In Chapter 9 we saw the power of decoys, which can take the form of either a feature price decoy or a pure price decoy, and in both cases can affect consumer behaviour in your favour.
Chapter 10 showed how to use hyperbolic discounting to get consumers to pay more for your product by paying for it in the future.
Chapter 11 examined two topics: social and peer effects on willingness to pay; and the endowment effect and loss aversion. These can be difficult to apply so we looked at mechanisms to introduce them into the sales process for your product or service.
In Chapter 12 we designed bundles to increase the perceived value of your products and make them harder to compare on price with the competition.
In Chapter 13 we looked at the power of ‘free’ as a price point. Free offers can attract new customers or increase willingness to pay for non-free products.
Chapter 14 showed how to upsell customers with add-on items or more expensive versions of the same product.
Chapter 15 examined how to change the perception of your price by attaching it to something larger; and, similarly, to show that your price is great value by basing it directly on the value or profit that the customer gets from buying.
Chapter 16 discussed how price perception works when the customer is spending someone else’s money rather than their own, and how the ability to rationalise a price becomes as important as true value.
Chapter 17 examined the complexities of the pricing environment and the risks that different techniques can conflict when used in different sales channels. It looked at how memory, brand consistency and channel differentiation can help you stay consistent and defend against price arbitrage.
In Chapter 18 we focused on charitable giving, both as a sales technique and because of what it reveals about the psychology of how we purchase products in general.
Finally, Chapter 19 considered the legal and ethical aspects of pricing and the importance of not misleading customers.
Together, this suite of techniques and psychological discoveries provides a comprehensive approach to setting the pricing strategy for new or existing services or products. As we saw in this epilogue, the same approaches can be used on investment decisions such as selling your company, as well as in consumer and business pricing.
You may wish to increase the profits of your company using a new pricing strategy in order to expand, to sell the business, or simply to be able to take home more money and spend it on yourself. Whichever it is, pricing is your main tool for increasing the perceived value you create for customers and keeping a decent share of it in return.
I received a letter last week with an illegible postmark and an airmail sticker. It was unsigned, but the handwriting was familiar, and I had already guessed who it had come from. She won’t mind if I share the last paragraph with you.
Prices, for all their significance, are just one of the messages we send each other when we trade and work together. This particular message relates to something people care a lot about – the amount of money in their pocket – so people treat it as important. Prices are just one part of the economic conversation, but they reveal deeper values at work. A price is a simple way for us to make a decision that trades off between things that are too important for us to compare directly. A price may just look like a number. But until we all figure out what we really care about in this rich, subtle and complicated system called the economy, prices will be the language we speak. Treat them with care – they reveal your true feelings.
Bibliography and further reading
The following are useful general sources for information and ideas on pricing, both theory and practice.
Willam Poundstone’s Priceless: The Hidden Psychology of Value (Hill & Wang/Oneworld, 2010) is a very good collection for general readers of different pricing anecdotes and approaches, and describes many of the original experiments in which these approaches were discovered.
Smart Pricing by Wharton professors Jagmohan Raju and Z. John Zhang (Pearson Prentice Hall, 2010) illustrates a smaller range of practical approaches to pricing than Priceless, but does so in more detail.
The Marketing Science Institute in 2006 published Pricing by Russell Winer, which contains a solid and comprehensive review of most market research techniques to have been written up in academic literature.
A number of good books on pricing exist which do not focus on psychology. For example Baker, Marn and Zawada’s The Price Advantage (John Wiley & Sons, 2010) and Reed Holden’s Pricing With Confidence (John Wiley & Sons, 2008).
There are a number of technical books on the economic theory of pricing, such as Milton Friedman’s Price Theory (most recent edition by Transaction Publishers, 2007) or Steven E. Landsburg’s Price Theory and Applications (Cengage Learning, 2008). These focus on the traditional theory of suppy and demand, and do not engage in pricing psychology at all. Similarly, How to Price by Oz Shy (Cambridge University Press, 2008) gives an overview of methods that are do not take a psychological approach, but are instead based on traditional (rational) economics.
Several books on behavioural economics cover some of the pricing techniques outlined here. Basic Instincts by Peter Lunn (Marshall Cavendish, 2010) is one of the best; Predictably Irrational by Dan Ariely (HarperCollins, 2008) and Nudge by Richard H. Thaler and Cass R. Sunstein (Yale University Press, 2008) are also good. All three cover a whole range of behavioural phenomena and biases that go beyond the pricing world.
The methods and techniques described in each chapter are not necessarily directly based on the publications referenced below, but the articles will provide more insight and a broader understanding of the approaches from each chapter.
Chapter 1: Pricing as positioning
• Dobson, Gregory and Shlomo Kalish (1988): ‘Positioning and pricing a product line’. Marketing Science, Vol 7 no 2.
• Hauser, John R. (1988): ‘Competitive price and positioning strategies’. Marketing Science, Vol 7 no 1.
• Lewis, R. C. (1981): ‘The positioning statement for hotels’. The Cornell Hotel and Restaurant Administrative Quarterly, Vol 22(1), 51–61.
• Nagle, T. T. (1987): The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making. Prentice Hall.
• Shaw, Margaret (1992): ‘Positioning and price: merging theory, strategy and tactics’. Journal of Hospitality & Tourism Research, Vol 15, no 2, p 31.
Chapter 2: Cost – based calculations
Most business economics textbooks – and even some accountancy books – will expand on the basic principles presented in this chapter. For example:
• Harris, Neil (2012): Business Economics: Theory and Application. Routledge.
• Thomas, Christopher R. and S. Charles Maurice (2010): Managerial Economics. McGraw-Hill.
There are plenty of more academic treatments of the dynamics of cost-based pricing. Two examples are:
• Maskin, E. and J. Tirole (1988): ‘A theory of dynamic oligopoly II: price competition, kinked demand curves and Edgeworth cycles’. Econometrica, Vol 56.
• Noel, Michael (2003): ‘Edgeworth price cycles, cost-based pricing and sticky pricing in retail gasoline markets’. Department of Economics, UC San Diego.
Chapter 3: Reading the customer’s mind
• Phlips, Louis (1983): The Economics of Price Discrimination. Cambridge University Press.
• Rao, Vithala R. (ed) (2009): Handbook of Pricing Research in Marketing. Edward Elgar Publishing.
• Winer, Russell S. (2006): Pricing. Marketing Science Institute.
Chapter 4: Segmentation
• Kotler, Philip and Kevin Lane Keller (2006): Marketing Management. Pearson Prentice Hall.
• Pigou, Arthur Cecil (1952). Economics of Welfare. Transaction Publishers.
• Stiving, Mark (2011): Impact Pricing. Entrepreneur Press.
In focus: does 99p pricing work?
• See refs in Priceless
Chapter 5: New launches, belief and fairness
• B
olton, L. E., L. Warlop and J. W. Alba (2003): ‘Consumer perceptions of price (un)fairness’. Journal of Consumer Research, Vol 29 part 4.
• Huang, Jen-Hung, Ching-Te Chang and Cathy Yi-Hsuan Chen (2005): ‘Perceived fairness of pricing on the Internet’. Journal of Economic Psychology, Vol 26 issue 3.
• Hultink, Erik Jan, Susan Hart, Henry S. J. Robben and Abbie Griffin (2000): ‘Launch decisions and new product success’. Journal of Product Innovation Management, Vol 17 issue 1.
• Maxwell, Sarah (2008): The Price Is Wrong. John Wiley & Sons.
• Shehryar, Omar and David M. Hunt (2005): ‘Buyer behavior and procedural fairness in pricing: exploring the moderating role of product familiarity’. Journal of Product and Brand Management, Vol 14 issue 4.
• Zeithaml, Valarie A. (1988): ‘Consumer perceptions of price, quality and value’. The Journal of Marketing.
Chapter 6: Memory and expectations, trials and reframing your prices
• Cestari, Vincenzo, Paolo del Giovane and Clelia Rossi-Arnaud (2007): ‘Memory for prices and the Euro cash changeover: an analysis for cinema prices in Italy’. Bank of Italy Economic Research Paper, No. 619.
• Diamond, William D. and Leland Campbell (1989): ‘The framing of sales promotions: effects on reference price change’. Advances in Consumer Research, Vol 16.
• Goering, Patricia A. (1985): ‘Effects of product trial on consumer expectations, demand and prices’. Journal of Consumer Research, Vol 12 issue 1.
