o Psychology of Pricing Value is very difficult for different product categories price variation Hard to determine fairness of price without knowing price range BUSMKT 1441 Consumer Behavior Exam 3 Study Guide The Price is Right Psychology of Pricing Classical Economic Theory easy to determine how much utility we have Price should be set equal with consumer utility o But consumers don t know how to value products Price o How do consumers value products Need context o How does price affect consumer value o What heuristics are used in price cognition The Relativity Factor in Pricing Reference Price Theory Consumers evaluate price relative to a standard or reference price Consumers do not evaluate price in absolute terms Suggests price skimming initial price becomes the reference price Internal Reference Price generated by consumer Varies with product familiarity Doesn t mean you actually have to buy the product o External Reference Price set by marketers Examples Manufacturer s Suggested Retail Price MSRP Original un discounted price Price of other items in the o Product line o Store Internal External references influence consumer perception of price fairness Beer on the Beach Study participants were asked to imagine that they were lying on a hot beach and wanted a cold beer They were asked to indicate how much that beer would cost if it were purchased from o Condition 1 fancy resort o Condition 2 run down convenience store Value determination considers cost of production materials process price of substitutes Reference Price Theory New Products Potential strategies for pricing new products 1 Skimming setting initially high prices and slowly lowering them over time to maximize profits at every price sensitive layer in the market EX Apple products Sale location has substantial influence on price perception o 2 Penetration setting a low initial price to enter the market quickly deeply to attract a large number of buyers and win a large market share EX complementary products Keurig complementary K cups are expensive money making Razors handle is cheap razor is expensive Reference Price Theory suggests skimming initial price becomes reference price perceived as a good deal Anchoring Effect How Consumers Value Products Tendency to rely too heavily or to anchor on one trait or piece of information when making decisions o Consumers make decisions or estimates based on an initial reference point anchor which they then adjust from o Anchoring often occurs unintentionally without awareness o Anchors can be irrelevant to price judgment o Classic demonstration Kahneman and Tversky s UN Study Random number from 1 100 asked to estimate African countries in UN Higher number gave higher estimate even knowing the number given was random Willingness to Pay Study Implication manipulate context of reference points Pre Class Survey Anchoring Effect o Asked to enter the last SSN digit then indicate how much you would be willing to pay for a stainless steel cheese grater o o Housing Price Study Anchoring Effect o Students and real estate agents were asked to tour and appraise a house listing price 134 900 All participants were given the property listing sheet and info about housing sales in the area in the city Condition 1 listing price of 119 900 Condition 2 listing price of 129 900 Condition 3 listing price of 139 900 Condition 4 listing price of 149 900 o Listing price is the initial offer buyer proposes price they are willing o Finding price estimates were anchored on the given list price of the house for both students and real estate agents Implication set higher reference price increases offers you receive o o Principle of Coherent Arbitrariness Arbitrariness valuations of goods experiences have one large arbitrary component Initial amount is arbitrary and dictated by an anchor Coherence once one valuation is made subsequent valuations are scaled appropriately to the first one large arbitrary component Indicative of consumers desire for consistency The SSN Study o Participants shown 6 products without price information Asked whether they would buy each product for a dollar amount equal to the last two digits of their SSN Asked to state their maximum willingness to pay for the product Arbitrary anchor average price scales price estimate rare wine Price increases with higher SSN You Get What You Pay For Placebo Effect Price affects taste o Wine fMRI Study when told wine was expensive it tasted better Price affects efficacy how well a product works o SoBe Study participants given info about SoBe Adreneline Rush s mental acuity boosting properties its price then drank it and asked to solve 15 word jumble puzzles in 30 minutes Condition 1 full price Condition 2 discounted price Condition 3 control Participants given the full price found the product more efficacious relative to those who received it at a discounted price o Pain Meds Study recruited participants to test a new pain killer Participants received a series of electric shocks took the pain killer and then received a second series of shocks Condition 1 regular price of 2 50 a pill Condition 2 discounted price of 0 10 a pill Participants given a higher price recorded the meds worked better Brand indication preference for brands over generics despite the same effects Anchoring Left Digit Effect Heuristic Using a 9 ending price can affect judgments of how different two parties are o Only occurs when the use of such an ending leads to the change in the left most digit 3 00 versus 2 99 o Most likely to happen when the 2 prices are close Pen Study participants were shown pen ads and asked to evaluate how expensive they were o Participants perceived magnitude of target price Lowering the price by one cent to a 9 ending price affects magnitude perception only when the left digit changes Left Digit Effect Margarine Sales o Positive increase in sales right column Reading Price Fixing In This Market Selling a Home Requires Savvy Jonathan Clements Four pricing tricks to improve the odds of finding a buyer 1 Looking Slim 1 99 instead of 2 00 Left Digit Effect to give buyers a sense the product is cheaper than it really is 2 Stacking Up set a high list price so buyers will use it as a reference But if the list price is set too high the impact will be less than if the price were reasonable 3 Sending Messages round numbers will convey quality while precise numbers will indicate bargain We associate precise numbers with lower priced goods Precise numbers can