Category: Pricing

💎 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

💎 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 £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.

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