William Poundstone's book is about the psychology of pricing.
Insights from the book:
1. Prada stores carry a few obscenely expensive items in order to boost sales for everything else (which look like bargains in comparison). People used to download music for free, then Steve Jobs convinced them to pay. How? By charging 99 cents. That price has a hypnotic effect: the profit margin of the 99 Cents Only store is twice that of Wal-Mart. Why do text messages cost money, while e-mails are free? Why do jars of peanut butter keep getting smaller in order to keep the price the “same”? The answer is simple: prices are a collective hallucination.
2. In psychological experiments, people are unable to estimate “fair” prices accurately and are strongly influenced by the unconscious, irrational, and politically incorrect. It hasn’t taken long for marketers to apply these findings. “Price consultants” advise retailers on how to convince consumers to pay more for less, and negotiation coaches offer similar advice for businesspeople cutting deals. The new psychology of price dictates the design of price tags, menus, rebates, “sale” ads, cell phone plans, supermarket aisles, real estate offers, wage packages, tort demands, and corporate buyouts. Prices are the most pervasive hidden persuaders of all. Rooted in the emerging field of behavioral decision theory, Priceless should prove indispensable to anyone who negotiates.
3. A German professor (Hermann Simon) runs the biggest pricing consulting firm in the world, that restaurant menus are better designed without leading dots before the price (otherwise they guide the eye to the lowest priced item) or that supermarkets yield a $2 higher average shopping cart revenue if the path through the market goes counterclockwise instead of clockwise.
4. Much of what we think of as "fair" pricing is nothing more than a collection of cognitive fallacies and biases. The most important of these fallacies are the contrast effect (pricing taking on significance from neighboring prices) and the anchoring effect (we are drawn to a particular number). Poundstone illustrates these effects, and the process by which their importance was recognized first in the literature and then in consumer practice, through a long series of vignettes that recapitulate the genesis and development of pricing theory, behavioral economics, and psychological decision theory.
5. Psychophysics: Poundstone is an engaging intellectual historian who traces the development of behavioral economics from its roots in the 1960s in a discipline called psychophysics, an offshoot of psychology.. there was a law of diminishing returns to money -- that to most human beings, the pleasure of finding a $50 bill lying on the street was not, in fact, five times the pleasure of finding a $10 bill.
6. The power of suggestion also extends to negotiation, where the party making the first offer inevitably gets the upper hand, no matter how unrealistic that offer might be, simply because it subconsciously becomes the reference point for all that follows.
7. Retailers long ago learned that using 99-cent prices works like a charm when selling some items but not others. And every TV huckster knows how to increase both sales volumes and prices just by throwing in lots of free add-ons that cost very little and that most people wouldn't have purchased anyway. As for those unlimited wireless calling plans, most people would do better paying by the call, but prefer them anyway because there's no pain or guilt associated with making any particular call.
8. On overpriced holiday gifts: People are suckers for anything that's called a discount. They don't really know what things should be selling for, but if you tell them this is 40 percent off, they'll buy it.
9. The 99- cent endings on things: They've done studies with catalog companies and Web sites where they'll basically make two versions of their catalog or Web site, and they'll be selling the exact, same product. But on one version, they'll sell it for $34 and on the other one, they'll sell it for $39 and surprisingly, more people buy it at $39. This basically shows that there is some magic to prices ending in nine.
The best theory is that people assume that it's sort of been discounted. It doesn't make a whole lot of sense, but the effects are really pretty big -about, like, you can increase sales like about 20 percent or so in a lot of situations.
So it's something that's used an awful lot. Certainly, if you go to any fast food place and just look at the menu there, you're going to find that practically all of the prices end in nine.
10. The anchoring phenomenon: Jewelry is a good example, but it also applies to today's complex electronics. When you're looking at flat-screen TVs, you know, you really can't compare them on every feature because no one reads, you know, the manuals and so forth. So if you see one that's for $1,000 and another that's $1,500 marked down to $1,000, you figure that the marked-down one is going to be better.
And that's what a lot of retailers have found, particularly this past holiday season, when they've really been using a lot of these price consultants and really have been engineering these sales and discounts.
11. The ever-shrinking container. That pound of coffee does not have a pound in it anymore. The cereal box, as you say, is getting skinnier and skinnier, but the size - the height and width hasn't changed.
12. $100 or over $100 hamburgers: The reason that's there isn't because they figure they're going to sell a lot of those $100 hamburgers. But once you look at that and sort of say to your, you know, the people with you, gee, who would spend $100 on a hamburger, that $100 remains in your short-term memory. And then you look at the more reasonably priced stuff, and you see a $50 steak and you say, well, that's pretty reasonable. It's a steak instead of a hamburger, and it's half the price. But if they hadn't had that $100 hamburger there, you probably would have said $50 for a steak? That's absurd.
So it really does have a big effect. Another thing they've found: Even the typography matters. You want to make sure that the prices are not in a single column because then people kind of go down the column and pick whatever is cheapest. But of course, a restaurant wants you to choose what you want and not pay too much attention to the price. So the way to do that is to make sure there's no dollar signs or cents figures on the price. It's just a number. And maybe it's at the end of a block of copy, so that it doesn't form a simple line. And that way, people tend to get something more expensive.
13. The concept of loss aversion: Daniel Kahneman said that he considered loss aversion his most important contribution to the theory of decision-making. In that sense, page 99 could be considered pivotal to the book’s argument. Loss aversion refers to the fact that losing money is not simply the mirror image of gaining money. There is an all-important asymmetry: Losses are more keenly felt. That is, losing $100 stings more than winning $100 delights. Prices are monetary losses that may be balanced by the gains of what we acquire. Loss aversion is thus central to many the tricks of today’s psychological marketers. Kahneman speculates that loss aversion also explains some of our deep-set cultural traditions:
Kahneman observed that loss aversion ‘extends to the domain of moral intuitions, in which imposing losses and failing to share gains are evaluated quite differently.’ There’s a law against being a thief, not against being a tightwad. And while avarice makes the list of seven deadly sins, and charity the top three Christian virtues, the ten commandments forbids only stealing or coveting someone else’s wife and property. Charity is only a suggestion.
[From the Great Books Series. Also see The Success Manual - Encyclopedia of Advice, which contains summaries of 100+ Most useful books.]
