“Priceless: The Myth of Fair Value” by William Poundstone
February 25, 2015 - mmr
Why this book matters?
Consumer decision-making is a complex process, often rooted in the irrational subconscious. As market researchers, it is important to note this phenomenon as we design surveys intended to mimic consumer behavior especially when pricing is involved. Attention must be paid to how pricing information is displayed in a survey to elicit the most accurate results.
In the book “Priceless: The Myth of Fair Value,” William Poundstone argues that prices are the most prevalent concealed persuaders in the marketplace. They are a prime example of the seesaw battle between the rational conscious and the irrational subconscious. Consumers have no intrinsic value of money in terms of magnitude, so their “value” of money is derived from relative contrasts.
This notion gave birth to the theory of “anchoring and adjustment.” Briefly explained, the anchor serves as a benchmark for approximating an unknown value, and consumers adjust downward or upward to determine their “actual” value.
However, consumers normally don’t adjust enough, so marketers can exploit this theory in various ways to capture untapped revenue streams without increasing expenses.
Research Industry Implications
An interesting research implication of this theory is menu design and pricing for the restaurant industry – an often complex topic. For example, restaurants frequently include high priced items on their menu so that other items appear cheaper than reality. Restaurants don’t have to intend to sell the high priced items, but they provide an important relative contrast to the other items, ultimately enticing customers to spend money on higher margin selections.
When aiding with menu design and layout, consider placing higher margin items adjacent to the higher priced items (the anchors) so relative contrast is strongest.
Knowing that consumers don’t adjust enough, when designing pricing research for specific menu items consider replicating the full menu experience as accurately as possible. Seeing the full menu will allow respondents to “anchor and adjust” and could help create more accurate estimates for purchase interest and price sensitivity.
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