# Summary of experimentally verified pricing heuristics

A post on ConversionXL sums up a bunch of experiments on pricing and suggests ways of combining them to best effect. All electronic goods can be had for free, so every person who buys an electronic good is essentially entering into a voluntary transaction. Getting pricing right is the best way to convince (rather than coerce) customers to pay, and to frame that payment so that it's as large as possible.

Researches found that sale price markers (with the old price mentioned) were more powerful than mere prices ending with the number nine. In the following split test, the left one won:

9 not so magical after all? Not so fast!

Then they they split tested the winner above with a similar tag, but which had \$39 instead of \$40:

This had the strongest effect of all.

I’m wondering whether the effect of this price tag could be increased by reducing the font size of \$39. Say what?

Marketing professors at Clark University and The University of Connecticut found that consumers perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface. In our minds, physical magnitude is related to numerical magnitude.

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1. “All electronic goods can be had for free, so every person who buys an electronic good is essentially entering into a voluntary transaction.”

…so physical goods are an involuntary transaction?

1. Boundegar says:

I know, that whole sentence made no sense at all.  Maybe he meant that goods in the form of data, such as an mp3, can be had for free, so every dollar spent on music is voluntary?  Whereas the seller of physical stuff can lock you out if you won’t pay?

2. jackbird says:

\$48/\$40 vs \$48/\$39 seems rigged.  Did they test \$48/\$40 vs \$47/\$39?

3. big ryan says:

is it possible that \$39 did better than \$40 because its a buck cheaper?

1. dragonfrog says:

Well, the same item did better at “\$40 (reg \$48)” than it did at “\$39” even thought it’s a buck more expensive.

4. Economics textbooks should begin with this statement:

“Rather than being rational actors, as previous editions of this book have noted, human beings are subject to numerous psychological and perceptual tricks. You can take advantage of these to get rich and become powerful. However, you are liable to someday get lined up against a wall and shot, and history will mark you as a scumbag.”

1. HarveyBoing says:

Exactly. I fail to see what these psychology experiments have to do with the fair pricing of goods.

A purely free- and transparent-market approach assumes perfect knowledge by both seller and buyer. These experiments serve only the seller, and further the end of preventing the buyer from having perfect knowledge, and/or acting correctly on what knowledge they do have.

If we want to talk about getting consumers to pay for electronic goods, how about we start with the idea that consumers shouldn’t be tricked into paying more than what’s fair by using age-old price-presentation manipulation or other gimmicks.

This piece isn’t about “getting the price right” for the market. It’s about extracting as much profit for the seller, at the expense of the buyer.

1. Antinous / Moderator says:

It’s about extracting as much profit for the seller, at the expense of the buyer.

That’s what the free market is, was and always shall be. Anything else is fantasy.

1. HarveyBoing says:

Simply not true. It’s certainly how much of our capitalist system works, but it’s not what the abstract “free market” is all about. The theoretical “free market” is about finding that “perfect balance” between what a seller is willing to receive and what a buyer is willing to pay.

In a sense, it’s “at the expense” of both buyer and seller. It’s certainly not solely at the expense of the buyer.

You can leave yourself resigned to the status quo if you like, but don’t confuse that with economic theory, and certainly don’t confuse that with whether the article described here is about “getting the price right” or simply making the seller better at exploiting the buyer. (Hint: while it’s advertised as the former, it’s really about the latter).

1. wysinwyg says:

What you are describing as the abstract free market is an unattainable ideal.  Just as matter cannot attain a temperature of absolute zero no real market could possibly attain the “perfect balance” between supply and demand.

This is because entry into the market on the side of the supplier can only be motivated by profit.  Fair prices minimize profit.  Therefore suppliers will do whatever they can to impede the tendency towards fair prices.  If they fail they’ll usually leave the market to large firms that can still make a profit through economies of scale — Bic would be a good example.

2. HarveyBoing says:

An impossible ideal does not mean there’s no point in working in that direction.

Fair prices only “minimize profit” in the sense that they minimize the advantage one party has over the other. They don’t eliminate profit, just as they don’t eliminate value on the part of the buyer.

We already have lots of industries where profit is “minimized” by market forces, particularly in commoditized goods. Yet, competition still exists in those markets.

Indeed, strong competition is the hallmark of such situations. Without competition, prices would rise well above the “minimized” level.

Sure, sellers do what they can to maximize profit. Buyers do what they can do minimize cost. But that doesn’t mean that “getting the price right” is actually simply favoring the seller’s side of the equation.

3. wysinwyg says:

An impossible ideal does not mean there’s no point in working in that direction.

No, but you also haven’t demonstrated it’s desirable to work in that direction.  Nearly free markets seem to me worse than heavily regulated markets and so it seems to me trying to attain this goal is actually a bad thing.

Yet, competition still exists in those markets. Indeed, strong competition is the hallmark of such situations. Without competition, prices would rise well above the “minimized” level.

I can’t think of a single market where this is the case.  Bic has a little bit of competition but not much; on the other hand, they can’t really raise their prices too significantly because there is some competition and the only barrier to entry in most of their markets is…the low prices offered by Bic!

