Deciphering The Psychology of Pricing What mental tricks do retailers employ to push products? William Poundstone, author of Priceless: The Myth of Fair Market Value (and How To Take Advantage of It), talks about the science of pricing and shares tips for savvy shopping.
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Deciphering The Psychology of Pricing

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Deciphering The Psychology of Pricing

Deciphering The Psychology of Pricing

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Ira Flatow, host:

Up next: If you think that you're a great shopper and a pro at salary negotiations, you can outsmart the used-car salesman - well, maybe you can, or maybe you've just been fooled into thinking that you can. Maybe you only think you got a great deal when that was the deal that they wanted you to get anyhow.

Joining me now is William Poundstone. He's author of a new book, �Priceless: The Myth Of A Fair Market Value (And How to Take Advantage of It),� just out from Hill and Langley. Welcome to SCIENCE FRIDAY.

Mr. WILLIAM POUNDSTONE (Author, �Priceless: Myth Of Fair Market Value And How To Take Advantage Of It�): Yes, thank you.

FLATOW: Do you think a lot of people brought gifts this holiday season that they paid too much for?

Mr. POUNDSTONE: Yeah, that's probably true. In fact, one of most insidious thing is all these discounts that obviously, we've had this past season. They've really done research and found that, you know, 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.

FLATOW: So, they have no idea what the value - the inherent value of a product is?

Mr. POUNDSTONE: Yeah. Basically, we all operate on remembered prices or advertised prices, but when you do experiments where people really don't know what something should be costing - like, let's say if I show you something and I say, this is a very expensive, fancy wine. And you don't know anything about wine and you're supposed to guess it. It's very easy to manipulate your guess about what that wine is going to be worth.

FLATOW: Mm-hmm. And I love the trick, though, when you see the 99- cent endings on things.

Mr. POUNDSTONE: Yeah, that's certainly one of the classics. 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.

FLATOW: 1-800-989 - speaking of nines - 1-800-989-8255 is our number. We're talking with William Poundstone, author of "Priceless: The Myth of Fair Value (and How To Take Advantage of It)." Can you take advantage of it?

Mr. POUNDSTONE: Yeah, definitely. It's - certainly the good negotiators are the people who know some of these psychological tricks and are able to apply them. Maybe the most important of all is that in any sort of negotiation, for a salary, a car or a house, you really want to be the first person to name a number. And of course, a lot of job hunters don't do that. They figure that, you know, I really don't know what I'm worth in today's job market, so I'm going to let the employer make the first offer. And then whatever he says, I'll say, you know, that's not quite enough and ask for 10 percent more.

But really, they've done studies on this, and they've found that people are very susceptible to the first number in a negotiation. And there is this huge statistical effect, when they do experiments, that the final negotiated price is influenced by that first number. So you really want to make sure to give a first number that's favorable to you, and everyone negotiating should start with that.

FLATOW: So if you're going apartment hunting, you don't go in and say, what are you asking for this apartment? You say, I want to pay this number for the apartment.

Mr. POUNDSTONE: Yeah, exactly.

FLATOW: And let them come down to meet your number instead of you going up to meet their number.

Mr. POUNDSTONE: Yeah, that's definitely what you should do. It uses the technique called anchoring, which is basically that when you don't know what something is really worth, the first number you hear is going to exert this statistical effect on it. So you want to use that in your advantage.

FLATOW: And do marketing people really study this, these techniques carefully?

Mr. POUNDSTONE: Yes, at least the effective ones, I think, do. In fact, one of the interesting things I come up with in the book is that there's this new profession called price consultants, who are basically in the business of telling retailers and marketers the best price to charge for each particular product. And it's basically about the psychology of it, and they use various tricks like that. And it's become a very big business.

FLATOW: So you hire people to tell you - you could hire the same people. You mention in your book that Coke and Pepsi - hiring the same people.

Mr. POUNDSTONE: Yes, one of the best-known price consultants is known as Simon-Kucher and Partners. They've been around since the 1980s, and it's kind of amazing. They have as their clients many companies that compete against each other because when you do prices, apparently, it's not so much a conflict of interest. But you wouldn't expect Coke and Pepsi to have the same ad agency, but they actually use the same price consultants.

FLATOW: OK. We're going to take a short break and come back, talk lots more with William Poundstone, author of "Priceless: The Myth of Fair Value (How To Take Advantage of It)." Our number, 1-800-989-8255. You can tweet us @scifri. Maybe you have buyer's remorse today. We'll talk about - maybe you could talk about what happens when you bring it back. So stay with us. We'll be right back after this short break.

