Category: Pricing

💎 Why supermarkets change prices: it’s a way of ascertain who is price sensitive

One common situation is for two supermarkets to be competing for the same customers. As we’ve discussed, it’s hard for be systematically more expensive than the others without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices. That way, both can distinguish the bargain hunters from those in need of specific products, like people shopping to pick up ingredients for a cook-book recipe they are making for a dinner party. Bargain-hunters will pick up whatever is on sale and make something of it. The dinner-party shoppers come to the supermarket to buy specific products and will be less sensitive to prices. The price-targeting strategy only works because the supermarkets always vary the patterns of their special offers, and because it is too much trouble to go to both stores or to order two separate internet deliveries, carefully comparing the price of each good every time we go online. If shoppers could predict what was to be discounted, they could choose recipes ahead of time, and even choose the appropriate supermarket to pick up the ingredients wherever they’re least expensive.

Excerpt from: The Undercover Economist by Tim Harford

💎 Interesting reframing of how much Spotify pay musicians

If we take the UK’s most listened-to radio show- BBC Radio 2’s Breakfast Show – then the songwriter can expect the Performing Right Society for Music expect Phonographic Performance Limited (PPL) to collect roughly £60. Stare at a royalty statement which lists £150 for a spin alongside £0.005 for a stream and you can understand the fear of letting go of the old wine.

But the economics don’t support that fear. A ‘spin’ on BBC Radio 2’s Breakfast Show will reach 8 million people; you need therefore to divide the £150 by the 8 million pairs of ears to get a comparative unit value per listener, and this results in £0.00002 – which is less than half a percent of the £ 0.005 that you would get from one unique person on a streaming service. What’s more, this is not an either/or comparison as those who listen to it on the radio may be more inclined to stream it on Spotify. To bring this calculation full circle, had those 8 million listeners streamed the song on Spotify (which is not beyond the realms of possibility), a cheque of £40,000 would be paid across to the artist and songwriter – not £150.  ‘Not too shabby’ as some Americans like to say.

Excerpt from: Tarzan Economics: Eight Principles for Pivoting through Disruption by Will Page

💎 The power of reframing costs in a B2B context

In the same way, in the early stages of a food delivery brand (now worth over £1bn), the proposal was to pay the restaurant directly for each meal it supplied and then to invoice them monthly for the commission on the month’s past sales. A marketing thinker pointed out that this was a mistake. “We should keep the money from each meal sold, deduct commission, and then send them a payment every month”. He or she understood that, if the restaurant saw the new business as a source of incremental revenue they would value it; if they saw it primarily as a cost, they would look for ways to avoid it. Again, in economic terms, there is no difference between the first proposal and the second, but the psychological effect on the business will be dramatically different.

Excerpt from: The Objectivity Trap by Rory Sutherland

💎 On how anchors influence us (even when they bear no relationship to the estimated value)

Surprisingly, anchors influence us even when they bear no relationship to the estimated value, and even when they’re patently absurd. Following the seminal experiments of Kahneman and Tversky in the 1970s, two German researchers named Thomas Mussweiler and Fritz Strack demonstrated this effect with remarkable creativity. In one of their experiments, they divided their subjects into two groups, asking one group whether Mahatma Gandhi was over or under 140 years old when he died, and the other whether he was over or under 9 years old when he died. Obviously, no one had trouble answering these questions. But when the respondents were then asked to estimate Gandhi’s age at death, these clearly ridiculous “anchors” made a difference: the group anchored on 140 thought, on average, that Gandhi had died at age 67, whereas the group anchored on 9 believed he had died at age 50. (Actually, Gandhi died at age 78.)

