Chapter 5 – Psychological Influences in Pricing

Why is there a need to lower the price by decimals?

1. To avoid pilferages
2. To create an illusion of lower price
3. To hide the fact that your price is actually higher
4. Gives us the impression of a “Last Price”
5. Desire for products makes people round down prices if there is a decimal digit

Ending in Nines does have Economic Impact

Informal research has examined selling behavior and odd price points between $29.99 and $28.53

Logic dictates that lowest price sells more than higher prices

However the product sells better when priced at $29.99 over $28.53, a direct contradiction of economic
theory

PROSPECT THEORY

Examines how people make choices between prospective offers amidst risky outcomes. Every purchase
decision entails risk called “Opportunity Cost”

“Status Quo Bias” – Avoiding New Offers who deviates from these reference points

Effects Related to Prospect Theory:

1.1 Losses Weighs Heavier than gains (2.5%)

1.2 Inflection at the Point of Reference
Current Level of Satisfaction
Recent Prices seen in the Market
Most recent status of value as perceived
1.3 Diminishing Sensitivity ( Prices increases = people tend to be less sensitive when it comes to price
increase )
1.4 Risk Aversion and Seeking on +/- Frames
When it comes to gains – choose lesser gain instead of unsure bigger gain
When it comes to losses – choose bigger prospective loss than a lesser sure loss

2.1 Reference Price Effects - The current prevailing prices with reference to the past observed prices is
very important to the customer

2.2 Endowment Effect – Customers who experience the product first hand creates an impression that
the benefits mean a lot to them, decreasing their price sensitivity

2.3 Anchoring – the first price point the customer hears is difficult to erase from his mind
2.4 Comparison Set Effect

Perceived Benefit Comparison

Perceived Cost per Benefit Comparison

Price Objective Comparison

2.5 Framing Effect – Framing through added benefits and Framing through Comparison

2.6 Order Bias – effect related to anchoring

2.7 End – Benefit – influenced by the amount the product contributes to the end benefits sought by a
customer

Tenets of Prospect Theory

1. Basic tenet of economics is that people seek to maximize their utility in a transaction
2. Humans are predictably rational
3. The element of RISK allows humans to be irrational when it comes to payments

4 FUNDS OF MONEY

1. People spend their own money on themselves

2. People spend their own money on someone else
3. People spend someone else’s money on themselves
4. People will spend someone else’s money on someone else,