It’s all about the price tag
Popular Research Studies on Pricing
- Comparative pricing is not always optimal
- Sell time, not money
- The power of number 9
- The power of context
People’s perception of discounts
Here’s an excerpt from the Economist on people’s ability to do some mental maths!
“WHEN retailers want to entice customers to buy a particular product, they typically offer it at a discount. According to a new study to be published in the Journal of Marketing, they are missing a trick. A team of researchers, led by Akshay Rao of the University of Minnesota’s Carlson School of Management, looked at consumers’ attitudes to discounting. Shoppers, they found, much prefer getting something extra free to getting something cheaper. The main reason is that most people are useless at fractions. Consumers often struggle to realise, for example, that a 50% increase in quantity is the same as a 33% discount in price. They overwhelmingly assume the former is better value. In an experiment, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for).
This numerical blind spot remains even when the deal clearly favours the discounted product. In another experiment, this time on his undergraduates, Mr Rao offered two deals on loose coffee beans: 33% extra free or 33% off the price. The discount is by far the better proposition, but the supposedly clever students viewed them as equivalent. Studies have shown other ways in which retailers can exploit consumers’ innumeracy. One is to befuddle them with double discounting. People are more likely to see a bargain in a product that has been reduced by 20%, and then by an additional 25%, than one which has been subject to an equivalent, one-off, 40% reduction.”
The effect of Anchors
“When a consumer is presented with an offer, a key element in the decision to accept or reject it is whether it appears to be a “fair deal” or not. We know that buying pain – the activation of our brain’s pain center when paying for a purchase – increases when the price seems too high. But how does that value equation work? The answer is anchoring – typically, we store an anchor price for different products that we then use to judge relative value. That sounds simple enough… but it’s actually not. Some anchor prices are stickier than others, and at times totally unrelated factors can affect these anchor points. The better marketers can understand how anchoring works, the more creative and effective pricing strategies they will be able to develop.”
UPDATE: And if you thought..
And if you thought prices only changed infrequently, research from Amazon Marketplace will surely dispel that myth.
“The pricing wars were fought last month over a General Electric microwave oven. Sellers on Amazon.com Inc. changed its price nine times in one day, with the price fluctuating between $744.46 and $871.49, according to data compiled by consumer-price research firm Decide Inc. for The Wall Street Journal. Best Buy Inc. responded by lifting its online price on the oven to $899.99 from $809.99 after the Amazon prices rose, then lowering it again after Amazon prices for the oven dropped. The most frequent price adjustments are occurring among Web stores selling products on Amazon, which encourages ruthless competition between retailers vying for the top spot among search results. Sellers such as children’s clothing store Cookie’s use software to change prices every 15 minutes in order to stay on top of Amazon rankings.”
Taken from Wallstreet Journal, full article.