Pricing

Math Anxiety and Suboptimal Decision Making

By Christine Carragee
June 24, 2013

A friend of mine posted this informational nugget from the HBR blog on Facebook last week:

“People who suffer from math anxiety prefer easier-to-process dollar discounts (“$10 off the regular price of $50”) over percentage discounts (“20% off”) and sometimes make suboptimal decisions because of that preference.” http://blogs.hbr.org/daily-stat/2013/06/math-anxiety-affects-consumer.html

trading discounts

I’ve been in department stores that have conversion tables over the sales racks which calculate out net prices based on discount tiers to save consumers this burden. When you buy a house, there are a host of forms designed by the consumer protection agency to ensure that you know all the nickel and dime charges that contribute to closing costs. There are no shortage of examples of online calculators to help you determine whether to lease or buy a car and tools to simplify other complex consumer decisions, but how do we help our businesses make these calls?

Whether due to math phobias, or a cognitively miserly nature, suboptimal decision making is a pervasive issue not just for retail consumers, but also in the B2B space. With all the various discount levers a sales person can trade-off or layer into a deal negotiation, it can be hard to keep track of the net impact to deal or product level profitability. Very quickly, a volume tier discount schedule, combined with variable payment terms and a waived shipping fee can leave the realm of mental math for most people.

math phobia

Before its too late

It is important to help sales, marketing and finance all come together to anticipate the profitability of a tailored negotiation before deals are signed. “Deal Negotiator” is a product feature in Vendavo which helps to frame these conversations, quantifying leakage in the deal or product level waterfall of each negotiable adjustment. Using slider bars or keying in alternative rates, sales can ramp up or down discounts and swap out terms and see proposals side-by-side. One of the benefits of having a formal tool to do this type of evaluation is that you can then capture the results (your expectations) before the sale occurs.

Ex Post Analysis

An added complexity in B2B sales centers on purchase commitments and uncertainty for the future which is less of a factor in most consumer decisions.  For this reason, its important to do analysis not just before agreements are signed, but also after the fact to see if customer behavior fell within an expected range, was compliant with contract terms and if cost expectations were in line with projections.  The results of the analysis should be fed back into the model to continually improve forecasting abilities.

Question for you

What tool is your organization currently using to reduce Math Anxiety and to optimize decision making during negotiations?

For more information on “Deal Negotiator” see the course “Negotiating a Price Agreement” in the Application Library area of Vendavo University.

The original Math Anxiety research, published in Journal of the Academy of Marketing Science

May 2013, Volume 41, Issue 3, pp 271-282 can be found here:

http://link.springer.com/article/10.1007%2Fs11747-012-0313-6#page-1

– Christine Carragee

    Christine Carragee

    Christine has a diverse background in pricing analysis and implementation across industries. As a pricing practitioner, she has worked in both B2B and B2C environments and collaborated across functional areas to improve margin performance. Applying her passion for data analysis, Christine has helped Vendavo customers to anticipate their data and reporting needs during requirements gathering in anticipation of the on-going the value realization process. Another component of her work has focused on corporate education and training; ensuring strong project ROI through user adoption and increased pricing understanding.