the lens of neuroscience with Prof. Dr. Kai-Markus Mueller

Speaker A: Hi everyone, I'm um, Anda Rousseau and you are listening to the Sweet Spot by Pricing Works, the podcast about pricing excellence and its potential to transform B2B. On today's two part episode, we look at pricing and sales through the lens of neuroscience with Dr. Kai Marcus Mueller, professor of consumer behavior at HFU Business School of Ferdmungen University in Germany and Director of Pricing Research at Neurensics, a neuromarket research company based in Amsterdam. Kai has previously founded and ran a startup where he developed Neuropricing, a suite of neurotechnology based methods to measure and model optimal prices, which has been acquired by Neurensics. He has experience working for the US government in strategy consulting and holds a PhD in neuroscience. His latest book, the Invisible the Secrets and the Science of Winning Minds and Winning Deals, has been co authored by top sales expert Gabby Rebock, who has over 30 years of experience in industrial sales, marketing and management. The Invisible Game is packed with amazing science backed insights for pricing and sales which will be the focus of our discussion today. Now let's dive in. Part one starts now. Doctor Kai Marcus Mueller, welcome to our podcast and thank you so much for taking the time to speak to us today.

Speaker B: Thank you for having me, Anda.

Speaker A: So Kai, you said I could call you Kai. I've really enjoyed reading your new book the Invisible Game and I wanted to share some of its key insights with our audience. The best part of the book for me is captured in all of those paragraphs titled what is the science behind this? I love that there is now science to explain so many of the behaviors and the thinking that I have seen in my roles in business, uh, pricing and working closely with sales over the years. But before we get into the book, can you share with us a bit about your professional journey so far and how you've come to combine pricing with neuroscience? It's a really fascinating combination.

Speaker B: Absolutely. So, um, well, by training I am a psychologist, uh, a neuroscientist. So I have degrees in psychology and neuroscience, which means in brain research basically. And I did my PhD in the United States, um, actually at the US government, um, under George Bush back in the days, um, and it was a good time, um, I liked it. And if you do neuroscience today, you really do actually data analytics. The main thing you do these days is analyzing these incredible amounts of data that you get from brain scans. Now I liked the quantitative work, um, but I wanted to see something totally new. So I came back to Germany and I started working at one of the leading management Consulting firms that, um, deal with pricing strategy. So prices are also quantitative. And, um, I liked it. It was very engaging. I learned a lot. Uh, but after two years, I thought, it's time to do my own thing. It's time to improve some things that I think can be improved, predominantly pricing research. In pricing research, you generally ask people somehow what, what the right price is. Either you give them a choice or you ask, um, them about the maximal willingness to pay or what, what a good price is or at which price it feels cheap and so forth. There's a number of different methods. They have to some degree, their merits. But really what bothered me is that in the end you ask people, and people really don't know what they're willing to pay for something. They don't know what a price feels like. They can verbalize this. And finally, they, um, aren't even interested in telling you what they're willing to pay. I mean, if I ask you about a product and you are that right target group, then you most likely think that your answer will influence what is going to be charged in the end. And so you will most likely give me not your maximal willingness to pay, but you will, um, stop earlier and just give me a lower price, which is something I've seen in practice. Um, then when I did qualitative research sometimes on projects, was something you would see, um, obvious and you'd have to, like by hand, potentially even correct for those, for those, uh, answers. So being a brain scientist, um, I knew that there were different tools to understand what people truly feel and what they truly are going to do. There were also a bunch of very cool papers coming out that showed that brain scans have amazing power to predict what people are going to do in future. And so I founded a startup back in the days, and in that startup we worked on developing algorithms and scientific experiments and approaches based on science that tell us the quote, unquote true, the true willingness to pay off the consumer, or of any customer, by the way. Also in B2B, um, we did that with the electroencephalogram, the EEG. That is this brain cap that you can wear and it has little wires sticking out of the cap. And what you can measure is what people call the brain waves.

Speaker A: Wow. Measuring the true willingness to pay off the consumer is, I think, every pricing person's dream. Right. As a key question underlying pricing is how much someone is willing to pay for something. So I can't wait to get into the detail of those brain studies. But with that introduction, if someone asked you what your Superpower was, I guess you could say that you can read people's minds. Is that true? I'm getting slightly worried now.

