Crafting a pricing strategy is vital for any business's success, especially for startups that often go head-to-head with giant corporations. A deep understanding of consumer behaviour is essential to nail down the perfect price point for your product. Yet, many businesses get caught in the 'relativity trap,' a cognitive bias that can significantly sway consumer decisions.

The relativity trap occurs when consumers make decisions based on the comparative value of products rather than their intrinsic worth. The Pen & Suit experiment brings this concept to life.

Picture two stores: Store A sells pens for $16 and suits for $500. Store B offers the same pens for $1 and suits for $485. Despite the negligible difference in overall savings, consumers tend to buy pens from Store B and suits from Store A, showing how perceived savings can skew purchasing choices.

Consider the common scenario in retail discounting: You're looking to buy jeans within a budget of INR 2500 but come across a pair initially priced at INR 6000, slashed by 50% to INR 3000. The temptation of the 'deal' often leads shoppers to stretch their budget, influenced more by the perceived saving than the actual price. The likelihood of you spending 20% more than planned is high, all because of the allure of a 50% discount.

For startups, squaring off against the pricing of established brands is a battle with slim odds due to the resource disparity. This is where smart differentiation becomes your ally. However, tread carefully: being too similar to established brands is a strategic misstep, but being overly different is risky too. The sweet spot of differentiation is where your product aligns with consumer expectations yet stands out just enough to pique interest.

Behavioural economics, the field that fuses psychology with economic principles, reveals that consumers struggle with comparing dissimilar product categories. Startups can capitalize on this by offering innovative products that disrupt the market. By showcasing the superior value of your product or service compared to the old guard, you can flip the script and set relativity traps for your competitors.

In summary, by understanding the relativity trap and employing thoughtful differentiation, startups can devise a pricing strategy that delivers real value and positions them as an attractive alternative to the big players. The goal is to strike a delicate balance between competitive pricing and unique value, leveraging consumer biases to your strategic advantage.