Sure, sellers do what they can to maximize profit. Buyers do what they can do minimize cost. But that doesn’t mean that “getting the price right” is actually simply favoring the seller’s side of the equation.

I’ve already argued otherwise.  As I said, since the only motivation for a seller to enter a market or stay in it is profit motive the seller’s side is automatically favored.  The seller can play the ultimatum game: pay my price or I won’t play.  In many markets (food, clothing, housing, healthcare) the buyer can’t really refuse to pay.  This clearly favors the seller — hence the need for regulation in food, housing, and healthcare markets.

I’ve actually made an argument where as far as I can see you’ve simply asserted my argument was wrong without offering any examples or rationale as to why.  I am unconvinced.

I haven’t gotten into the specifics of information asymmetry, why it’s inevitable, why it prevents fair prices, and why almost every profitable industry that exists profits as a result of information asymmetry. Any economic model requiring perfect information is doomed to fail to describe real-world economics.

4. oasisob1 says:

You’ve hit upon the Heisenberg uncertainty principle of capitalism.

5. oasisob1 says:

It is at the expense of the picker, however.

2. Finnagain says:

When does the shooting of rich, powerful scumbags commence?

5. “All electronic goods can be had for free, so every person who buys an electronic good is essentially entering into a voluntary transaction.”

1. Daemonworks says:

Not much, given that one of the two involves something that has a replication cost, and the other doesn’t.

The economic theory of Supply and Demand sort of breaks down with electronic goods, as there’s an effectively unlimited supply.

6. Gary Robbins says:

7. peregrinus says:

They can test really tiny text with really tiny prices on me if they like.

I’m no believer in the rational agent.

8. andygates says:

Physical magnitude and importance go waaay back; check the Egyptian conquest reliefs  Big ol’ conquering Pharaoh and his court are huge, and the captured slaves are teeny tiny.

I wonder if it’s a basic human confusion between small and far away?  Maybe we pay more attention to the thing we (mis)perceive as closest, at some deep unconscious level.

9. L_Mariachi says:

I feel insulted by prices that end in 9 (or .95, .98, 9/10ths of a cent, etc.) Like they think I’m going to be misled by such a transparent ruse, on the order of doing reverse psychology on a stubborn two-year-old. I’m more likely to buy something at \$40 than \$39, because it shows a level of respect for my rounding-up skills.

Go to a classy restaurant, chances are there will be few if any decimal points on the menu.

1. xkot says:

Go to a *really* classy restaurant, and there won’t be any prices on the menu at all!

Or so they tell me.

2. Ryan_T_H says:

There also won’t be dollar signs. By just posting a number without the formatting that is normally associated with money like dollar signs and decimals they disassociate the price with the idea of money. Thus their customers feel less hesitant about spending \$50 on a dish that represents \$4 of ingredients and \$46 of atmosphere and presentation.

1. L_Mariachi says:

Right, similar to how casino tables use plastic chips instead of cash. The \$100 chip is the same size as the \$1 chip, and none of it really feels like money.

But where the casino’s motive in disassociating chips from “real money” is to encourage players to throw it around more freely, I think it’s different at a restaurant. When you sit down at most places with no dollar signs or decimals, you’ve already committed to an expensive meal and you don’t really care if one entree is five bucks more than another. Their motive is to disassociate from money because caring about money (on that scale anyway) is tacky and low-class.

There are also normal places, sandwich shops and food trucks and such, that use round numbered pricing just to save themselves having to make fiddly amounts of change. Most bars don’t keep anything smaller than quarters in the register.

2. wysinwyg says:

Shouldn’t you also be accounting for the cost of paying cooks and a chef in addition to ingredients and atmosphere?  I’m pretty sure higher quality of food should play some part in your accounting.

10. There’s another thing I’ve noticed, first in TV ads in the UK but now I’m seeing it being employed in North America, where they won’t say the word ‘dollars’ or ‘pounds’ and they won’t say ‘hundred’ or ‘**- ty’. So, say a thing that is on sale for five hundred and forty-nine pounds is described as “now only five four nine!”
I just saw an ad on Peachtree TV (it was for some sort of cable TV service, I think AT&T), where the service was described as costing ‘nineteen a month’ (the word dollar was omitted), but, if you sign up now you get a rebate cheque for ‘one hundred and fifty dollars.’

1. Antinous / Moderator says:

So, say a thing that is on sale for five hundred and forty-nine pounds is described as “now only five four nine!”

That’s been true for the last half century wherever I’ve lived. I’d be quite surprised to hear the unit of currency.

11. Daemonworks says:

For added fun, in many cases you can raise sales by increasing price without changing anything else at all.

12. Finnagain says:

Well if it costs more, it’s clearly better. Duh.

13. Florian Bösch says:

“perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface”

That’s the solution right there. Print the font on the label so small you’ll need a microscope to read it. Put a microscope besides each item to sell.

1. oasisob1 says:

So you can snatch their wallet while they check out the pricetag? Genius!

14. CLamb says:

What if it said:  Reg 4800 mills; Sale 4 eagles?