Phew, we’ve had a couple of months on pricing, and now this is the last of those posts.
Since researching how you can influence pricing, new research has come to hand, so I’ll summarize it here.
You can influence customers to choose a more expensive option if you sort products by descending price (i.e., from high to low).
Suk, Lee, and Lichtenstein (2012) tested that claim in a bar. Over an 8-week span (and 1,195 beers), the researchers alternated the sequence of beer prices. And they were able to maximize revenue when they sorted beer prices from high to low.
Thanks to a simple change in sequencing, the bar owners now make an extra $0.24 (on average) for every beer sold.
But why does that happen? The researchers proposed two reasons.
Reason 1: Anchoring / Reference Prices
When consumers evaluate a list of products, they use the initial prices to generate their reference price.
If the initial prices are high, consumers will generate a higher reference price. When consumers use that reference price to evaluate the options later in the list, the new options will seem like a better deal (because those prices will be lower than the inflated reference price).
In addition, that higher reference price becomes a numerical anchor that pulls the eventual choice upward.
Reason 2: Loss Aversion
As humans, we focus on losses. Whenever we choose an option, we lose benefits from the options that we didn’t choose. And that hurts.
Depending on your pricing order (i.e., low to high vs. high to low), customers perceive different losses when they scan down the list of products.
When you sort products by ascending price (i.e., low to high), customers view each new product as a loss in price. With each new option, they’re gradually losing the ability to pay a lower price. Thus, they feel motivated to minimize that loss by choosing a lower priced product.
But here’s the flipside. When you sort products by descending price (i.e., high to low), customers view each new product as a loss in quality. Thus, they feel motivated to retain a higher quality (thus more expensive) product.
But here’s a caveat: those customers need to associate price with quality. Without that association, this effect diminishes.
Suk, Lee, and Lichtenstein (2012) also conducted some follow up studies (including a lab study with pens), and they found similar results. So the findings should generalize to other contexts (e.g., ecommerce products).
For example, based on results from numerous A/B tests, you might be able to increase revenue by arranging subscription or SaaS products from most expensive to least expensive.
This tactic is pretty neat. King and Janiszewski (2011) showed participants the following pizza advertisements:
The first two advertisements offered unlimited toppings — an economically better deal than the other two ads. However, people evaluated the other two ads more favorably.
Why did that happen? Because those ads incorporated multiples of the price:
At first glance, it seems absurd. Rest assured, there is a psychological reason behind that effect.
In our brain’s associative network, we store common arithmetical operations:
“Over time, children are drilled on simple problems so that an association develops between operands (e.g., 2 x 6) and results (e.g., 12). These stored associations are called “number facts” (Baroody 1985). Stored number facts enable a child, and later an adult, to respond effortlessly to simple arithmetic problems.” (King & Janiszewski 2011, pp. 328)
Because of those associations, exposure to two numbers (e.g., 2 and 6) increases processing fluency for the sum (e.g., 8) and product (e.g., 12).
When the pizza ads contained multiples of $24 (e.g., 3 and 8), participants could process the price of $24 more easily. The price simply felt right. They misattributed that ease and pleasantness with the attractiveness of the offer.
Use that insight for your own product. Wherever you display your price, incorporate multiples of that price:
One final caveat: include two — and only two — multiples. If your price is $12, a wide assortment of multiples (e.g., 2, 3, 4, and 6) will reduce fluency. To increase fluency of $12, use two multiples that result in the sum (e.g., 6 + 6) or product (e.g., 4 x 3).
Soster, Gershoff, and Bearden (2014) found evidence for a bottom dollar effect.
Bottom Dollar Effect – We feel the pain of paying in accordance with the depletion of our budget. We feel more pain when we have fewer funds available in our budget.
Suppose you have a monthly budget of $300. If you spend $10 on a movie ticket, you will generally feel more pain toward the end of the month — when your budget is nearing depletion.
The researchers conducted multiple studies and found that this effect influences willingness to pay and purchase satisfaction (Soster, Gershoff, & Bearden, 2014). You’re more likely to buy a product (and be satisfied with it) when you have more money left in your budget.