(Soundbite of music)

FLATOW: You're listening to SCIENCE FRIDAY from NPR News. I'm Ira Flatow. We're talking about how to be a smart consumer with William Poundstone, author of "Priceless: The Myth of Fair Value (and How To Take Advantage of It)." Our number, 1-800-989-8255. Lots of folks on the line. Todd(ph) in Athens, Ohio. Hi, welcome. Hi, Todd.

TODD (Caller): Yeah, hello.

FLATOW: Hi there.

TODD: Great, I'm glad you took my call. My little story, a quick anecdote is I'm a jeweler and for years, we've set up the carts in the malls where we sell the jewelry. And the very first year that we did that, my wife and I, we set up the cart and we sold, you know, the silver chains, sterling silver chains. And we went all around the mall and checked the prices of all the silver chains, and we priced our chains lower than anyone else in the whole mall, and put them out on display.

And they sat, and they sat, and they sat. So we were getting closer to Christmas and worried, so we doubled the price on every chain, and we put a 50 percent off sign in front of it, and they sold like crazy.

(Soundbite of laughter)

TODD: And I had the same thing happen with emeralds, where I had bought emeralds. I got a good price on them, and I put a display of emeralds in the case. And people would take it, they'd look at it, and they'd put it back. And I had one customer pick up a ring and she goes, this is perfect, exactly what I want. And she looked at it and she went, no thanks, and handed it back to me. And I was like what? You know, what happened?

And she said, well, I looked at the price on this, and I've been shopping emeralds around, and there's just no way that an emerald this nice could be at this price. So I'm assuming there's something wrong with it. So I doubled all the prices on my emeralds. If it was $400, I made it $800, and guess what? They all started selling because people had a perceived value.

FLATOW: They want to get - they don't know what the emerald's really worth, and that's what William Poundstone is saying.

TODD: Right, and I had gotten them direct from Brazil, had done really well, and I thought I was doing this great favor.

FLATOW: Bill, what do you say about that?

Mr. POUNDSTONE: Yeah, that's a perfect example of this anchoring phenomenon. And of course, 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.

FLATOW: Another trick that you mentioned in the book, that I've watched over the years, is the ever-shrinking container. That pound of coffee does not have a pound in it anymore, right?


FLATOW: The cereal box, as you say, is getting skinnier and skinnier, but the size - the height and width hasn't changed.

Mr. POUNDSTONE: Yeah. Well, they definitely wouldn't change the height and width because they want to make sure those cereal boxes command the same visual space on the shelf. But what they do is make them thinner so they contain a little less. And the reason they do that is that they know that consumers don't like it when they raise prices. And when you think about it, because of inflation, I mean, basically every retailer has to be raising prices constantly.

But with commonly purchased things like that, they're afraid that if they raise the price, you'll either switch brands or switch stores. So what price consultants do, they tell people that you have to just shrink the package. And there are all sorts of invisible ways to do that.

I think my favorite is Puff's tissues. Their tissues used to be 8.6 inches long, and they shrunk it to 8.4 inches, but not only wouldn't you notice that, but you can't even see it because obviously, the hole is in the middle of the box. And you don't see that there's, like, over an inch of air inside that Puff's box. So as long as people don't notice, they don't realize that in effect, you've raised the price.

FLATOW: Are these things tested out before they go to market, or they just say, I think this will work, let's do it?

Mr. POUNDSTONE: Certainly, the price consultants have a bag of tricks that they know have worked in the past. But what's interesting is that with, you know, bar codes and scanners and Internet sales, basically all the sales data is quantitative now. So they can do, in effect, experiments all the time. And that's how they find out what's going to work.

FLATOW: Is that why we saw so many different sizes of soft drinks coming out, the liter bottle, the two-liter bottle? Because going back to what you say, I don't know how much a liter of soda should cost.

Mr. POUNDSTONE: Yeah, exactly. It's a way of fostering confusion. If you've been buying the same size of Coke for years and years, you know what it should cost and you'd get upset if they raised the price. But if I show you a container you've never seen before, it's bigger or smaller, you don't know how to evaluate it.

And you can say, well, you can do the math. But most people are too busy to worry about that. They just make this intuitive guess. So that's basically what people want you to be doing because when you guess, you usually guess wrong.

FLATOW: Caroline(ph) in Anchorage. Hi, Caroline.

