Pricing Theories Simplified

Con­sider this…you just lost your job, your part­ner ran off with the neigh­bor, your house was just fore­closed pretty bad huh? What would your reac­tion be other than find­ing the near­est bridge to jump of or the near­est bar to get plas­tered? Well, as hard as it may be to under­stand most folks would hit the local mall and “treat” them­selves by spend­ing a few hun­dred bucks on some­thing to take their mind off the pain. You may won­der like I have for years why we do this espe­cially when doing so is obvi­ously against our best inter­est as I have been rant­ing about the last few weeks.

The Emo­tional Buyer

The answer can be boiled down to one basic principle…Buying is Emo­tional! What? you say mum­bling that you are always ratio­nal when you buy stuff. Well con­sider this then…while the dif­fer­ence between 99 and 100 when expressed as mere num­bers is barely noticed but when expressed in mon­e­tary form the dif­fer­ence between $9.99 $10.00 is seen a much larger dif­fer­ence so much so when we only see the $9.99 and we begin sali­vate and won­der where our drool cup is.

Or, con­sider this…when decid­ing between two online pur­chases both rel­a­tively sim­i­lar but one offers free ship­ping while the other doesn’t we imme­di­ately go crazy with joy and pick the one with free ship­ping. Oh! We do so auto­mat­i­cally with­out actu­ally con­sid­er­ing qual­ity dif­fer­ences or the fact the ship­ping price we are “sav­ing” is well under $5.00.

You get the drift…buying is emo­tional, our brains have been wired for cen­turies to react to cer­tain sit­u­a­tions based on our expec­ta­tions, per­cep­tions and many other behav­ioral traits that often lead us to buy things we won­der later what we were thinking.

It is this emo­tional trig­ger that adver­tis­ers have played on for decades. But wait it doesn’t have to be that way and in fact things are chang­ing dras­ti­cally. By know­ing the psy­cho­log­i­cal and behav­ioral ten­den­cies of buy­ers we can develop our own pric­ing strate­gies that help buy­ers see the value in our stuff and not the price. So with that in mind let’s look at some of the the­o­ries some old most new that have been tested and found valid recently by Behav­ioral Scientists.

The value of Zero

Take a look at a few price tags how many do you see either con­tain­ing lots of zeros or end­ing in zeros? Not many I’ll bet. What gives with this? Well there are gen­er­ally two con­flict­ing the­o­ries about whether or not to use zeroes.

Zero makes peo­ple keep walk­ing because they inter­pret the zero to mean high price (the same behav­ior that makes blind to the penny dif­fer­ence above). Some pric­ing the­o­rists main­tain that using zero not only com­mu­ni­cates higher price but also higher value. And that the higher the value (per­ceived by buy­ers) the more a seller should con­sider pric­ing with zeros. So, instead pric­ing that dress at $155.95 and barely break­ing even with a sale at that price you should con­sider the buyer the dress is aimed at and price it between $180.00 and $200.00. Doing so will nat­u­rally draw buy­ers who not only could afford it but also more likely to appre­ci­ate its value and not nec­es­sar­ily be  attracted by price.

Not using zero also has two rel­a­tive oppos­ing the­o­ries. The first reflects the dis­count blind­ness dis­cussed above ($9.99 vs $10.00). The sec­ond, is a lit­tle quirky. It basi­cally says that not using zero can be inter­preted by buy­ers that you are care­ful about your pric­ing and there­fore your prices match the value of your stuff.

What to do…

Whether and which of these the­o­ries you use should be based entirely on your mar­ket posi­tion and buyer pro­file. If your mar­ket posi­tion is sell­ing high end jew­elry to highly rich folks then you might want to con­sider using zeros as a foun­da­tion for your pricing.

Like wise if your posi­tion is to sell your stuff at mid-level price points to mod­er­ate income buy­ers then you might want to try not using zeros.

Don’t think this is an either or type thing, you can also have a range of price points in you inven­tory, just know that not using zeros is likely to encour­age buy­ing of low to mid range stuff while using zeros will encour­age buy­ing of high end stuff.

The Placebo Effect

We’ve all heard of patients being given meds to take care of cer­tain ill­nesses and how said ill­ness was mirac­u­lously done away with soon after the meds were taken only to find out that the mir­a­cle drug was sim­ply sugar or vit­a­min C. Behav­ioral sci­en­tists have taken these exper­i­ments fur­ther to other areas of our lives to show how we can eas­ily con­vince our­selves of the  true­ness of our choices. What’s this all about?

