A price discount of 20% is economically equal to a volume increase of 25%. Chen et al. (2012) discovered that consumers err when calculating percentages and tend to ignore the base value the percentage refers to – an effect coined “base value neglect.”
The researchers observed that consumers systematically prefer a large percentage to a small percentage. This means consumers prefer a bonus pack to an economically identical price discount when both are expressed as percentages. Vice versa, consumers also prefer a size decrease to price increase when presented as a percentage.
In a field study, Chen et al. (2012) sold a hand lotion either at a 35% price discount or as bonus pack with 50% more content in a small retail store. After 16 weeks of promotion, the researchers observed that the bonus pack promotion sold 81% more units per day than the price discount promotion.
To manipulate the number of syllables of a given price Coulter, Choi, and Monroe (2012) introduced a comma into the same four-digit price and let it mention in a radio commercial as, for example, $1,645 (one thousand six hundred forty-five: 9 syllables) vs. $1645 (sixteen forty-five: 5 syllables). Then participants were asked to rate the magnitude of the price on a 10-point scale.
Participants rated the magnitude of the price with the comma higher than the same price without a comma.
Every day, companies or governments wrongly make highly simplistic assumptions about what people care about. Two major US retailers, JCPenney and Macy’s, both fell foul of this misunderstanding when they tried to reduce their reliance on couponing and sales, and instead simply reduced their permanent prices. In both cases, the strategy was a commercial disaster. People didn’t want low prices – they wanted concrete savings. One possible explanation for this is that we are psychologically rivalrous, and we like to feel we are getting a better deal than other people. If everyone can pay a low price, the thrill of having won out over other people disappears; a quantifiable saving makes on feel smart, while paying the same low prices as everyone else just makes us feel like cheapskates. Another possible explanation is that a low price, unlike a discount, does not allow people any scope to write a more cheerful narrative about a purchase after the event – ‘I saved £33’, rather than ‘I spent £45’.
In one study I told participants that a 250g box of PG Tips cost £2.29, while the same weight of Tesco own label tea cost £1. When questioned about the price, 31% of the respondents rated PG Tips as good value.
I then asked another group the same question but with one tweak. Rather than compare PG Tips to own label it was contrasted with Twining’s, priced at £3.49. In this scenario, the number who thought PG Tips represented good value jumped to 65%.
Brands can apply price relativity in two broad ways. First, don’t accept your comparison set as fixed. Do everything you can to change the field of reference shoppers have to one that is even more profitable to you.
I’ve just got one of those Nespresso machines, it’s fantastic. The really interesting thing about this Nespresso machine is that if I asked you to go out and buy those Twining’s super premium teabags which are £6.50 for 25 teabags you’d look at me as if I’m bonkers. For £6.50 you should get 100 teabags, 1,000 tea bags, you know? But actually it’s 25p for a cup of tea, it’s not bonkers, you pay a quid or two at Starbucks, but paying that for a teabag seems impossible. Wha’t clever about the espresso machine is that because it comes in individual pods, if you had to buy a jar of espresso coffee it would cost about 150 quid. You say to yourself: “I can’t, I simply cannot buy this thing, I cannot bring myself to pay 100 quid for a jar of Nescafe, it’s impossible”, but because the things come in individual pods, our frame of reference isn’t Nescafe, it’s Starbucks, where we actually pay a quid or two for a shot of coffee at Starbucks, so at 26p, well the machine’s paying for itself, right?
Excerpt from: Rory Sutherland: The Wiki Man by Rory Sutherland
Gilbert and colleagues measured the preferences, values, and personalities of more than nineteen thousand adults ages eighteen to sixty-eight. Some were asked to predict how much they would change over the next decade, others to reflect about how much they had changed in the previous one. Predictors expected that they would change very little in the next decade, while reflectors reported having changed a lot in the previous one. Qualities that feel immutable changes immensely. Core values — pleasure, security, success, and honesty — transformed. Preferences for vacations, music, hobbies, and even friend were transfigured. Hilariously, predictors were willing to pay an average of $129 a ticket for a show ten years away by their current favorite band, while reflectors would only pay $80 to see a show today by their favorite band from ten years ago.
The biggest thing to remember is that numbers that end in 0 inevitably feel like temporary placeholders, guesstimates that you can easily be negotiated off of. But anything you throw out that sounds less rounded — say, $37,263 — feels like a figure that you came to as a result of thoughtful calculation. Such numbers feel serious and permanent to your counterpart, so use them to fortify your offers.
Sailing across the Aegean Sea he was captured by Sicilian pirates.
They demanded a ransom: 20 talents of silver.
(That’s about 620kg worth about $600k.)
Caesar told them they were being ridiculous.
He couldn’t possibly allow himself to be ransomed so cheaply.
The pirates hesitated, the were confused.
Caesar insisted the ransom must be more than doubled to 50 talents of silver.
(Around 1550kg worth about $1.5 million.)
Now the pirated didn’t know what to make of this.
Normally their captives tried to escape as cheaply as possible.
They didn’t understand what was going on.
But if he said he would double the ransom, why argue?