CAROLINE (Caller): Yes, good morning - or probably afternoon, your time. I wanted to ask a question. I remember the J.D.(ph) story, but my main question is how - do they market differently for different audiences? Not to make any broad generalities, but do the NPR audience in those particular areas, do they market with a more realistic, a more scientific or something like that and - than they would, for instance, to - I'm watching a football game right now, and I heard the 99 cents and I thought, you know, I wonder if. So...

FLATOW: Good question, and let's get an answer.

Mr. POUNDSTONE: Yeah, well, certainly they do segment by, you know, by price, income level and so forth. Obviously, some shoppers are really looking for a bargain, and others are wanting to spend a lot of money. But I think the interesting thing is that a lot of this psychology of price is just standard human nature, and it pretty much applies to all of us.

In fact, they've even done studies which show that smarter people, if anything, are more susceptible to this. I think a lot of people, when you hear about these discount things or the prices ending in nine, figure, well, maybe other people fall for that but I won't. But they've done studies and found that the smarter you are, in some ways the more susceptible you are to these things.

FLATOW: Thanks, Caroline, happy New Year.

CAROLINE: You're welcome.

FLATOW: One other part in - you give a little bit of it in the book, but it's certainly powerful and something we see all the time, is those late-night commercials, whether you're getting the rag that mops things up, it's the - but wait, there's more. I mean, they keep adding stuff onto this thing, and they give you two or three of them. And you're - and what you realize is you're paying more for shipping and handling than you are for the product itself after a while.

Mr. POUNDSTONE: Yeah, that uses a principle that Richard Thaler(ph) calls, don't wrap up all the Christmas presents in one box. If you listen to those infomercials, they're really all the same. They break it down by special features, special add-in product. They're going to give you two different Snuggies. They're going to give you something that goes with the Snuggie. And they just keep listing all these great things.

And the point is, the more things that you hear that sound like they're good and worthwhile products, the more inclined you are to buy that. So you'll find, in fact, you can't actually buy one of anything on an infomercial. It's always a two-for-one offer, and that's because they've done their research and found that people are more likely to buy that way.

FLATOW: Let's go to the phones, to Stuart(ph) in Minneapolis. Hi, Stuart.

STUART (Caller): Hi, happy New Year to both of you.

FLATOW: Thank you.

STUART: I happen to have a book on Amazon, actually to plug it. You know of it, Ira, it's a book of Antarctic photographs. I have to keep tracking it just out of curiosity, and Amazon changes, over the course of a year and a half, the price roller-coasters over a range of $10, and it's beyond me to figure out what their algorithm is there. So I was wondering if your expert there has any insights to how these prices just change?

FLATOW: Good question.

Mr. POUNDSTONE: That's known as market segmentation. They figure, we're going to offer it at one price, say a high price, and let the people who are willing to pay that buy it. Then they try a lower price, and you'll get some people who were interested but wouldn't have paid the higher price. Then they'll move it up to the high price again to get some of the people who aren't so price-conscious. So that's a pretty common trick, and it really does tend to increase sales.

A famous example of that was former president of American Airlines said, you know, if I've got 2,000 people on a flight, I should really have 2,000 different prices for that particular flight because everyone has a different willingness to pay. And that's what these price consultants try to do. They try to figure out what's the maximum price each person is willing to pay and somehow, find a way to get them to pay that.

FLATOW: Unfortunately, that has come true.


FLATOW: If you've flown these days. You also talk in your book about restaurant menus and how to put the pricing on the menus, influencing what we order. That was fascinating.

Mr. POUNDSTONE: Yeah, there are consultants even specializing in menu design nowadays. And any restaurant has certain items that are more profitable, and certain ones which they figure they have to have on the menu but aren't so profitable. So they want to make sure that people's attention is drawn to the things that they really want you to order because they make more money. And there are several ways to do that.

They've found that people open a menu and automatically look at the upper right-hand corner. So usually, whatever is there is something that's high profit. And another trick they use, uses this anchoring idea. They'll have one thing that's really expensive on the menu.

For instance, in New York, there are several places that have, like, $100 or over $100 hamburgers. And 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.

FLATOW: Interesting. Stacy(ph) in Wilson, Wyoming. Hi, welcome.

STACY (Caller): Hi, thanks. Currently, I work at a specialty grocery store. And like your guest said, we - everything is 69 or 99, but interestingly, nothing is 19.09, .09 is the big no-no because then it seems like it's not a deal. Although if it was 19.99, you know, people would buy it. And we have sale tags that are 10 cents off and people, without even thinking, well, oh, it's on sale.