The truth is that place­bos work because of the power of sug­ges­tion specif­i­cally related to price and value. Recent exper­i­ments by MIT test­ing this phe­nom­e­non has shown that    a pain reliever “prod­uct” (veladone, a vit­a­min C cap­sule) priced at $2.50 a dose “relieved” the pain of small elec­tri­cal shocks sim­ply because of its price and the per­ceived effec­tive­ness related to price.

Fur­ther exper­i­ments by Dan Ariely author of Pre­dictably Irra­tional and his team where “Veladone” was priced at $2.50 and ten cents for two dif­fer­ent groups showed that for the group receiv­ing the higher priced med all reported sig­nif­i­cant reduc­tion in pain, while only half of those receiv­ing the  ten cent ver­sion expe­ri­enced pain relief. Addi­tion­ally, the “pain reduc­tion” was more “effec­tive” for those who had recently expe­ri­enced pain and were using pain meds.

Mov­ing away from Meds the same group at MIT tested the effect using other prod­ucts. A series of exper­i­ments using SoBe Adren­a­line Rush which promises to “improve func­tion­al­ity and ele­vate your game” was  used. The effect of price was tested on groups of stu­dents,  half were given SoBe at full price and half at a very dis­counted price. They were then test using a series of ana­grams to deter­mine if expe­ri­enced the “energy for your mind” effect touted by SoBe. The results…the stu­dents drink­ing the full price bev­er­age scored the same as those who didn’t drink it. The stu­dents who drank the lower priced option only half as good as those who drank the full price ver­sion. Fur­ther tests showed that by tested some hyped infor­ma­tion about the drink cited by “50 sci­en­tific stud­ies” showed that those who scored lower with­out the hype improved their score by .06 (cal­cu­lated by the amount of addi­tional ques­tions answered).Similarly, the full price group increased by improved by 3.3 addi­tional questions.

Two things are respon­si­ble for caus­ing the results above:

• Belief based on our con­fi­dence in the product’s abil­ity to ful­fill our expec­ta­tions and our needs. Both the price and hype trig­ger irra­tional responses in us that cause us to believe some­thing is true when it is not, based often on very lit­tle experience.
• Con­di­tion­ing on the other hand was reflected in the SoBe exper­i­ments. After being exposed to a mes­sage or out­come for a cer­tain amount of time our brain secretes chem­i­cals that stim­u­late neuro-transmitters that antic­i­pate an out­come and cause our reac­tion to be automatic.

The Placebo effect causes us to auto­mat­i­cally assume dis­counted prod­ucts have lesser value and effec­tive­ness than full priced sim­i­lar items.

What to do…

The prob­lem here is not to assume we are all doomed but rather to do a cou­ple of things:

• When we buy we should slow down or even stop when faced with dis­counted pric­ing espe­cially for things impor­tant to us.
• Con­sider the prod­uct and what it does for use in the con­text of our val­ues for exam­ple is the out­come from prod­uct x con­sis­tent with its price. Or is it no dif­fer­ent than it’s lower priced version.

From our point of view as sell­ers we need to know how dif­fer­ent pric­ing mech­a­nism work and how they fit in with our image as a brand and the val­ues of our buy­ers. Sure a high price com­mu­ni­cates higher value all over the place but in the con­text of a given mar­ket the high­ness of the price will be rel­a­tive to that market’s abil­ity to absorb it. So if you are try­ing to sell high end art at a largely Craft ori­ented art fair you may not be all that successful.

Both of these approaches can help us in how we dis­play our work. An unor­ga­nized dis­play that doesn’t help us stand­out AND attract buy­ers will nat­u­rally tend to draw bar­gain hunters. On the other hand, a dis­play that enhances our work, by sup­port­ing its value will tend to attract buy­ers more will­ing to buy. Why? Because we have used both belief and con­di­tion­ing to attract buy­ers. Now. the dis­or­ga­nized dis­play may be attract­ing the right buy­ers unless you the artist have posi­tioned your­self to sell to bar­gain hunters. Like­wise, the dis­play that is based on pro­ject­ing the value of the work is using the belief  and con­di­tion­ing that work dis­played well is likely to be worth the price.

Finally, if we want our buy­ers to see the value of our stuff we need to lean more towards pric­ing that rein­forces that per­cep­tion and the two the­o­ries dis­cussed above are tools that can help us.