Mind Your Decisions

The Calculating Guru Questions Pricing Tricks

Those late night TV infomercials make me laugh. “It’s all yours for under $20! Just pick up the phone and order our product (for $19.99).”

Yes, the product is “under $20.” But not by a meaningful amount. Does $19.99 really sound better than $20? Is anyone fooled by the pricing trick?

Apparently the tricks are established rules of business. Recently, Jonathan Clements of The Wall Street Journal reports on four pricing tricks that sellers use. He suggests you should consider them when selling your house. The article is an amusing read (as are other topics in his column “Getting Going”):

Price Fixing: In This Market, Selling a Home Requires Savvy

The Calculating Guru is intrigued. If they worked, pricing tricks could both help as a seller–to increase profits–and as a buyer–to be on guard. Before we come to any conclusions, let’s go through Clements’ claim and its logical implications. This article is divided into thee motivating questions.

First, what are the four pricing tricks Clements discusses?

Second, why do they work?

Third, if the tricks have worked before does that mean you should use them? That is, is it really necessary to have savvy as his article title suggests?

What are the tricks?

Here is The Calculating Guru’s executive summary of the four tricks:

1. The Missing Penny
People feel $1.99 is much cheaper than $2.

2. High-Balling
You can raise people’s reference point by listing artificially high.

3. Giving False Precision
We associate precise numbers with bargains. If a house should sell for around $600,000, then offering a round number like $595,000 will convey quality. Instead, choose a higher but precise number like $595,385 to indicate a bargain.

4. Easy-to-Understand Discounts
We perceive easily computable discounts as better than larger discounts. As the article points out, a discount from $595,385 to $585,385 might seem better than from $595,385 to $578,495.

Why do tricks work?

We all know the missing penny. It’s the oldest trick in the book. I feel that I counter it by rounding prices up every time I make a decision. I often mentally keep track of items as I shop so I have a good estimate when the total is rung up.

But the trick works because of the volume of purchases. There’s just no way that I can be thinking all the time. When I go to the supermarket I might buy 15-20 items at a time. Even if I misjudged one purchase, that alone would motivate sellers to choose the misleading price.

The pricing advantage is actually even larger. I just discussed what happens when I’m making conscious decisions quickly. And as a counter-part, I will be influenced unconsciously by pricing choices. Perhaps seeing a $1.99 price over and over again might lead me to think a product has higher value than if it were marked $2. I might choose to consume more of it over a year than I otherwise would have.

The article suggests our vulnerability is why pricing tricks continue to be employed:

“When we look at prices, we make judgments in a fraction of a second,” explains Manoj Thomas, a marketing professor at Cornell University’s Johnson Graduate School of Management.

There’s not much I can do, but I do get annoyed by these types of tricks. This was the inspiration for an earlier discussion about cereal.

Are tricks necessary?

Let’s assume that experiments show that pricing tricks have worked on customers. All businesses agree on the logic, that it’s possible to take advantage of consumers. Therefore, almost all prices in the market use at least one pricing trick.

If you’re a new seller, does that mean you should use a pricing trick?

That’s what Clements is reporting, but I think that’s a logical mistake. I would answer, no, it’s not necessarily true new sellers should use pricing tricks.

From a logical perspective, the statement “pricing tricks have worked on customers” does not imply “pricing tricks will work on your customers.”

From a practical perspective, I think repeated customers get accustomed to pricing tricks. The advantage lessens or might even disappear. For instance, Trader Joe’s popular Charles Shaw wine is priced at $1.99 in California, but everyone refers to it as “2 buck Chuck.”

What’s more compelling is that there are sophisticated buyers who use deal websites like Slick Deals. Take a look at the front page that lists the hottest deals. You won’t see those annoying missing penny prices. All the submissions already round to the nearest dollar. That means new buyers from the site never get the initial misleading impression.

On that note, whole dollar pricing might even improve a seller’s turnover. The site Woot offers one deal per day, updated midnight Central time. There’s a frenzy of buying when a new product is shown. The really great deals are sold out within a matter of minutes. Most of the deals are shown with the missing penny method. But as a counter, shipping is usually a flat rate of $5. This makes it easier to calculate the final price and helps people make fast decisions. That’s pretty important for a site where time is a crucial element. I wonder what would happen if the product listing was also a rounded price.

All said and done, I am not sold these tricks will work. I’m skeptical it will work on a home sale because buyers comparison shop, discuss purchases for days, and desire honest sellers.

Simply put, tricks may work but they are not necessary to success. They are not even sufficient–the “high-balling” technique of starting at a very high price might deter potential buyers who are scared by sticker shock.

I know that I will have a tough time convincing sellers about this, but I try. I would be happy if just one of you guys agreed with me and the next time you list an item on eBay or Craig’s List you would use a simple rounded figure instead of a missing penny price. I myself am drafting an ebook and I promise I won’t use a pricing trick.

For my own shopping, I consciously favor stores with round pricing. That’s not good enough to convince sellers in general, but it’s a start to a better market. When I face a deceptive price, I try to spend more time and hope that I don’t fall prey to a bad snap decision.

(If you’re interested in reading more about snap decisions, the best book I’ve read on this topic is Malcolm Gladwell’s Blink. It’s not a scientific treatment of the matter, but it is a fun read and very well written. Thanks to reader Clyde Smithson for recommending the book to me.)