Tuesday, July 24, 2012

Consumer Math - Price Extremes

For the first half of the 20th century, Economists assumed that buyers were rational, i.e. that they would also do that made the most sense mathematically. But experiments showed that buyers are very irrational by influenced by things we are often not even aware of. TheAtlantic.com gives some examples in The 11 Ways That Consumers Are Hopeless at Math.

Anchor Bias

Most of us have no idea what a fair price is for a home so instead we have to build a mental model of price comparisons and determine if the price is reasonable. Salespersons take advantage of this by showing the highest priced items first. Suppose you want a pool table. The salesperson will first show you a $10,000 model with amazing features. Oh, that's way too much. Next a $5000 table that's on sale. Uh, still too high. How about this $3000 model for bargain hunters? You take it because it seems like such a deal in comparison and you're beginning to look cheap. In reality there are many fine pool tables for under $3000 but the salesperson has distorted your mental price model artificially high. Odds are that $10,000 pool table will never sell but it's used to distort your perception of a fair price range.

Some menus take advantage of price anchors by listing early and prominently a steak or lobster at a high cost. So anything you order seems a bargain in comparison.

The book Priceless give a real example, Williams-Sonoma doubled sales of a $279 bread maker by adding a $429 bread maker next to their $279 model. Nothing had changed in the old model but now it looked like a bargain in comparison.

Price Extremes & Goldilocks

Given a range of prices and product choices which do we pick? Most will shun the highest priced thinking it must be overpriced and shun the lowest priced because it must be somehow inferior to allow for the super low price. So we pick a price in the middle of the range that's not too high or too low but just right regardless of the actual merits of the products themselves.

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