Relative price difference matters not the absolute.
Weber-Fechner law: Relative price difference and not the absolute matters.
Weber gradually increased the weight that a blindfolded man was holding and asked him to respond when he first felt the increase.
Response was proportional to a relative increase in the weight.
If the weight is 1 kg, an increase of 10 grams will not be perceived.
If weight is 20 grams, an increase in 10 grams is perceived
Applies to sound, vision etc.
Psychology in Pricing Strategy
I will show you two numerical differences. Look at them quickly!
Psychology in Pricing
Which difference do you think is greater?
Top or Bottom
Odd number pricing ($0.99 vs. $1.00).
This is why Nike shoes are priced at $49.99, not $50!
Theoretical underpinning: Mental categorization.
Pricing and social networks
Pricing Trump towers
Price quality perceptions
Prospect Theory (Kahnemann and Tversky)
One additional dollar gives a lesser increase in satisfaction or value than the dissatisfaction caused by a one dollar decrease
Giving or taking a dollar
People feel the pain of losses much more than they feel the happiness of equivalent gains.
Prospect Theory Applications Unbundle gains: Sports Illustrated, offer additional benefits rather than a discount Bundle Losses: Sellers of consumer durables and warranties. Example, a $50 warranty for $700 appliance.
Developing profitable pricing strategies is a critical and creative exercise.
Pricing is the only element of the marketing mix whose cost is getting it wrong.
Pricing’s impact on profitability is often more significant and more immediate than the impact of other elements of the marketing mix.
Pricing Strategies Homework
In the New York city stereo wars of the 90’s Crazy Eddie had made his trademark “We cannot be undersold. We will not be undersold. Our prices are the lowest….guaranteed. Our prices are insane.” His main competitor Newmark & Lewis is no less ambitious. With any purchase you get the store’s “ Lifetime low-price guarantee ”. It promises to rebate double the difference if you can find a lower price elsewhere. If after your purchase from Newmark you find the same item at a lower price (proof of purchase required), in this marketing area, during the lifetime of your purchase, Newmark will give you a 200% gift certificate refund (100% of the price difference plus an additional 100%). These strategies on the face of it seem so crazy. They could lead to superheated competition and could run both Crazy Eddie and Newmark out of business. What do think happened? Think of the following questions:
Would these price guarantees claims increase competition between the two retailers and reduce their profits or would it do the opposite?
What could be the reasons why these retailers adopted these policies in the first place?
Can you think of some advantages of these policies?