They let Caesar’s men go back to Rome to raise the money.
And in Rome, in his absence, Caesar suddenly became very famous.
No one had ever been ransomed for such a vast sum before.
He must be very special, he must be very important/
That ransom demand put Julius Caesar on the political map.
He had just invented the Veblen effect.
With this in mind, in early 2000 the board of trustees of Ursinus College adopted a proposal designed to increase applications that at first might seem counterintuitive: The board raised tuition nearly 20 percent. The policy flew in the face of conventional economic theory, by which a drop in price is the surest way to increased demand. Unconventional or not, it worked: Applications soared. The strategy has been employed with equal success by a number of other colleges, including Bryn Mawr, Notre Dame, and Rice.
Although it is not what standard economic theory would recommend, it’s easy to see why raising tuition would increase the number of applicants. Parents want to send their kids to high-quality, prestigious schools. But academic quality and prestige are hard to assess, and so they use price as an indicator of quality. If it costs a lot, they tell themselves, it must be good.
There are countless ways to price a project.
Thinking about how long it will take and adding up the days is a start. But really it’s about the value of an idea, not the time spent. In a famous Victorian court case, John Ruskin taunted the artist James Abbott McNeill Whistler that a painting that had taken just two days to make was not ‘worth’ the fee of 200 guineas. The painter responded: “I ask it for the knowledge I have gained in the work of a lifetime.”
How much pleasure do you get from your car? Put it on a scale from 0 to 10. If you don’t own a car, then do the same for your house, your flat, your laptop, anything like that. Psychologists Norbert Schwarz, Daniel Kahneman and Jing Xu asked motorists this question and compared their responses with the monetary value of the vehicle. The result? The more luxurious the car, the more pleasure it gave the owner. A BMW 7 Series generates about fifty percent more pleasure than a Ford Escort. So far, so good: when somebody sinks a load f money in a vehicle, at least they felt a good return on their investment in the form of joy.
Now, let’s ask a slightly different question: how happy were you during your last car trip? The researchers posed the question too, and again compared the motorists’ answers with values of their cars. The result? No correlation. No matter how luxurious or how shabby the vehicle, the owners’ happiness ratings were all equally rock bottom.
But when Meghan Busse, Duncan Simester and Florian Zettelmayer, academics from MIT and the Kellogg School of Management, investigated they discovered a curious anomaly. In the previous weeks the car companies had been cutting prices so much that the employee discount was generally no better and occasionally more expensive, than existing deals.
The academics hypothesised that it was the price cue, not the price, which mattered. Consumers reacted to the plausibility of the deal rather than the actual discount. When consumers don’t trust brands they treat deals sceptically, but when they’re accompanied by a back story they have more heft.
When you are contemplating promotions don’t rely on an eye-watering discount. Numbers leave customers cold. We’re not natural statisticians – stories move us to action far better.
The same approach can be used to communicate initial product value. Steve Jobs used anchoring during the launch of the Apple iPad to such effect. At one of his fames launch presentations, he introduced the “rumoured cost” that was speculated to be $999. This information anchored the press to the notion this would be the high-priced product. However, when Jobs later in the event revealed the iPad to be priced at $499, this “anchoring and reveal” tactic created a notion of value for money.
Excerpt from: Northstar
Like it or not, price cutting is the crack cocaine of business. You’re both the junkie and the dealer. Liker any drug, the insanely addictive short-term high will momentarily camouflage the long-term effects of underselling your product. And you will all too quickly get hooked. Your price-cutting habit will rapidly spiral out of control. Cut costs, make it cheaper, cut costs, make it cheaper. You’ll be trying to save money on production. Reducing the quality of your product, cutting corners, until you’ll eventually be cutting your own business’s throat. And then the slow truth of this self-induced vicious cycle dawns: you can’t make it any cheaper. You’ve slashed it until you have no margin left. And you’ve dumbed down your mission to boot. Game over, dude, all because you became a discount hobo.
Want proof? Consider an experiment conducted several years ago by Drazen Prelec and Duncan Simester, marketing professors at the Massachusetts Institute of Technology in Cambridge, Massachusetts. The pair organized a real-life, sealed-bid auction for tickets to a Boston Celtics game (this was during the Larry Bird, Kevin McHale, Robert Parish era, so the tickets were especially valuable). Half the participants in the auction were informed that whoever won the bidding would have to pay for the tickets in cash (although they had a day to come up with the funds). The other half were told that the winning bidder would have to pay by credit card. Prelec and Simester then averaged the bids of those who thought they would have to pay in cash and those who thought they could pay with a credit card. Incredibly, the average credit card bid was roughly twice as large as the average cash bid.
Just setting the printer default to “draft” quality would save consumers hundreds of dollars a year. Yet few consumers do. Though many companies still sell cheaper ink refills, refills account for only 10 to 15 percent of the market. That means that 90 percent of printing is still done using ink that, according to the PC World analysis, costs $4,731 per gallon. You might as well fill your ink cartridges with 1985 vintage Krug champagne.