Speaker B: I can read your minds if you are 30 or 40 people, at least. Right. So if you come to me, uh, I cannot really read your mind. Nobody can do that. People, uh, claim that that's a little bit, uh, over the top. Uh, but on average, I can. On average is really possible. So, you know, if. So that's one of those problems, uh, with, say, lie detectors, right? Your brain might. Might be wired a little different. And, you know, I cannot put you to jail just, you know, because, uh, I get. I pick up the wrong signal. But on average, we say 40 people, you know, it averages out, and you get an amazingly clear signal of, you know, the willingness to pay no matter what people say.

Speaker A: I'd like to dive into the book now because I have so many questions, and you have all the answers. So when most people think of pricing, they think numbers and math. But your studies show that there is so much more to it than that. So why is pricing such a sensitive topic?

Speaker B: Well, in pricing, there is an exchange happening between you and me, between a customer and, uh, a supplier and so forth. And our brains are evolutionarily hardwired to be generous, to be working together, to survive together in a cave. You know, basically. You know, in our evolutionary history, we were sparse over the entire world in small tribes, and we had to rely on each other. And if you ask me something, I was generally attempting to give you as much as possible because I knew it would come back. And, uh, you know, the entire, um, the entire tribe relies on each other now today, you know, we don't live in small tribes anymore. We live in, you know, big companies, and we live in sales jobs, and we live in, um, the purchasing jobs and so forth. So when somebody asks me, it's. The first thing is I want to be liked, right? And I want to be liked, and I want the deal. Right. That's the other thing. I want the deal also because that is something that many companies are not very good at. They incentivize their salespeople on the revenue instead of the profit. So, um, now there's a strong force in me, basically a strong psychological force to give in and say, yeah, whatever, you know, um, I'll give you a discount and, and I'll make this cheaper. And, you know, it's. It's. It's an issue. But at the same time, there's another force, namely my boss, uh, my family and so forth. And they all want me, you know, to get the best deal. So there's a strong, what psychologists call cognitive dissonance, right? So there is some. I want two things, you know, and the question is, which one do I do? And so uh, in that respect that turns it automatically into something very sensitive. And then, um, when I have cognitive dissonance, I am what psychologists call psychological, um, arousal. Right? I'm basically psyched out or I'm excited, right? M and when I'm excited, um, then I have a tendency to do the straightforward thing. Okay. Uh, that is something that uh, has been studied in a m. Bunch of very, very amazing details, uh, by Robert Zayan. And for that I think you need to read the book because that's maybe beyond the scope of this podcast. I'll give you a simple example. Um, when you are uh, going on, when you're doing 100 meter race, ah, like um, a sprint, um, it's actually a relatively simple task. So where are you better when you're in a Stadium with 80,000 people screaming at you or when you are at six o' clock in the morning alone on the track? You are probably better when you're in a stadium, right? And that is, you know, because this is a simple thing, a simple task and you do the straightforward thing and you do it better, right? You do better. However, if it's, if we're talking about something complicated, you know, if you're uh, trying to solve a complicated chess puzzle and there's 80,000 people scream screaming at you, you're so excited that you are not finding the right solution, the optimal solution. Um, you're much better at six o' clock in the morning by yourself thinking about this problem. And so here is that additional danger in prices. We have this cognitive dissonance as I just explained, and we are excited and then we have a tendency to do the straightforward thing. And what is a straightforward thing? Maybe it's saying yes and then maybe it even leads to boost decision dissonance. Now you have made this decision. You're angry at yourself because you thought actually I didn't want to do this.

Speaker A: Right? So what we say and do with prices actually shows much more about what we're thinking, how we're thinking, our emotions. And there's a lot that is behind that. That is this invisible part, right? Um, it's not just what we can easily observe, which is the number and that's it. There's just so much nuance behind that

Speaker B: that we can unpack m maybe very quickly. That is exactly it. So you may have heard of System one and System two which are things that I'm doing quickly and the uh, things that I'm doing um, well thought out. Um, and the Invisible Game is basically um, those things that are happening invisibly and where the two system ones, potentially two system ones of the purchaser, um, and of the seller, that makes, that makes sense.

