Downward Counterfactual – In Pricing

If we had not reduced our prices our customers would have switched to our competitors.

Or more generally, ” If we had not taken action X, it would have been much worse.”

Counterfactual thinking is more common than you think, in business and everyday scenarios. We always want to look on the bright side, to talk about how worse things would have been. A variation of this more prevalent in business situations but goes unnoticed, it is the equivalent of drawing the target after shooting the arrow.  It usually occurs in post-game analysis, when you find many new benefits that were shown because of the action taken and would not have occurred if not for the action. For example,

“Our price reduction enabled better relations with our channel partners” or

“Our price reduction enabled us find bugs in our coupon redemption software”

The new benefits may be real or perceived  but helps the proponent to not only see things on the bright side but also claim victory. But most of the time it is about deflecting criticism of poor or bad results in the rest of the areas. In this example of price reduction, the lost profit and the absence of promised increase in sales. The proponents shift the discussion to these new benefits stating as if it had always been the plan.

How do you, as marketer, protect yourself from falling into the trap? By clearly stating the goals  and metrics before you take any action and post action by focusing  the analysis on the performance on these goals. It is not to say all the new benefits are worthless, improved channel partner relations are important to a marketer. But the question to ask is

“Would you have done the price reduction when the only stated goal is to improve channel partner relations? Were these enough to justify the investment?”

Would you have invested in  project X if the only stated return is all the secondary and tertiary benefits that you are finding after the fact? Would you even be looking for these new benefits if you had met or exceeded performance on stated goals?

If the answer is no to any or all these question, then you are coming up with  downward counterfactual arguments.

Before you reduce prices, understand the reasons you are doing it and after the price reduction be aware of counterfactual  explanations.