Consider that insight when planning the timing of promotions. Specifically, you could offer free trials toward the beginning of the month — when monthly budgets are higher:
“…if a marketer’s goal is to attract new customers or generate word of mouth, initial satisfaction with trial is important. So, promotions of these types might be better timed at the beginning of the month, or immediately after consumers receive tax refunds, in order to ensure that budgets are not approaching exhaustion at the time of purchase.” (Soster, Gershoff, & Bearden, 2014, pp. 672-673)
And that leads to the next tactic…
Likewise, discounts and price promotions will be more effective toward the end of the month — when budgets are nearing exhaustion.
However, the previous two tactics assume that your customers are using monthly budgets. The researchers explain that you should always consider your target customers (and the types of budgets that they follow):
“…consumers may construct their mental budgets differently on the basis of individual circumstances (e.g., college administrators may budget for the academic year, assistant professors may budget for the semester, college students may budget for the week).” (Soster, Gershoff, & Bearden, 2014, pp. 673)
How do your customers budget their expenses? Plan your promotions accordingly.
This tactic might sound bizarre. But a surprising amount of research supports it.
Coulter and Grewal (2014) found that customers prefer prices that contain the same letters in their name or birthday:
“…consumers like prices (e.g., “fifty-five dollars”) that contain digits beginning with the same first letter (e.g., “F”) as their own name (e.g., “Fred,” “Mr. Frank”) more than prices that do not. Similarly, prices that contain cents digits (e.g., $49.15) that correspond to a consumer’s date of birth (e.g., April 15) also enhance pricing liking and purchase intentions.” (pp. 102)
The underlying principle involves implicit egotism (Pelham, Carvallo, & Jones, 2005). We all possess an innate sense of self-centeredness. We subconsciously gravitate toward things that resemble ourselves — including the letters in our name or the numbers in our birthday.
Some researchers suggest that we make important life decisions based on that principle. For example, people named Dennis are more likely to become dentists, and people named Louis are more likely to live in St. Louis (Pelham, Mirenberg, & Jones, 2002).
If you need to give someone a custom price quote, it might not hurt to slightly adjust the price to complement that customer’s name or birthday (perhaps after a quick glance at their Facebook page).
Oftentimes you’ll want to display a sale price next to an original price. If so, which placement is more effective:
The answer? The first placement:
Biswas et al., (2013) conducted multiple studies and found that customers perceive a larger discount when the sale price is positioned to the right of the original price.
Why does that happen? Based on numerical cognition, we can subtract two numbers more easily when the smaller number is positioned on the right:
The researchers dubbed it the subtraction principle.
More importantly, they found that it alters the perception of discounts. When a sale price appears to the right of the original price, customers can calculate the discount more easily — enlarging its perceived magnitude.
But one caveat: the discount should be moderate in size. If your discount is either very low or very high, you might want to place the sale price on the left:
“…at both very low discount depths and exaggerated discount depths, retailers should use sale price display locations that hinder initiation of the subtraction task. This is because when consumers calculate these discount depths, they may either suspect the retailer of opportunistic motives (in the case of very low discounts) or question product quality (in the case of exaggerated discounts).” (Biswas et al., 2013, pp. 63)
Suppose that you’re selling a product bundle. Which order is better:
Give up? Research shows that the second presentation is more effective (Bagchi & Davis, 2012).
However, there are two conditions.
1. The unit price calculation must be difficult
With a difficult calculation, customers use heuristics to make their purchase decision. Specifically, they use the first piece of information to guide their purchase decision:
When the quantity is larger, an anchoring effect occurs. Customers anchor on the high quantity (e.g., 70), and they adjust insufficiently for price. Because the numerical price is lower than the numerical quantity, consumers falsely infer that the price is an attractive deal.
Obviously you should only use this pricing tactic if it makes sense for your product. As the researchers warn:
“…offering larger packages without understanding consumers’ perceptions can be a dangerous proposition, and bigger isn’t always better.” (Bagchi & Davis, 2012, pp. 71)
Discounts can be harmful. When you stop offering a discount, you might cause people to (a) choose a competitor’s product or (b) wait for the next discount.
But when and why do those harmful effects occur? The answer lies in the positioning of your brand — whether it’s high quality or low quality (Wathieu, Muthukrishnan, & Bronnenberg, 2004).