An especially common version of this phenomenon is what psychologists call denominator neglect. If you want people to be impressed by an amount, choose a large scale (“$365 a year”); if you want them not to be impressed, choose a small scale (“only a dollar a day”). The effects of strategically choosing the right scale (i.e., the right denominator) can be dramatic. In one study, respondents judged a disease that kills 1,200 out of every 10,000 afflicted individuals to be more dangerous than one that’s twice as lethal, killing 24 out of every 100.
Wine without a price tag doesn’t have this effect. In 2008, American food and wine critics teamed up with a statistician from Yale and a couple of Swedish economists to study the results of thousands of blind tastings of wines ranging from $1.65 to $150 a bottle. They found that when they can’t see the price tag, people prefer cheaper wine to pricier bottles. Experts’ tastes did move in the proper direction. they favored finer, more expensive wines. But the bias was almost imperceptible. A wine that cost ten times more than another was ranked by experts only seven points higher on a scale of one to one hundred.
This framing effect of brands is not marketing hype; it increases the perceived value and the willingness to pay a premium price — even for objectively identical products. The VW Sharan and the Ford Galaxy are identical cars – both produced in the same factories – but consumers have been willing to spend a premium of €2,000 for the frame that the VW brand added. In the UK, Virgin Mobile has higher perceived network quality and satisfaction scores than T-Mobile despite the fact that it uses the exact same network.
Excerpt from: Decoded: The Science Behind Why We Buy by Phil Barden
When we launched Haagen-Dazs in the UK in the early 90s we were in the middle of a recession. Not the best of times to be launching a luxury ice-cream brand. We positioned the brand as a sensual pleasure. We didn’t compare it to other ice creams, in fact we hardly mentioned the word ice cream. But at £3 a pot it was not only accessible, it was the most stylish pleasure you could purchase. The brand took off. Haagen-Dazs weren’t in the ice cream business, they were in the sensual pleasure business.
Sadly, over time, a succession of brand owners dragged it back to the ice cream sector. Now it’s just one of a number of ice creams fighting for attention in the supermarket freezer. Imagine where they could have taken that brand had they realized the potential of where we had positioned it – they didn’t realize we’d created a fashion brand.
I ran an experiment among my colleagues using King Cobra, a little known variant of Cobra lager. It’s a strong Indian beer, with an ABV of 7.5%, and it comes in a 750ml serving, the same size as a wine bottle.
A little subterfuge was required. I told my colleagues that we needed to run some tastings for a client. I organised two separate tastings of the beer alongside half a dozen other drinks. The participants rated the taste of the drinks on a scale from one to ten and said how much they’d be prepared to pay for each one in a supermarket.
The twist was that in each tasting Cobra was served alongside a different selection of drinks: in the first case bottled beers; in the second wines. The accompanying drinks had a significant effect on the amount people were prepared to pay for Cobra. When it was accompanied by bottled beers they offered £3.75, but when it was served with a selection of wines that rose, by 28%, to £4.80.
Christopher Hsee, George Loewenstein, Sally Blount and Max H. Bazerman once ran an experiment in which they asked people browsing used textbooks how much they would pay for a music dictionary that had 10,000 words and was in perfect condition. Another group was asked how much they would pay for a music dictionary with 20,000 words but a torn front cover. Neither group knew about the other dictionary. On average, the students were willing to pay $24 for the 10,000-word dictionary and $20 for the cover-torn 20,000-word one. The cover – irrelevant to looking up words – made a big difference.
The researchers then cornered another group and presented them with both options simultaneously. Now the students could compare the two options side by side. That changed their perception of the products. In this easy-to-compare group, the students said they would pay $19 for the 10,000-word dictionary and $27 for the 20,000-word one with the torn cover. Suddenly, with the introduction of a more clearly comparable aspect – number of words – the larger dictionary became more valuable, despite the torn cover.
What about new payment technologies?
Recently we have seen a flurry of new payment methods – the most widespread of which are contactless cards. Gabrielle Hobday and I investigated how contactless cards affected price sensitivity by posing three questions to people leaving coffee shops in Central London:
How much did you spend?
What means of payment did you use?
Please can we see your receipt?
The last question was crucial, as it let us compare recollection with reality.
The findings were striking. People paying with cash typically overestimated their spend by 9%, whereas those using contactless cards underestimated by 5%. A stretch of 14 percentage points. Credit card estimates were, in contrast, spot on.
The variation is important: on a typical supermarket shop of £25, the 14% difference between recollections of spend on a contactless card and cash amounts to £3.50. Contactless cards could be the difference between remembering a shopping trip as expensive or cheap. It is this memory that determines whether shoppers return. A positive recollection can either be achieved by steep discounting, which erodes profits, or by an innovative approach to payment.
In a coffee-bar in Sincelejo, northern Colombia, the following is displayed: ‘Bread with butter: 100 pesos. Bread with margarine: 80 pesos. Bread without butter: 60 pesos. Bread without margarine: 40 pesos.’
Bernardo Recaman, Bogota, Colombia.
Excerpt from: The Best Ever Notes and Queries by Joseph Harker