• Gourville, J. T. (1998): ‘Pennies-a-day: the effect of temporal reframing on transaction evaluation’. Journal of Consumer Research, Vol 24 no 4.
• Mazumdar, Tridib and Purushottam Papatla (1995): ‘Loyalty differences in the use of internal and external reference prices’. Marketing Letters, Vol 6 no 2.
• Winer, Russell S. (1986): ‘A reference price model of brand choice’. Journal of Consumer Research, Vol 13.
Chapter 7: Anchoring
• Chapman, Gretchen B. and Eric J. Johnson (1999): ‘Anchoring, activation and the construction of values’. Organizational Behavior and Human Decision Processes, Vol 79 issue 2.
• Epley, Nicholas and Thomas Gilovich (2006): ‘The anchoring-and-adjustment heuristic: why the adjustments are insufficient’. Psychological Science, Vol 17 no 4.
• Slovic, Paul and Sarah Lichtenstein (1983): ‘Preference reversals: a broader perspective’. The American Economic Review, Vol 73 issue 4.
• Yadav, M. S. (1994): ‘How buyers evaluate product bundles: A model of anchoring and adjustment’. Journal of Consumer Research, Vol 21 no 2.
Chapter 8: Competition
• Cotterill, Ronald W., William P. Putsis, Jr. and Ravi Dhar (2000): ‘Assessing the competitive interaction between private labels and national brands’. The Journal of Business, Vol 73 no 1.
• Coughlan, Anne T. and Murali K. Mantrala (1992): ‘Dynamic competitive pricing strategies’. International Journal of Research in Marketing, Vol 9 issue 1.
• Dickson, Peter R. (1992): ‘Towards a general theory of competitive rationality’. The Journal of Marketing, Vol 56(1).
• Gabaix, Xavier and David Laibson (2005): ‘Shrouded attributes, consumer myopia and information suppression in competitive markets’. NBER Working Paper, No. 11755.
• Gerla, Harry S. (1985): ‘The psychology of predatory pricing: why predatory pricing pays’. Southwestern Law Journal, Vol 39(3), p 755.
• Kopalle, Praveen et al (2009): ‘Retailer pricing and competitive effects’. Journal of Retailing, Vol 85 issue 1.
Chapter 9: Decoys
• Ariely, Dan and Thomas S. Wallsten (1995): ‘Seeking subjective dominance in multidimensional space: an explanation of the asymmetric dominance effect’. Organizational Behavior and Human Decision Processes, Vol 63 issue 3.
• Bateman, Ian J., Alistair Munro and Gregory L. Poe (2008): ‘Decoy effects in choice experiments and contingent valuation: asymmetric dominance’. Land Economics, Vol 84 no 1.
• Munro, Alistair and Robert Sugden (2003): ‘On the theory of reference-dependent preferences’. Journal of Economic Behavior & Organization, Vol 50 issue 4.
• Simonson, Itamar and Amos Tversky (1992): ‘Choice in context: trade off contrast and extremeness aversion’. Journal of Marketing Research, Vol 29(3).
Chapter 10: Paying tomorrow for what you get today
• Dasgupta, P. and E. Maskin (2005): ‘Uncertainty and hyperbolic discounting’. American Economic Review, Vol 95 no 4.
• Laibson, David (1997): ‘Golden eggs and hyperbolic discounting’. The Quarterly Journal of Economics, Vol 112(2).
• Liberman, Nira, Yaacov Trope and Elena Stephan (2007): ‘Psychological distance’. Social Psychology: Handbook of Basic Principles (eds. Kruglanski and Higgins), Guilford Press.
• Onwujekwe, Obinna et al (2001): ‘Hypothetical and actual willingness-to-pay for insecticide-treated nets in five Nigerian communities’. Tropical Medicine and International Health, Vol 6 issue 7.
• Rubinstein, Ariel (2003): ‘ “Economics and Psychology”? The case of hyperbolic discounting’. International Economic Review, Vol 44 issue 4.
• Trope, Yaacov, Nira Liberman and Cheryl Wakslak (2007): ‘Construal levels and psychological distance: effects on representation, prediction, evaluation and behaviour’. Journal of Consumer Psychology, Vol 17(2).