But interestingly, before this, I sold cars. And people who think, oh, I know so much about cars. I'm going to go in and get a great deal. What they don't realize is that modern-day sales - car salesmen are trained in these new methods, like Joe Verde and they're - they have to read Zig Ziegler. And it's our job to get, you know, seven yeses out of you within, you know, the first 15 minutes of talking to someone.

So just because I know the inside and out of a car, you know, they don't know the inside and out of the psychology of every step of that car sale. So, I'd love to hear your guest comment on that.

FLATOW: Thanks, Stacy.

Mr. POUNDSTONE: Yeah. One of the best things you can do when negotiating for a car is to bring along a friend, or even two. Because, you know, people go to get cars, they're a little more educated than they used to be. They'll often have a printout from Consumer Reports or something, telling, you know, what are all the, the dealer incentives and what the dealer actually paid for that car. And then they tell you, you should figure 5 percent on top of that is a fair profit.

But dealers obviously don't like that, so they basically are going to challenge all your facts. And they've done studies and showed that if you're the only one in the room, you know, trying to defend your facts, you tend to give in pretty easily. But if you have a few other people who agree with you there, then you tend to hold your ground better. So that can make a big difference in terms of buying a car, and it's something that, really, you should do, even though everyone says, oh, I don't need that.

CONAN: Talking with William Poundstone, author of "Priceless: The Myth of Fair Value (and How to Take Advantage of It)" on SCIENCE FRIDAY from NPR News.

I'm Ira Flatow, getting a real education on all the things I did wrong about negotiating and buying. Are there any other things you can arm yourself with, Bill?

Mr. POUNDSTONE: Yeah. Certainly, an important thing is in real estate. There was, when these ideas were first floated in psychology, there was a lot of skepticism that these psychological tricks would apply to something like real estate, that has market value and where big money is at stake.

But they did an interesting experiment in Tucson, Arizona. They took a bunch of people to a house that was actually on sale, and they gave them all the printouts that you normally got with the comp figures and everything, and asked them to estimate what was the fair market price for that house.

Now, the only variable in this experiment was that different groups of people saw different values for the listing price. And they found that their estimates were hugely influenced by that listing price. And the interesting thing is, they even did this with professional real estate agents. Now, their agents were a little less influenced by the listing price than the non-experts, but even the real estate agents were influenced.

So it's important to understand that you're going to be influenced by that listing price, and you really want to do everything you can to consider the possibility that maybe the listing price is not very accurate.

FLATOW: So you want to get in with the anchor number yourself?


FLATOW: You come in as the aggressive person.

Mr. POUNDSTONE: Yes, with a low offer, because everyone is based - in real estate, since no two houses are entirely comparable, everyone is doing this guesstimate of what they think it should be worth. And they found that whenever you have to make one of these guesstimates, you're very easily influenced by an anchor figure that you hear.

FLATOW: And a lot of times - and products, getting back to products - we see women's items, identical items for women priced so much higher than stuff for men.

Mr. POUNDSTONE: Yeah. They've done studies and apparently found that in certain situations, women seem to be less price sensitive and unfortunately, they're taking advantage of that. For instance, there's - I think it's Barbasol shaving cream. And it comes in a big, blocky can for the men and a little, skinny can for the women.

And the women's can actually holds less product, but it sells for more money. And it sells pretty well.

FLATOW: Yeah. I think I've even seen that with deodorant and razor blades and things like that.


FLATOW: Where they're identical items.


FLATOW: They may have a little different color, but they're aimed at different people.

Mr. POUNDSTONE: Yeah. Now, I mean, they do have rationales for this. They say that women's shaving cream is more likely to be used in the shower, so they have a rust-proof can. That supposedly justifies part of it. But in many cases, I think it's just the case that they've found that they can charge more in this case, and people will pay it.

FLATOW: All right. We're going to take a break and come back and move onto another segment of our program. But I want to thank you, William, for taking time to be with us today.

Mr. POUNDSTONE: Well, thank you.

FLATOW: Very informative reading. It's called "Priceless: The Myth of Fair Value (and How To Take Advantage of It)" by William Poundstone. You will learn a lot about how to bargain, and some of the mistakes you may have made in the past. Have a happy New Year.

Mr. POUNDSTONE: Well, thank you. Yes.

FLATOW: We're going to take a break, as they say, and switch gears. And we're going to come back and talk about - and get your fingers dialing-ready, because if you're a fan of the show "Numbers," we're going to talk about math and some math quizzes for you that you can take, and maybe become a contestant on our little quiz show after the break. So stay with us. We'll be right back.

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