Your Brain at Wal-Mart
Manoj Thomas studies how the human brain responds to posted prices, and how it decides whether or not to buy a new product.
Manoj Thomas trained as an engineer, earned an MBA, and worked in the corporate world for six years, before he decided to pursue a career in academia.
"I liked to think more deeply about problems," he says. "How the consumers' mind works is more fascinating to me than meeting sales projections."
Thomas launched a new career focused on studying the human mind in the context of the market, as he earned his PhD in marketing from New York University's Stern School of Business, and joined the Johnson School at Cornell on the marketing faculty. Thomas leads the school's innovative immersion learning program in Strategic Marketing, while pursuing two concurrent streams of research:
- The psychology of price cognition
- How the ease or difficulty of thinking affects consumers' judgments
Within the first stream of research, Thomas set out to explore what he calls the "Wal-Mart effect" or the "Precision Effect." The retailing giant always uses precise prices (e.g., $3.72), and seldom uses round prices (e.g., $3.75 or $3.50). He and his co-authors, Daniel Simon and Vrinda Kadiyali, tested the Wal-Mart effect in real estate sales data from South Florida and Long Island, New York. Their analysis shows that sellers who used precise prices negotiated for final sale prices of $1,500 to $2,000 more than those who didn't.
"Larger magnitudes are usually rounded and therefore have many zeroes, whereas smaller magnitudes are usually expressed as precise numbers. So when sellers list a home at a precise price, the price is judged by buyers to be smaller," Thomas says. "This effects negotiations between buyers and sellers."
Uncovering this bias in real estate market advances our knowledge about how the human mind works. That the Wal-Mart pricing effect occurs not only in retail stores but also in the real estate transactions suggests that the biases in price magnitude judgments are not caused by careless mistakes. Rather, these biases seem to be caused by deep-seated, non-conscious mental processes that operate without our awareness.
And what about the prevalence of ".99" in pricing? Thomas attributes that to a different psychological mechanism: Left-digit anchoring. He found that consumers often perceive the price to be lower than if the price were rounded to the next dollar. "Because people read from left to right, they tend to anchor their judgment of price on the left-most digit," he says. So a price of $1.99 will seem to the potential buyer to be closer to $1 than to $2.
Thomas' pricing research also suggests that the ease or difficulty of thinking about a product or price can affect one's perceptions. When making a decision to purchase a discounted product, consumers must judge whether the difference between the regular price and the sale price is large or small. In one study, Thomas and his co-author discovered that people perceive the difference between $5.00 and $4.00 to be larger than that between $4.97 and $3.96.
"Usually it is easier to compare two dissimilar magnitudes than two similar magnitudes; overuse of this heuristic can make people incorrectly judge the difference to be larger for pairs with easier computations (e.g., $5.00 – $4.00) than for pairs with difficult computations (e.g., $4.97 – $3.96)," Thomas says.
Another study revealed important insights for sellers, on providing information on new products. "New product buying decisions are made quickly by consumers, and marketers must provide descriptive information about the product" Thomas says. "Should that information be vividly descriptive or pleasantly fluent?"
The answer: give lots of information on a new product, but be certain each word is easy to process and understand. "The more information the better—as long as it's easy to pronounce," he says.
Here's an idea. How about offering products that the consumers really want and/or need at a fair price and manufactured in a socially and environmentally responsible way? How about going back to the concept of consumer as customer rather than stockholder as customer? Perhaps commerce run in a cooperative and mutually beneficial way would be more profitable for everyone in the long run. No costs of lobbying to get unfair advantages, no expensive research teams to figure out how to fool the public and bilk them of their hard earned wages. No costs to clean up the environment from hazardous production methods, or legal fees fighting the responsibility to clean up the mess. Lower health care costs when employees are less stressed and not exposed to hazardous chemicals or practices, and when consumers are not subjected to chemicals.
I'm just sayin'that in the long run what's good for people and the environment might be good to our pocket book too.
I've always been fascinated with the psychology of pricing, so this is very interesting. I'm curious about how this applies to the pricing of hourly services such as business or executive coaching. And I would think that on some level there is also a value consideration when it comes to service pricing. Does $199.99 versus $200.00 per hour create a negative perception, even though it appears to be a better buy?
What kind of people were being studied? If I see a sticker that says $1.99, I count that as being $2.00. $2.99 to me is $3.00. I think that prices ought to be rounded out - instead of $5.99 or $3.75, just put $6 or $4. I have to question why when a person thinks something is deal because it is 1 cent below the whole dollar. I know it was explained somewhat but it doesn't make sense.
Actually, the next discussion should be on morality in marketing. Though these tricks may work in getting your company more money, some may view it as morally objectionable to take advantage of your fellow man/woman's misconceptions. A large portion of our planet's current economic strife is due, not only to the greed of companies, but to the misjudgments of consumers as to what they need and can spend. Marketing firms need to stop telling people "Hey! Look at this! It's much better than the version we released a week ago and has these functions that you desperately need to survive! And look, it's only $99.99!", and instead focus on the moral obligation of describing their products fairly and accurately, including eliminating misleading pricing policies.
Thanks for the helpful insight and information. I will be utilizing the concept when pricing real estate for sale in the near future.
Good read.
Let's talk about Your Brain at the Gas Station
Note that gas stations have this 9/10th of a cent tag attached to their prices and that it largely goes unnoticed! So if per gallon price of gas is 2.99 9/10, it is closer to 3.00 but feels like 2.99.
This helps in keeping sticker shock at bay while collecting most of the revenue.
Post a new comment: