Ever look at the number on a price tag and wonder where that number came from?
According to Mark Ellwood, the author of “Bargain Fever: How to Shop in a Discounted World,” a price consultant was probably paid a lot of money to help determine the number on that tag.
Ellwood says price consulting started in the 1980s when Hermann Simon, a former professor of economics in Germany, challenged the traditional method of “cost-plus pricing,” which is pricing something according to the cost of acquiring it.
Simon and his colleagues invented value-based pricing, essentially transaction utility in practice. Don’t start with manufacturing costs, Simon said, but with the customer and what they value about a certain product.
Today, price-consulting savants break down exactly how much the demand for a good or service yo-yos in sync with its price tag (a concept known as price elasticity of demand), then help businesses adjust accordingly. The brinkmanship is akin to an everyday auction, pushing prices as high as the market will bear.
Here are a few methods of price consulting used to manipulate you into buying something you might not really need. Next time you’re in a store, keep an eye out.
To explain “anchor pricing,” Ellwood uses the example of Panera’s $US16.99 lobster sandwich, which the chain introduced to its menu in 2009. “An absurdly expensive treat became an anchor price, throwing everything else on the list into bargain relief.”
According to Ellwood, that one item on a restaurant menu or in a store that is wildly overpriced has a purpose: to make everything else seem cheap in comparison.
This pricing strategy uses the power of three to push shoppers toward the one product a store is hoping to sell the most.
Ellwood presents an imaginary Best Buy offering three Samsung TVs each marked down 30%: a 32-inch for $US499, a 40-inch for $US699, and a 46-inch for $US899. According to Ellwood, Best Buy is hoping to sell the 40-inch option because it will likely offer the healthiest margin.
“[Goldilocks pricing] identifies a target item and then bookends it with similar offerings that make it both a bargain (cheaper than a 46-inch TV) and better quality (that 32-inch is for skinflint Luddites),” he writes. “Offering just a pair of similar items, shoppers will be drawn to the cheaper one. Present a trio instead, though, and they will gravitate to the mid-priced option.”
Prices ending in 7, 8, or .99
Here’s something else that’s not just a coincidence: prices that have common endings.
According to Ellwood, price consulting uses number theory to signal a certain kind of product. “Retailers know that prices ending in 9 indicate a value product (such as throwaway sunglasses), while a 0 ending shorthands premium and prestige (designer clothing), and 7 or 8 endings signal items priced to move and closeouts.”
Ellwood cites one price consultant who “estimates that $US9.99 price tag, can, on average, sell 10 to 20% more product than a $US10 one.”
The author says that “prices ending in 7 or 8 are most common in clearance racks or at retailers whose reputation rests entirely on good value, such as Costco or Walmart; they’re intended to imply a constant spigot of bargains.”