Excerpt from: You’re About to Make a Terrible Mistake!: How Biases Distort Decision-Making and What You Can Do to Fight Them by Olivier Sibony

💎 The anchoring effect is influential (even when the anchors are ridiculous)

They asked people two versions of the Gandhi questions. One version is what I’ve repeated here. The other began by asking people whether Gandhi was older or younger than 140 when he died, which was followed by the same direction to guess Gandhi’s age when he died. Strack and Mussweiler found that when the first question mentioned the number nine, the average guess on the following question was 50. In the second version, the average guess was 67. So those who heard the lower number before guessing guessed lower. Those who heard the higher number, guessed higher.

Excerpt from: Risk: The Science and Politics of Fear by Dan Gardner

💎 The 18th century advertising gimmicks behind the promotion of the potato (it’s all about appearances)

The demographic threat they thus posed. Here at last, late in the story, we get a glimpse of an individual as potato innovator, at least according to legend. Antoine-Augustin Parmentier was an apothecary working with the French army who rather carelessly managed to get himself captured no fewer than five times by the Prussians during the Seven Years War. They fed him on nothing but potatoes, and he was surprised to see himself growing plump and healthy on the diet. On his return to France in 1763 he devoted himself to proselytizing the benefits of the potato as the solution to France’s repeated famines. With grain prices high after poor harvests, he was pushing at an open door.

Parmentier was a bit of a showman and he devised a series of publicity stunts to get his message across. Hegot the attention of the queen, Marie Antoinette, and persuaded her to wear potato flowers in her hair, supposedly after a contrived encounter in the gardens of Versailles. He planted a field of potatoes on the outskirts of Paris and posted guards to protect it, knowing that the presence of the guards would itself advertise the value of the crop, and attract hungry thieves at night, when the guards were mysteriously absent. He gave dinners of potato cuisine to people of influence, including Benjamin Franklin. But he was also scientific in his approach. His ‘Examen chimique des pommes de terre’, published in 1773 (a year after the parliament had repealed the ban on potatoes), praised the nutrient contents of potatoes.

Excerpt from: How Innovation Works by Matt Ridley

💎 Pricing two items equally makes choosing harder (and could result in fewer sales)

Kim, Novemsky, and Dhar (2013) ran this gum experiment in South Korea. Participants were given W1,000 (about $1) and asked which gum they would like to buy. Participants could also choose to keep the money and not buy any gum. When both gums were priced at W630 only 46% of participants decided to buy one of both options, but when the price was slightly different (W620 vs. W640) this proportion increased to 77%.

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

💎 It’s well proven that price affects quality perceptions (but its effect is weighted on a number of factors)

Völckner and Hofmann (2007) analyzed 71 studies from 23 publications spanning from 1989 to 2006. The researchers distilled following findings:

  • The impact of price on quality perception is significant but has decreased since reported in the late 1980s (Rao and Monroe 1989).
  • Price-quality inference is stronger for higher-priced products.
  • Price-quality inferences decrease with increasing familiarity with the product.
  • Price-quality inference is stronger for fast-moving consumer goods than for services or durable goods.
  • Price-quality inference is stronger in European countries than in North American countries.

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

💎 Consumers are far more likely to splurge windfall money than expected (gamblers beware)

Payday is not the only moment when customers spend more. Any time consumers receive a windfall, like birthdays or bonuses, they will increase their spending. Three Ohio University psychologists, Hal Arkes, Cynthia Joyner and Mark Prezzo, ran an experiment in 1994 exploring this phenomenon. When they recruited students for the experiment half were told a week before that they would be paid $3, while the rest expected to be given course credits. However, when the participants arrived at the experiment they were all given the same $3-dollar incentive.

The participants were given the chance to gamble with their cash on a simple dice game. Those who had been given cash in the windfall condition gambled on average $2.16 while those who had been fully expecting the money only frittered away $1.

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

💎 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 “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.

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

💎 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

💎 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 £33’, rather than ‘I spent £45’.

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

💎 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 £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.

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

💎 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 £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

💎 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

💎 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

💎 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

💎 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

💎 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

💎 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

💎 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

💎 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. Like 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

💎 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

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

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.

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

💎 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

💎 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 — 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

💎 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 £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

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

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