In the psychological pricing in marketing, discussed in the Priceless book; the author William Poundstone expounds the hidden psychology of value. He conducted psychological experiments in which people are unable to estimate “fair” prices accurately. And strongly influenced by the unconscious, irrational, and politically incorrect. It delves deeply in consumer psychology and pricing.  


Experiment in psychological pricing in marketing


One such experiment was done using the example of two breadmakers, priced at $279 and $429 respectively, both manufactured by the same company. The $279 model released first and sales were ok; but after introducing the $429 model, sales for the cheaper model nearly doubled. It didn’t matter that sales for the more expensive version were lukewarm, the very presence of the $429 model made the cheaper version more attractive. It’s called anchoring. The purchase heavily swayed by that first choice.


Anchoring is so effective that almost anyone selling anything anywhere is making use of it. By creating a reference point, sellers are priming buyers by providing them with a kind of standard so the focus becomes the difference in price and the value offered, as opposed to the price itself.


When asked in research experiments, the average estimate for the first choice was above 45 per cent. Tests showed the sensory systems are highly dependent on contrast to create meaning. Like the price difference of two types of bread. These are the psychological price points.


What is psychophysics?


The book explains that much of the work on modern-day pricing theory started in a still obscure field known as psychophysics. Psychophysics is the scientific study of the relationship between stimuli and the sensations and perceptions evoked by these stimuli.


It deduces that as the size of the purchase increased; subjects would be more willing to buy additional smaller items. Small extra purchases should seem like minor expenditures when they follow larger purchases. In addition, it found that subjects responded not only to actual changes in purchase size but also to changes in the presentation or framing of a purchase.


It didn’t take 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 business people cutting deals.


The new psychology of price


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 behavioural decision theory, “Priceless” should prove indispensable to anyone who is into negotiating price.


The benefits of psychological pricing clearly shows here as to “persuade” the price is fair.


Price is not absolute in psychological pricing in marketing


The lesson in Poundstone’s book is that price is not absolute; because price is really just a number. Numbers understood in relation to one another.


What this means is that people are more sensitive to the differences between numbers and not to the number itself. Given that most buyers have no inkling about the actual cost that went into manufacturing the product they are thinking of buying and what are the psychological price points. And therefore unable to make an informed decision about whether the asking price is fair.


What’s particularly interesting in the case of luxury goods, that certain products so specialised that companies like Whole Foods, specialising in organic products; can charge prices that wouldn’t normally be noticed because these products often don’t have an effective reference point making it hard difficult to find how fair the price tag actually is or not.


Herein lies the meat of the problem: people’s perception of what’s fair is often contradictory.  Hence, rarely in line with classical economic models.


Fairness depends on perception, which varies for different people, hence the implied myth of fair value. Therefore, there is no clear consensus between customers about what the price of a product ought to be, and often the same customers will make contradictory decisions depending on their own experience as they make a purchase.


The difference in approach to a transaction between buyers and sellers. How people view losses and gains differently are loosely discussed throughout the book.  Poundstone concludes with the opinion that “we spend our lives searching for the lowest price, the highest salary, the most money.”


We highly recommend that you read this book on the psychological pricing in marketing. 


On the Priceless book review, we give this 4 out of 5. A good starter book to learn more about psychological pricing.