Is a $399K list price really better than $400K?

NEW YORK – June 19, 2017 – Why did my doughnut cost 99 cents this morning instead of a simple, even dollar? It turns out that the price has less to do with cost or value and more to do with how our brains process numbers.

Our brains are good at some things but not others. We are terrible at crunching numbers, for example.

But we excel at quickly processing our environment – for instance, if we see a long object moving on the ground, we don’t calculate its trajectory and motion. Instead, we just run – better to take the risk of embarrassment (a twig on the ground) than risk being bitten by a snake.

To do this, our brains need to take in a relatively small amount of information and make up the rest using previous experience, expectations, and predictions.

Your brain is a cheater

The brain cheats, taking shortcuts and making snap judgments instead of carefully deliberating the facts. Most of the time, this is a good thing, because shortcuts are efficient and usually get you to the same place as the long way.

All business owners should consider experimenting with prices. Thanks to brain science, we now know that even a one-cent change can make a big difference.

Consider using a number that the human brain is likely to round down to make your product appear to be a better value. As a consumer, just becoming aware of your brain’s shortcuts can make you a more careful buyer.

Numbers are an easy place for the brain to take a shortcut. We tend to be great at making estimations but horrible at rounding. When our brains see a price tag with lots of numbers, they automatically estimate, so $4.99 ends up closer to $4 than $5; $66,999 becomes $66,000 or sometimes even $60,000. Psychologists have known this for decades, and economists now begrudgingly admit it as well.

Psychological factors

Businesses have used pricing tricks for years to their advantage. They figured out by experimentation that tiny differences in pricing can make big differences in sales, and researchers studied this effect in depth in the 1990s and early 2000s.

They found that there is often a big sales difference between $2.99 and $3, but dropping a product’s price from $2.24 to $2.23 does not yield a measurable increase in sales. A penny is not always worth a penny.

Of course, there are other psychological factors at work in pricing. Relative pricing plays an important role: A product’s price compared to the products physically surrounding it can impact its sales. That is why gas stations not only charge per gallon to the nine-tenths of a cent but also price match to the competitor across the street. The human brain is especially good at making either/or comparisons and especially bad at decimals.

How shoppers can prevail

This strategy applies to shoppers as well. If you’re buying a 99-cent doughnut, think $1. A penny probably won’t break your budget, but rounding bias becomes more important for a larger purchase.

A $399,000 house is pretty much $400,000, but not in your mind: your brain’s shortcut system will try to suggest it’s closer to $300,000.

When the stakes are that high, don’t just think about it. Remember, our brains are better at thinking than “we” are and will continue to trick us!

To combat this, physically write down the price on a piece of paper, strike through it, and re-write the appropriate number by rounding up. The best defense is always a strong offense.

Copyright © 2017, USATODAY.com, USA TODAY. Jeff Stibel is vice chairman of Dun & Bradstreet, a partner of Bryant Stibel and an entrepreneur who also happens to be a brain scientist. He is the USA TODAY bestselling author of “Breakpoint” and “Wired for Thought.”

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