Chapter 11: The tea party
• Amaldoss, Wilfred and Sanjay Jain (2005): ‘Pricing of conspicuous goods: a competitive analysis of social effects’. Journal of Marketing Research, Vol 42 no 1.
• Kahneman, Daniel, Jack L. Knetsch and Richard H. Thaler (1991): ‘Anomalies: the endowment effect, loss aversion and status quo bias’. The Journal of Economic Perspectives, Vol 5 issue 1.
• Loewenstein, George F., Leigh Thompson and Max H. Bazerman (1989): ‘Social utility and decision-making in interpersonal contexts’. Journal of Personality and Social Psychology, Vol 57(3).
• Monroe, Kent B. (1973): ‘Buyers’ subjective perceptions of price’. Journal of Marketing Research, Vol 10(1).
• Moretti, Enrico (2011): ‘Social learning and peer effects in consumption: evidence from movie sales’. Review of Economic Studies, Vol 78(1).
• Jacoby, Jacob, Jerry C. Olson and Rafael A. Haddock (1971): ‘Price, brand name and product composition characteristics as determinants of perceived quality’. Journal of Applied Psychology, Vol 55(6).
Chapter 12: Bundling
• Adams, William James and Janet L. Yellen (1976): ‘Commodity bundling and the burden of monopoly’. Quarterly Journal of Economics, Vol 90.
• Hanson, Ward and R. Kipp Martin (1990): ‘Optimal bundle pricing’. Management Science, Vol 36 issue 2.
• Kaicker, Ajit, William O. Bearden and Kenneth C. Manning (1995): ‘Component versus bundle pricing: the role of selling price deviations from price expectations’. Journal of Business Research, Vol 33 issue 3.
• Olderog, Torsten and Bernd Skiera (2000): ‘The benefits of bundling strategies’. Schmalenbach Business Review, Vol 52
Chapter 13: Free offers
• Ariely, Dan (2008): Predictably Irrational: The Hidden Forces that Shape our Decisions, chapter 3. HarperCollins.
• Nunes, Joseph C. and Xavier Dreze (2006): ‘The endowed progress effect: how artificial advancement increases effort’. Journal of Consumer Research, Vol 32 no 4.
• Ries, Al and Jack Trout (1994): The 22 Immutable Laws of Marketing. Harper Business.
Chapter 14: Upselling
• Aydin, Goker and Serhan Ziya (2008): ‘Pricing promotional products under upselling’. Manufacturing & Service Operations Management, Vol 10 no 3.
• Chapman, G. B. and B. H. Bornstein (1996): ‘The more you ask for, the more you get: anchoring in personal injury verdicts’. Applied Cognitive Psychology, Vol 10 no 6.
While there is not an extensive treatment of upselling in the academic literature, there are a number of popular books that deal with it, such as:
• Schiffman, Stefan (2005): Upselling Techniques: That Really Work! Adams Media.
Chapter 15: Absorption and value pricing
• Kortge, G. Dean and Patrick A. Okonkwo (1993): ‘Perceived value approach to pricing’. Industrial Marketing Management, Vol 22 issue 2.
Ron Baker has written a number of books on value pricing, such as Implementing Value Pricing (John Wiley & Sons, 2010) and Pricing for Value (SPCK Publishing, 1999) – primarily aimed at those in professional services such as lawyers or accountants.
The term absorption pricing is used in a different sense in some of the literature, to refer to a cost-based pricing method. The sense I use it in this chapter is that the psychological decision to buy a smaller product is absorbed into a bigger decision and therefore becomes easier.
Chapter 16: Other people’s money
The principal-agent problem is covered in most intermediate economics textbooks and many journal articles, for example:
• Grossman, Sanford J. and Oliver D. Hart (1983): ‘An analysis of the principal-agent problem’. Econometrica, Vol 51 no 1.
• Laffont, Jean-Jacques and David Martimort (2001): The Theory of Incentives: The Principal-Agent Model. Princeton University Press.
There is an even bigger literature on business-to-business sales more generally. You could start with:
• Boaz, Nate, John Murnane and Kevin Nuffer (2010): ‘The basics of business-to-business sales success’. McKinsey Quarterly, May 2010. Accessible at: www.mckinseyquarterly.com/The_basics_of_business-to-business_sales_success_2586
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