The Decision Lab

Using psychology to understand the economy, from individual decisions to market behavior.

Pricing and Framing: When Are We Likely to Pay More for Products?

When are we likely to buy expensive products?

I think by this time almost every marketing strategy is tried as to how goods are priced: We are told that today is the last day of the sale; we are given the price at which the good was previously sold (this was $20 and now it's $14.95); or Gap tells us that the 30% off is for 4 days only (right). I want to write about one strategy firms use to increase the sale of a product. This strategy involves framing: the product is presented in the context of other, related products. We'll see that "relativity" is not a concept reserved for physics.

A classic example is as follows: Imagine that you are shopping for a bread maker at Williams-Sonoma. You have two options. A standard quality break maker is for sale for $80; and a higher quality bread maker is sold at $120. You compare and contrast the two machines. You tell yourself you are not an expert maker, and you go with the $80 one. Sure, some people would choose the more expensive one but not a majority of the people. At least not initially.

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So what does the company do, to make the more expensive version more attractive? Other than advertising it or playing with its price?

A subtle way that's shown to work is this: Williams-Sonoma, on top of the standard and the expensive versions, creates a much more expensive version (call it the "platinum" bread maker) and sells it for, say, $475.

Now when you go to the shop, you have 3 options. You can spend $80, or $120 or $475. Rationally speaking, adding an irrelevant option should not change your decision between the $80 and the $120 ones. The pros and cons did not change; quality of the bread makers remained the same, and you are making the same salary. You know that you are never going to spend $475 on a break maker. You don't have the budget for it. (Plus, to justify that big an expenditure, you'd have to eat bread every day, and that simply would be too heavy in carbs).

But the thing is, now you do would feel more comfortable buying the $120 one. After all, you are not buying the most expensive alternative. You have found the middle ground, and you are probably happier, compared to someone who buys the cheaper version with only two options.

The more expensive product, the platinum bread maker in this example, is called a "premium loss leader." A leader, because it's the highest quality/highest priced product. A loss leader, because it's raison d'etre is to lead the sale of the medium range product. In other words, the company never expected to make a profit from the sale of the $475 machine in the first place.

Irrelevant third options do change our decision-making processes, because they complete the frame that we think in. There is a wonderful example, reported by Dan Ariely in his book Predictably Irrational. It's about dating, and choosing men, but the main idea is analogous to choosing bread-makers. No pun intended.

Two computer generated images of men are shown to women. The first image is of Mike, the second one is Scott. They are both okay looking men, and women are 50-50 on who they want to date. So, to increase the attractiveness of Mike, what does the researcher do?

To a second group of women, he shows three pictures: Mike and Scott, same as before, are presented. In addition, a worse version of Mike is presented as a third option. That's a loss leader for the more normal Mike. Where normal Mike has hair, the inferior Mike's is thinning. Where normal Mike is very fit, inferior Mike is a little bulky. It's clear from the beginning that no one will choose the inferior Mike, but now many more women pick the normal Mike compared to Scott. This was never about normal Mike versus inferior Mike. The race is still between Mike and Scott but Mike is ahead now because his inferior version is also among the options. That makes comparability easier. Women, who didn't know how to compare Mike to Scott, now have a clear frame of mind in which they can compare the inferior Mike to the normal Mike. So normal Mike wins more dates. (And probably eats the bread made by the $120 machine).

So next time you want to steer the choices of friends, you can use this technique. If you are fond of an Italian restaurant, and your friends want Japanese, as an irrelevant third option you can present an irrationally expensive Italian restaurant (from a choice point of view, a very expensive restaurant is equivalent to the inferior Mike). This way, you increase your chances of going to the mid-range Italian restaurant.

On the other hand, in order to be smarter consumers, we should be able to blind ourselves to options we are sure we are never going to consider. But that's more difficult. Products are shelved in close proximity for a reason.

 

Gizem Saka, Ph.D., Cornell University. Teaches behavioral economics at Wellesley College.

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