OnDemand WTP Pricing Research

The Consequences of Amazon’s Pricing Power – Goods & Services | Medium

How Price Anchoring Works
Whenever we are presented with a buying opportunity, whether at the grocery store, a restaurant, or shopping for jeans online- our brains have to estimate whether the price of the product (or service) is good or bad. If you’re going out for coffee, for example, and you see that a latte costs $50- your brain will tell you: “Walk out and go somewhere else, coffee does not cost $50.”

How does your brain know to do this? At some point in your life, you learned that the average cup of coffee in the United States costs between $2 and $8. When you see that the coffee is $50 your brain knows that the price is way off.

The price you expect to see is your anchor- anything below this value range seems suspicious and anything above it seems ridiculous.

We humans have a pretty good sense of what most things should cost because we shop regularly and are exposed to prices constantly. However, there is an exception to this condition- and marketers exploit it regularly.

Manipulating Price Anchoring
Essentially, price anchoring is the concept that we compare all prices to the first value that is given to us. This is why you see the “Suggested Retail Price” on clothing item tags when the actual price of the garment is significantly less. The retailer is trying to set a price anchor in your mind. They are basically saying, “Look! This should be $100- that’s what the designer suggested we sell it for. But we’ll give it to you for only $85- trust us, you’re getting a great deal.”

Most people would say that they can’t be fooled by the arbitrary value assigned by the MSRP (Manufacturers Suggested Retail Price) and that it has no bearing on their decision of whether or not to buy the piece of clothing, but numerous researchers would argue that it does.

In one experiment, performed by legendary behavioral economics researcher Dan Ariely, it was proven that just giving people a random number to assign to a variety of random objects and then asking if they would pay that amount for each object swayed their decision either higher or lower.

For the experiment, he gave each student a list of several random items (a bottle of wine, a computer keyboard, a book…) and had them write the last two numbers of their Social Security Number (SSN) next to each item in the form of a price. So, if you SSN ended in 09, you would write $9 next to each item and if your SSN ended in 77, you would write $77 next to each item. He then asked the students to write down how much they would be willing to pay for each item. Guess what happened to the people with the high SSN…

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The Consequences of Amazon’s Pricing Power – Goods & Services – Medium.

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