Speaker A: So you touched on this earlier but I would like to as we expand on that a little bit, can you tell us what you've learned when you've monitored people's brains while asking them questions about pricing? What has their brain activity revealed that they themselves wouldn't tell us?

Speaker B: So there is like 2500 brain scans that I've conducted um, with prices, with the eeg. So I've learned a uh, whole lot of things. But I'll tell you one, one thing that I really um. One of my favorite studies that is, that is very impressive and that I think fits very well into the field of pricing and of the Invisible Game. Um, and also ah, of the B2B space that is um, somewhat uh, the area that pricing works does a lot of um, work in good. So we were approached by a um, insurance company and that insurance company um, was asking a lot of questions like how do we communicate our insurance product best? And all these kinds of things. But also they were wondering about a specific issue, namely is there a uh, price threshold? So they sold their insurances for, depending a little bit on the risk profile between the 80 and €110 per year. And there's something that you have all seen and you've all heard about and this is thing called the price threshold. So this is saying that why does this insurance cost €99 and not €101? Right? It really is not that critical. These €2 or this $0.01. Why does this gum cost $0.99 and not a euro? Um, it's because there is a lot of assumptions. There are a lot of assumptions out there that basically say, state that once you want to get above that threshold, people are not going to buy anymore. Well so we were doing the study and it was quite um, it was quite straightforward. We analyzed the data, we collected um, 40 um, potential consumers for this who are, who are you know, basically a good, a good fit for this specific um, insurance. Um, we also got a little help from the brokers because this is an insurance that was sold through brokers. And so we got these people we met, tested them, we explained how to communicate this best. We um, measure a lot of things and also we measured the pricing feel, good price, like as I explained before, the match mismatch signal. And from that match mismatch signal you can actually use a neuroeconomic model that, uh, we've developed. And you can then, um, turn this neuroscientific measure into a demand curve. You can basically predict what's going to happen in the market, at which price, how many people are going to buy. Um, so we had all these results and we had one result still, uh, still that needed to be answered. That was the threshold. And you know, we analyzed the data up and down, we looked at it, and there was no threshold. Yes, you know, if you sell it at 95, a few people more buy than at 105. But it wasn't like there was like an immediate drop in sales or something like that. It was, there was nothing. We looked at it and we were thinking back and forth, what do we do? And they sounded so convinced, the customer, that there was a threshold. Anyway, at some point we decided to say we tell them the truth. We tell them what we measured. We got out there, I told, um, um, the project, uh, leader, um, the customer, you know, everything's fine. Here's how you communicate it. This is, this. And also, there's no threshold. You know, there's. Don't worry about it. You know, if your brokers go above 100 or stay below 100, this is not critical. Right. Don't worry about it. If the risk profile requests requires a go over 100, just do it. Well said and done. Um, they said thank you. And uh, we hadn't heard from them in three months. And then I got a call and then my customer said, ah, from the insurance. The customer said, well, you know, this was such an impressive study. You had good predictions, everything worked out, everything was, you know, we validated everything in the field. Um, and this is very good. It's made me very happy, of course. But then he also said, yeah, you know, that's this other thing with this threshold, you know, um, we've been testing all kinds of prices in the market. We've been like fooling the brokers a little bit back and forth with it. And you know what, Sorry, when we go above 100, um, we don't sell any insurance anymore. Take a moment, think about what that means. Okay, So I hope you didn't think that my algorithm was bad or my research was bad. Um, indeed. What we got to do was a second study. And in that second study we were able to test the brains of the brokers. We tested 40 brokers brains. And it turns out the price threshold of perceiving €100 to be not the right price was not in the customer's, not in the consumer's mind. It was in the salesperson's mind, right? So this is, um, something that you always gotta be aware of and this is something that, um, you know, it's so hard to understand and so hard to grasp because it really, it really shakes your view of yourself. For me, as a, you know, being a brain scientist, you know, I know this is all just one and a half kilogram, um, mass where there's some bioelectric signals going on. And that I believe that I am someone is just, just some electricity up here. For me, this is a daily business. But for, you know, most of the people out there, this is not something that is. Has they, they did, you know, four years of a PhD and thought about it every day. But, um, this is new, right? This means, you know, the price threshold can be in your brain and be aware of that. And if, even if you don't sell in the market, the question is, is it because of the customer or is because of you?