In any marketplace, when retailers end discounts on premium products, demand shifts toward lower priced products. However, when retailers end discounts on lower priced products, the distribution of demand remains the same:
“…higher quality, higher regular price brands are less likely to be chosen after posting and retracting a price discount, whereas lower quality, lower regular price brands will continue to divert buyers away from higher quality brands after the discount is retracted with no detrimental impact on their own initial customer base.” (Wathieu, Muthukrishnan, & Bronnenberg, 2004, 4, pp. 652)
That effect occurs because of price saliency…
“A price discount posted by a brand not typically assumed by consumers to compete on the basis of price (i.e., a discounted higher quality, higher price brand) is particularly likely to be perceived as unusual and should cause price salience…causing an immediate increase in the amount of attention paid to price information and, ultimately, an increase in the weight accorded to the price attribute in subsequent choices.” (Wathieu, Muthukrishnan, & Bronnenberg, 2004, pp. 657)
In other words, when premium brands retract their discounts, customers will still be focusing on price. Thus, they’ll consider price more heavily in their purchase decision. Since the product is already priced high, the perceived cost will seem even larger (compared to a situation in which a discount wasn’t offered).
The takeaway? If you’re competing on price, feel free to offer discounts. However, if you’re competing on quality, you should avoid discounting so that you deemphasize price. Instead, remain focused on the attributes and quality of your product.
Marketers generally use two types of pricing strategies: hi-lo pricing and everyday low pricing (EDLP).
“…managers might regularly charge $999 for a television, put it on sale for $799 for a week, and then raise the price back to $999 after a week. Alternatively, some retail managers choose to employ an EDLP tactic and price the television at $919 every week.” (Tsiros & Hardesty, 2010, pp. 60)
Tsiros and Hardesty (2010) found benefits for a new strategy: steadily decreasing discounts (SDD). Instead of retracting a discount entirely, graduallyreturn the price to the same base level:
“Our research supports the use of an SDD tactic, in which the television described is discounted to $799, and then instead of returning it to its original price all at once, the retailer offers at least one additional sale, such as $899.” (Tsiros & Hardesty, 2010, pp. 60)
The researchers conducted a few studies and found positive outcomes on multiple metrics. An SDD strategy led to…
The researchers even conducted a field study. Over a 30-week span, they alternated between three strategies for a $24.95 wine bottle stopper at a kitchen appliance store.
In the experiments, SDD was effective because consumers developed an expectation of higher future prices, which increased their anticipated regret:
“…the “steadily decreasing” part of the discount is fundamental in providing consumers with a signal for higher future prices, which encourages them to buy now.” (Tsiros & Hardesty, 2010, pp. 59)
The researchers found no detrimental effects on store or brand image.
If your regular price and sale price share the same left digit, your discount will seem larger if the right digits are small (less than 5).
Based on numerical cognition, we compare numbers in relative terms. All else being equal, a $10 discount will be more appealing for a $50 item (compared to a $500 item) even though the absolute discount is the same (Tversky & Kahneman, 1981).
A similar process occurs when you compare small numbers (e.g., 0-4) with larger numbers (e.g., 6-10):
“The Weber-Fechner Law is based on people’s tendency to compare disparate digits (and, hence, price reductions) in relative terms. For example, because 3 is 50% greater than 2, and 8 is 14% greater than 7, the absolute difference between 2 and 3 is perceived to be greater than that between 7 and 8, even though their absolute differences are identical.” (Coulter & Coulter, 2007, pp. 163)
Those relative judgments are the answer.
In the section on charm pricing, you learned that people evaluate prices by encoding the digits from left to right. If a sale price shares the same left digit with the regular price, then people compare the remaining digits using relative comparisons.
Thus, the perceived magnitude will seem larger for small numbers, compared to larger numbers.
Coulter and Coulter (2007) conducted a few experiments, and they found support for that claim. Even when the absolute discounts were larger, people still perceived them to be smaller in magnitude. Here’s what they found.
Assuming that the left digit remains the same in the original and sale price, a discount will seem larger when the right digits are smaller.
What should you display first: your product or your price?
