πŸ’Ž Consumers systematically prefer a large percentage to a small percentage (bonus pack vs. price discount)

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 β€œbase 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.

Excerpt from: The Psychology of Price: How to use price to increase demand, profit and customer satisfaction by Leigh Caldwell

πŸ’Ž If you provide a price or quote best to leave out the comma (it makes the number look smaller)

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.

Excerpt from: The Psychology of Price: How to use price to increase demand, profit and customer satisfaction by Leigh Caldwell

πŸ’Ž On the dangers of everyday low pricing (as JCPenney and Macy’s found)

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 Β£33’, rather than ‘I spent Β£45’.

Excerpt from: Alchemy: The Surprising Power of Ideas That Don’t Make Sense by Rory Sutherland

πŸ’Ž On how shifting a brand’s comparison set can radically change willingness to pay (Tesco, PG Tips and Twining’s)

In one study I told participants that a 250g box of PG Tips cost Β£2.29, while the same weight of Tesco own label tea cost Β£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 Β£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.

Excerpt from: The Choice Factory: 25 behavioural biases that influence what we buy by Richard Shotton

πŸ’Ž On how Nespresso increased willingness to pay by changing their comparison set (“the machine’s paying for itself”)

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 Β£6.50 for 25 teabags you’d look at me as if I’m bonkers. For Β£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

πŸ’Ž On how we accept that our personality has changed but we underestimate how much it will change

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.

Excerpt from: Range: How Generalists Triumph in a Specialized World by David Epstein

πŸ’Ž The power of precise numbers ($37,263)

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.

Excerpt from: Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss and Tahl Raz

πŸ’Ž On the psychology of price (the Veblen effect)

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.

Excerpt from: Creative Blindness (And How To Cure It): Real-life stories of remarkable creative vision by Dave Trott

πŸ’Ž On avoiding pricing that’s based on time spent (it’s about the value of an idea)

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.”

Excerpt from: Now Try Something Weirder: How to keep having great ideas and survive in the creative business by Michael Johnson

πŸ’Ž On how higher prices increase joy but not happiness (think about your car)

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.

Excerpt from: The Art of the Good Life: Clear Thinking for Business and a Better Life by Rolf Dobelli

πŸ’Ž On the importance of providing a backstory to price cuts (plausibility of the deal)

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.

Excerpt from: The Choice Factory: 25 behavioural biases that influence what we buy by Richard Shotton

πŸ’Ž On anchoring in practice (at Apple)

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

πŸ’Ž On price cutting being the crack cocaine of business (you will all too quickly get hooked)

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.

Excerpt from: Business for Punks: Break All the Rules – the BrewDog Way by James Watt

πŸ’Ž On consumers become less price sensitive when spending with credit card (we treat physical and digital differently)

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.

Excerpt from: Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioural Economics by Gary Belsky and Thomas Gilovich

πŸ’Ž On consumers being price sensitive in some areas but price blind in others (printer ink versus champagne)

Just setting the printer default to β€œdraft” 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.

Excerpt from: The Price of Everything: The True Cost of Living by Eduardo Porter

πŸ’Ž On the power of a price tag (they are used as an incorrect indicator of quality)

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.

Excerpt from: The Price of Everything: The True Cost of Living by Eduardo Porter

πŸ’Ž On the financial value of the framing effect of brands

This framing effect of brands is not marketing hype; it increases the perceived value and the willingness to pay a premium price β€” 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

πŸ’Ž On breaking comparisons with your competition to charge an eye-watering premium (launching Haagen-Dazs)

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 Β£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.

Excerpt from: Hegarty on Advertising: Turning Intelligence into Magic by John Hegarty

πŸ’Ž On how much we’re prepared to pay for a product being partly determined by what we compare it to (beer versus wine)

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 Β£3.75, but when it was served with a selection of wines that rose, by 28%, to Β£4.80.

Excerpt from: The Choice Factory: 25 behavioural biases that influence what we buy by Richard Shotton

πŸ’Ž On how much we value a product partly depending on what we compare it to (choose your comparisons carefully)

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.

Excerpt from: Small Change: Money Mishaps and How to Avoid Them by Dan Ariely and Jeff Kreisler

πŸ’Ž On how contactless payments reduce price sensitivity (beware overspend)

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 Β£25, the 14% difference between recollections of spend on a contactless card and cash amounts to Β£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.

Excerpt from: The Choice Factory: 25 behavioural biases that influence what we buy by Richard Shotton