Speaker A: And sometimes we stand in our own way, right? We have these limitations in our minds and that they, what we do and clients may not see those limits and they may not act, um, in accordance with those, but it's all in our mind. So self awareness, I think in this situation is really, really important and questioning a little bit our beliefs, um, and why we're so convinced of, you know, what we, we think is true. So that, that leads me really nicely into my next question, which is that in your book you explain that often salespeople can fall prey to, I quote, the success illusion and the stability illusion. So can you describe what that means in practice and how salespeople can avoid this trap?

Speaker B: Right, so, um, what is the success illusion? We've coined this term because in sales you are often happy when you've made the deal, you want a project and you sell your hardware, software consulting, whatever it is. And the question is, whose game did you play? Did you play the game that was set by you, or did your game win the game set by the client? Um, you know, one of the main things we need to understand is that price is just an arbitrary association between a number on the one hand and a service or a product, um, on the other hand. And whoever sets the frame, whoever sets the rules of the game and sets the parameters, is likely the one who gets what he wants. Um, in the book, we also Bring, ah, an example not from sales in setting frames, but I think it illustrates this, um, you know, the success illusion to some degree. Um, so the, the story is as follows. There's, there's a monk. And the monk says, goes, goes to the, to the abbot and says, um, may I smoke while praying? And Abbott is shocked. Right. That is not something you do. You know, if you go to prayer, you go to prayer. And if you go to smoke, you, you smoke. So the abbot sends the monk to confession about his evil thoughts. And uh, he should, uh, in future not have such bad thoughts. So the uh, abbot goes on a hike and there's a replacement for the abbot. The same monk goes to the new abbot and says, you know, I'm, um, a smoker, uh, and uh, may I, may I pray while I'm smoking? So, um, the second, uh, abbot is very impressed and says, oh, well, you know, of course, you know, you are very dedicated monk. You are an amazing follower, uh, of our principles. And of course you go ahead and you know, I'll recommend you to become the future Abbott. Um, so you see, um, the monk in these cases, he sets the rules of the game. He sets the game and in the one case he sets the wrong frame and he loses the game. And the other case, he uh, sets the right frame and he wins the game. But in both cases the abbots believe they've won their game. Right. But in the first case, the airport really won the game because we played on the airbot's, uh, rules. And in the second case, um, uh, we, you know, the monk, we played on the monks, uh, on the monk's frame and in the monks to the monk's rules. And you know, um, the second abbot really has, uh, is falling to, you know, prey to the success illusion to some degree. Right. Um, and so that's the question. You know, there are many examples in sales where people have sold something but uh, the other side had no idea what it was and what it was worth. Basically, yes.

Speaker A: For sure. Especially if they haven't thought about measuring the willingness to pay, for example, in some situations and you've achieved the price and maybe you're happy with that price, but if you don't know how it compares with what you could have gotten or what your client was willing to pay, um, you could find that you've left a lot of money on the table and you haven't really worn, um, in reality. So that's incredibly interesting. I love the example of the monk. I thought it explains so well, um, this whole concept of framing and how he achieved the outcome that he wanted by simply asking a different question. It was as easy as that.

Speaker B: Yeah, exactly. Exactly. Yes, yes. Um, so the other thing you wanted to know about was the stability illusion. Um, we have a tendency to believe in stability because of a psychological mechanism called, uh, the confirmation bias. What is a confirmation bias? It is basically that we have a tendency to confirm the hypotheses we have about the world. Um, this is these days a big, big topic in social media, in the psychology of social media. People are in echo ch and so forth. And that is, um, that's because of the confirmation bias. Because they believe then, you know, they, they look for people that are exactly having the same opinions, right? They don't challenge their own opinions. And if this happens in sales, you may actually have, um, a real problem. Right? There may be potentially even be indicators on the other side that the other side potentially, um, changes their product line, that they change their, um, supply chain structure, so forth. And this may be, uh, a big problem for you, but if you look only for evidence that confirms that you're in good shape, then, um, you are falling prey to the stability illusion. And that is a. Ah, yeah, that's a dramatic human, very, very human tendency.

Speaker A: This is the end of part one. Thanks for tuning in and if you've enjoyed our conversation so far, we invite you to check out part two of this episode as well.