To answer that question, Karmarkar, Shiv, and Knutson (2015) gave participants $40 in shopping money. Then, the researchers used fMRI to analyze their brains while they shopped for online products.
Turns out, the first exposure — price vs. product — influenced the criteria that people used when deciding whether to buy.
When products were displayed first, participants based their purchase decision on the product qualities.
When prices were displayed first, participants based their purchase decision on the economic value.
If you sell luxury products, you want people to base their decision on your product qualities. You don’t want them to consider the economic value. Thus, for luxury products, show the product first. THEN show the price.
Roger Dooley gave the example of Tiffany’s jewelry. On Tiffany’s website, they emphasize the jewelry before revealing the price.
Even when they reveal the price, they visually deemphasize it — as if it’s unimportant and negligible.
The opposite is true for utilitarian products…
The researchers from the previous study conducted a follow-up study.
They showed participants discounted utilitarian products (e.g., a pack of AA batteries, USB drive, flashlight). Consistent with the original finding, participants were more likely to buy those products if they encountered the price first. With that initial exposure, people were more likely to appreciate the economic value of the purchase.
Puccinelli et al. (2013) found that men are more likely to buy products when the prices are displayed in red.
“Men seem to process the ads less in-depth and use price color as a visual heuristic to judge perceived savings offered by the store.” (Puccinelli et al., 2013, pp. 121)
Because men use heuristic processing to evaluate ads, when they encounter a red price, they’re more likely to base their decision around the red price — and the red price alone:
“…multiple stimuli present at the same time in the visual field compete for neural representation and when people give attention to any one target it leaves less available for others…when price information in retail ads is emphasized (e.g., by making it red), compared to other product attributes, the ability for people to process the other attributes of the ad (e.g., photo quality of products) is diminished.” (Puccinelli et al., 2013, pp. 121)
That red price became a focal point of attention – and thus the only information that men used to evaluate their purchase decision. More importantly, because men associate red prices with perceived savings, they relied more heavily on that belief.
Those findings also align with my research on color. In my color article, I explain how red increases arousal (which then increases our reliance on heuristic processing).
Customers care about the perceived magnitude of your price (i.e., whether it’s high or low). But they also care about the perceived fairness of your price.
Even if your price is low, customers could still perceive it to be unfair. Likewise, customers could still perceive high prices to be fair — depending on a few factors.
One important factor is your pricing method. Consider two types of pricing:
Customers perceive cost-based pricing to be fairer than market-based pricing (Xia, Monroe, & Cox, 2004). That’s why you can increase the perceived fairness of your price by emphasizing the inherent costs of your product:
“…consumers have little knowledge of a seller’s actual costs and profit margins…Therefore, sellers’ making the relevant cost and quality information transparent helps.” (Xia, Monroe, & Cox, 2004, pp. 9).
In your product descriptions, emphasize your product’s “top-of-the-line raw material” or any other cost-based input. That cost-related information will trigger a more empathetic perception of your price.
You might be familiar with the paradox of choice. When more options are present, people are often less likely to choose an option.
Once people choose an option, they lose the benefits offered in the other options. Because of loss aversion, they postpone their decision — especially when more options are present (because they’d be losing more benefits).
That insight led to a similar finding: people are more likely to choose an option if the potential options are similar (Sagi & Friedland, 2007). If options are similar, then people will receive similar benefits with any option. So loss aversion is lower.
But let’s question that insight.
In one study, Kim, Novemskey, and Dhar (2012) asked two groups of participants if they wanted to purchase a pack of gum. Each group had two options:
Despite a trivial difference, the results were extremely different. People were much more likely to choose a pack of gum when a price difference existed.
So why did that happen? Shouldn’t the first group be more likely to choose an option — since the gum was priced similarly?
When the packs of gum shared the same price, customers perceived the gum to be less similar. Paradoxically, adding a small price difference increased the perceived similarity.
Weird, right? I’ll explain.
When two products share the same price, people can’t immediately distinguish those products. As a result, they seek out differentiating characteristics. Thus, the product differences become more salient.
However, when you add a slight price difference, you reduce that need to search for differences. Customers can differentiate the products based on price. Because customers focus less attention on product differences, the two products maintain a higher degree of similarity. And that similarity makes people more likely to choose a product.