Sunday 23 March 2014

The Psychology of Price

The Psychology of Price - An episode of CBC's "Under the Influence" with Terry O'Reilly

A lot of thought has been put into how to capitalize on those that are in situations where they are prepared to spend money. If you are at a restaurant or in a shopping mall, you can bet that persuasive forces are acting upon your will, trying to take advantage of routine cognitive processes without you noticing.

The above article covers various examples. The most ubiquitous of these is the almost magical power of the number 9 on our willingness to consume. People perceive far more difference between $19.99 and $24.99 than they do between $20 and $25. They are also more likely to buy something priced $39 than $34. People have just been conditioned to associate the number 9 with a bargain. Now they are willing to spend more money for that 9 because it feels like spending less money.

When an item, especially an item that's difficult to value objectively such as an article of clothing, receives little attention from customers, one way to potentially boost interest is to double the price. People tend to attach more value to things that are expensive. When your item of clothing is more expensive than the other ones, it stands out as superior, the 'deluxe' option, so to speak.

Or, instead of doubling the price, you could just as easily claim that the item used to be far more expensive. An item that says "$19.99 - used to be $59.99" will sell much better than the same item with a price tag that just says "$19.99." Retailers often take items that don't sell and pretend as if they were on sale from much higher prices. This increases sales drastically. When JC Penney attempted a revolutionary marketing campaign that dumped this trick and refused to end prices with "99 cents," their stock dropped by 55%. They then had to release a commercial apologizing for their mistakes and asking customers to come back.

Anchoring is a familiar way to make sales more appealing. If people won't buy a basic item for $30, they might be more willing to buy it when the $30 option sits on the shelf beside a better, $60 version of the same item. Often these more expensive items are placed on the shelves simply to make the inferior option more desirable.

Menus are also carefully designed to optimize profit. Menu designers assume that the first place people look when they open a menu is the top right corner. The restaurant's most expensive dish should sit in that spot as an anchor that makes everything else seem cheap. Near this option will be the restaurant's most profitable dishes, the ones they really want you to buy. The least profitable dishes are usually located at the bottom of a menu, often in smaller type. Fun fact: diners are willing to spend more when dollar signs are not listed next to prices.

Associations are also very important in determining how much to value products. Wine poured into a wine glass will be compared to wine prices but wine poured into a champagne glass will be compared to champagne prices. Wine poured into a whiskey glass will be compared to whiskey prices - even though whiskey costs eleven times the price of wine.

Wine, like clothing, is an item that most people do not know how to value. Some clothing and some wine is far more expensive than other items that appear almost identical to the average consumer. These are the sorts of products for which consumers can really be influenced by anchors and associations. Most people, including top wine experts, cannot distinguish between cheap and expensive wines when the labels are removed. In an experiment where participants tasted $5 and $90 wine, subjects unanimously preferred the $90 wine, even when they were lied to by the experimenters and were actually drinking the $5 wine. Similarly, people told that they were taking more expensive pain-relieving drugs (whether they were taking the expensive ones or not), claimed to have received quicker-acting and longer-lasting pain relief. To be clear, these participants weren't lying about what they preferred because they wanted to be the type of people that prefer expensive wine - MRIs actually scanned more activity in the pleasure regions of the brain during drinking.

Another common pricing technique is bundling. In bundling, multiple products and/or services are bundled together under a single price. This makes it very difficult to compare packages with those offered by alternative companies. Cell phone service providers are notorious bundlers. If everyone offered the same package, it would be very simple to identify the company offering the cheapest deal.

Pricing is a huge driver of consumer decision-making. In some cases, it is perhaps even more influential than the item itself. When you're in an environment where you're expected to spend money, keep an eye out for the traps in place to influence you. Most of them aren't working in your favour.

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