How you frame the dollars frames the decisions
- Fri, October 28 2011
- Filed under: Marketing essentials
(NOTE: A quick correction - the report this post was based upon had a reversed sentence which contradicted a finding. The report was just corrected online here in the comments. I didn’t catch it when posting, which perhaps led to you scratching your head. Hawk-eyed reader Willy noticed. The bolded text below is now correct. Thanks.)
I think pricing psychology is fascinating, and it’s worth experimenting with it in our sector.
I’ve blogged here before about one idea—that of anchors. For example, if you see $50 vs. $5 is a common gift on a list, then $30 either looks like a small gift or a big one. Or a $25 wine seems expensive if it appears halfway down a list that begins with a house wine priced at $10 yet cheap if the options on the list are reversed and start with a $50 wine first.
The first number we hear frames how we react to other numbers.
Now, Inside Influence Report adds another dimension to these ideas. This week, they summarized research on how we react to packages of several items.
It’s really useful in thinking about products you sell, services you offer, grants you seek and donations you request.
Here’s the idea, as the Inside team explains: A movie theater might offer customers the option to watch 15 movies for $99 or a lawyer may offer 10 hours of consulting time for $2500. A pair of researchers—Rajesh Bagchi and Derick Davis from the Pamplin School of Business at Virginia Tech University—wondered if the order of the price and number of items matters in how people react. In other words, is it different if you offer $99 for 15 movies? What if the lawyer proposes 10 hours of consultancy time for $2500 or a smaller package of 2 hours for $500? And what if the offer is hard to figure out? For example a contract for $1700 results in service to 1,000 people vs. $1695 for 1,100 people.
The researchers presented these types of variations and asked the study participants how good a deal they thought they had been offered, the value for money it represented and, most importantly, how likely they were to make a purchase.
The results?
1. When the offer was easy to calculate, people rated that offer as better value with price first, item second, regardless of the size of the package
2. But when an offer was more difficult to calculate AND the package offered was large, then the reverse was true. People preferred item first, price second. People were more likely to prefer and trial the ‘58 hours for $289.50’ offer over ‘$289.50 for 58 hours.’
As Inside Influence notes:
When offered a choice people will typically anchor on the first piece of information presented to them and adjust (sometimes insufficiently) for the second piece of information that follows. Furthermore this effect is amplified the more difficult it becomes to calculate the offer, leading to different evaluations and preferences for what are essentially the same things… To think that clients and customers judge larger packages and offers as a better deal irrespective of how the price order is presented is a misconception.
The bottom line? If you have a complicated proposal of different prices that are hard to calculate, put the item first. If it’s easy with a smaller number of units? Put the price first.
Comments
Katya- As always, another great thought starter! Two things-absolutely, less (information) is more-keeping it simple! Also, the pricing combinations and thresholds are very real and measureable. The consumer has a “mental wallet”, which we need to discern and tap into to maximize thier engagment and action. Multiple analysis such as conjoint and Van Westendorp methods are valid methods to test pricing thresholds or optimal combinations for a giving/membership packages. It is a field which is very “untapped” in the non-profit sector. Thanks again for highlighting this area.