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Price Anchoring, Bundling, and Bracketing

price anchor

I’m a sucker for a bookstore. I can’t seem to walk past one without going in, and I seldom go in without buying something.

This has been a lifelong affliction of mine. When I was a teenager, my mother once asked me: “Why do you buy more books when you haven’t read all the ones you’ve got?”

To which I replied: “What’s the point in having a library full of books that I’ve already read?”

Occasionally I read a book that’s a real game-changer for me; a book that rings so true it forever changes the way I think about a particular subject. I’ve recently read such a book, and I enthusiastically recommend it to my friends and colleagues in the antiques business. It’s titled, “Priceless: The Myth of Fair Value (and How to Take Advantage of It)” by William Poundstone. This book should be required reading for anyone who intends to buy or sell anything.

Like most antiques dealers, I previously believed that pricing products and services was pure arithmetic: If I paid X for a product, my expenses were Y and my desired return on investment was Z, then I should sell my product for A (it’s really not that simple, but this is how most antiques dealers operate). Almost every antique dealer I’ve ever interviewed answered the question “How do you price your products?” with some variation of “I figure if I get two or three times what I paid, I’m doing alright.”

By such thinking, a Starbucks latte should cost less than a buck and digital text messages should cost about 1 cent per 100,000 texts.

Quoting decades of research and field observation, two messages of Poundstone’s book resonate:

  1. Consumers have no idea what products should actually cost; they can only determine relative value. This is really good news for antiques and art dealers, because variables such as quality, condition, rarity, etc., make comparison shopping difficult.
  2. The more you ask for, the more you get (on average).

I can almost hear a few readers’ gasps of horror: “Manipulative!” “Unfair!” “Sleazy!”

To those readers I say: Guess what? You’ve been delighted to pay such “manipulative, unfair, sleazy” prices for years; you’ve just failed to apply the same pricing techniques to your own business. Instead, you’ve watched your expenses go up, profits go down and dead inventory accumulate as you sing the refrain “my customers would never pay X for that product.”

Then you shell out $4 for a latte and spend a nickel to text your complaint to your spouse.

If you have ever done any of the following, you have enthusiastically embraced modern pricing psychology and were probably not even aware of it:

  • Eaten at a Chili’s, Applebees, Denny’s, Hooters, Olive Garden, TGI Friday’s or any of the national chain or fast-food restaurants.
  • Signed a cell phone agreement.
  • Gotten a rebate on a product purchase.
  • Bought a ticket to any public performance, such as a sporting event, theater performance or concert
  • Shopped at a 99-cent store
  • Gotten something for free.

Poundstone’s observations alternately enlightened me and aggravated me. Here are a few highlights:

Cell phone charges are completely arbitrary and use a technique called “bundling” to confuse a particular plan’s value. Complex billing plans make comparison shopping difficult, so many consumers choose to go with a flat-rate plan. Flat-rate plans are much more profitable for the service providers, because most consumers don’t use all of their allotted minutes. (Auctioneers have used a similar “bundling” technique for decades; after all, what is a box-lot other than a bundling of products?)

“Anchoring” — the technique of providing a high number as a point of comparison — was discussed in some detail in my last column. Since then, I’ve noticed that auctioneers who use a high price anchor to begin bidding seem to achieve higher prices than auctioneers who begin the bidding low. Auctioneers are often heard to claim that, “We don’t set prices; the bidders do.” Nevertheless, auction houses do set values; why else would they print catalogs stating the “expected sale prices” (estimates) of their items? The more you ask for, the more you get.

I recently attended two auctions that offered dozens of artworks consigned by a defunct gallery (no catalogs were available). The gallery’s price stickers were still in place and stated the “Gallery Price” for each work.

At the first auction, bids were started at the “gallery price” before dropping, and most sold at half that price. In contrast, the second auction house started the bidding at one-third the gallery price before dropping. I tracked the prices achieved (I’m prone to do that at auctions) and auction house No. 1 achieved almost double the sale prices of auction house No. 2 on similar merchandise.

Of course, other variables affect prices at auctions, but how hard is it for an auctioneer to start the bidding high rather than low? It cost auctioneers nothing to experiment with anchoring a lot’s price with a high number to begin bidding.

Charm prices — those ending in the number 9, 7 or 8 — actually work, and their effectiveness has nothing to do with being a few cents cheaper. Also notable is the concept of “SALE.” Every retailer has them, but proper signage is critical. The placement of the word “SALE” on a sign in combination with effective anchor and charm prices can mean the difference between a consumer seeing the sign or not seeing it.

Price bracketing — the practice of manipulating prices so that consumers buy your most profitable products — is used on everything from menus to BOGOs (buy-one-get-one) at your local retailer.

Antique dealers, do your signs point the way to the items you most want to sell?

Product pricing is no longer about value based on production and delivery costs (“the myth of fair value”). It’s about understanding what the consumer is willing to pay, and then getting them to pay that amount (“how to take advantage”).

Poundstone offers a paradigm shift in pricing for us mom-and-pop retailers and auctioneers. Like all paradigm shifts, anyone who fails to get on board will be run over by the train.

Previously published in Antique Trader Magazine

Originally posted 2017-11-05 21:24:36.

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