For Retailers Only - May 2010

The Psychology of Value
By Wanda Jankowski

Author William Poundstone details evidence that the human psyche is more tolerant of price shifts than retailers may think

Some of the biggest retail headaches for buyers and suppliers are caused by pricing issues. In his new book, Priceless: The Myth of Fair Value (and How to Take Advantage of It), William Poundstone offers hope for retailers facing shrinking profit margins in the findings of psychological experiments that examine how people make decisions. He contends that value is relative and pricing can be manipulated to make merchandise appear “well priced.”

“When estimating monetary values, people are easily swayed by the legerdemain of anchoring, by illusions trading on contrasts and the power of suggestion,” Poundstone writes.

Consumers, it turns out, aren’t very good at remembering how much items really cost if they don’t purchase them frequently. So a retailer’s ability to price to sell, even in today’s economy, may not be as restricted as you think.

One influence on how much one is willing to pay for an item is an anchor, defined by Poundstone as the “initial value that serves as a mental benchmark or starting point for estimating an unknown quantity.”

The same circle will seem large if surrounded by smaller circles and smaller when surrounded by larger ones. Providing a price anchor influences customers to purchase higher- or lower-priced items, whichever way you choose, to give you the best profit margin. Poundstone writes, “The way to sell a lot of $800 shoes is to display some $1,200 shoes next to them.”

A spin on anchoring is trade-off contrast. “The trade-off contrast rule says that when item X is clearly better than an inferior choice Y, consumers tend to buy X—even when there are many other choices and it’s impossible to say whether X is the best choice of all,” Poundstone writes.

For the concept to work, one product must be perceived as inferior—even if the inferiority is rooted in being overpriced.

“A $7,000 bag makes a similar $2,000 bag more desirable. (It’s much less expensive, and it’s still got the designer label!) This results in increased sales for the $2,000 bags—which might otherwise have been rejected as too expensive, too willfully over-the-top,” notes Poundstone.

How much a consumer spends is also influenced by the context or environment in which the merchandise is presented. Poundstone tells of an experiment involving how much an executive sitting on the beach would pay for a bottle of beer. The average executive was willing to pay more for a beer that came from a fancy hotel, than for the same beer that came from a run-down grocery store. The expectation of the price is influenced by the perception of where it is sold.

“So investing in superfluous luxury raises expectations about what the proper price of beer would be,” Poundstone concludes. This bodes well for retailers investing in well-designed interiors that signal to potential customers a luxury experience is at hand.

Though consumers seem to balk at rising prices, their own psyches hold the keys to influencing how much they are willing to pay for your goods. With Poundstone’s help, you can unlock those secrets.

Resource

  • Priceless: The Myth of Fair Value (and How to Take Advantage of it) by William Poundstone, published by Hill and Wang is available in bookstores.
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