Pricing and Negotiations
Scientific American has a great article “Why things cost $19.95″, focused on pricing of products and more specifically, our brain’s negotiations mechanisms.
University of Florida marketing professors Chris Janiszewski and Dan Uy suspected that something fundamental might be going on, that some characteristic of the opening bid itself might influence the way the brain thinks about value and shapes bidding behavior. In particular, they wanted to see if the degree of precision of the opening bid might be important to how the brain acts at an auction. Or, to put it in more familiar terms: Are we really fooled when storekeepers price something at $19.95 instead of a round 20 bucks?
They present some interesting data from home sales, initial pricing points vs. actual negotiated sale prices… and found that rounded initial prices such as $500,000 flexed more to sell, while more specific prices such as $494,500, had sales closer to that number.
What I got out of the article is “the more specific the price is the less flexible it seems to a buyer.” By “specific” I mean not rounded, but precise… I think it looks more “computed” and calculated, vs. someone “ballparking” it and making up a price. To me, it says they’ve spent time reasoning through the price, and there may be less flexibility in it.
The other side of “$19.95″ though is the experienced and critical consumer… ask someone how much something costs, and they’ll never say $19.95, they’ll always round to $20. Maybe we’ve just seen that “trick” to make it seem like a lower price too often. 8-)
Do you consciously make an effort to have your pricing be “precise” versus rounded? Why or why not?
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Comments
Thanks for the thoughts David,
I certainly agree with your testing recommendation, even more so with online commerce. I think that’s one of the greatest things about ecommerce online, the ability to test any number of pricing (or other) messaging, pricing, positioning, imagery, etc. and find out what REALLY works the best.
Unfortunately, I see companies that just put up their products and don’t change or test anything… they still go on their own subjective opinions for their offerings.
Thanks!
Charlie
Interesting… It would be interesting to run an A/B test on the pricing to see how it’s affects sales. There is also an anchoring effect in play that in my opinion does make it seem that a $14.95 feels like $14 and not $15, especially in purchases that are less intellectual and are more emotional. While buying a house is a very emotional experience, the price negotiation typically is intellectual, at least in my experience. The other question I would ask is whether in the survey mentioned above the price affected the consumer behavior or the consumer behavior affected the price.
Interesting question, but the only way to answer it is with A/B testing