When Is the Price Right?

Would you ever NOT buy something because the price is too LOW? A question for CBS Moneywatch.com editor-at-large Jill Schlesinger:

"One of the things that psychologists have discovered is that we really don't have this strong inner price sense," said author William Poundstone. "Instead, our unconscious mind is constantly making these quick snap judgments about what is a reasonable price."

Poundstone, the author of "Priceless: The Myth of Fair Value (and How to Take Advantage of It)," says we make unconscious assumptions about the value of a product.

"If you say something is 75 percent off, you figure that's a great deal," he said. "You don't really look at what the actual price is."

And then, there's the curious case of the number nine . . .

"What they've found is that they can offer the same item for $39 in one catalog, and $35 in the other, and more people buy it at $39 dollars even though it's more expensive," said Poundstone. "Now, this makes absolutely no sense whatsoever."

. . . Which doesn't stop companies trying to get the most bang from your buck by turning to consultants like Frank Luby.

"One of the most common ways to put through a price increase without shocking the consumer by raising the price is to change the package," Luby said.

He demonstrated by showing us two packages, for mayonnaise and ketchup, which appeared roughly the same size, but not quite - one is actually 14 percent smaller than the other.

"So if I were to swap those two out, and put the ketchup in here at the same price, I've effectively raised the price of that bottle of ketchup."

There's a lot of irrationality in consumers' decision, says behavioral economist Dan Ariely, author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions."

But in some ways, Ariely adds, we consumers are very predictable:

"We see a wine list, and this wine list could be very expensive. And a couple of predictable things that people do, for example, people don't buy the cheapest wine on the menu - they buy the second cheapest wine, often the case."

And then there's what the experts call a "price anchor."

"A good example of anchoring that's going on right now is the Chevrolet Volt," Luby said. "Its price right now, if you believe the information in the market, would be about $40,000. Not sure if I'm going to pay $40,000, but if the price comes down - together with a very compelling story - to $25,000 or $26,000, it may actually bring in more buyers than it would have if GM had just said from the beginning, 'The Volt will cost $27,000.'"

It's a tried-and-true technique.

Poundstone tells of a New York City restaurant that has on its menu a hamburger for a whopping $150.

"That's not really there to sell that $150 hamburger," he said. "It's really there because they know that you'll look at that, say, Who would be crazy enough to spend that money? and then you'll scan down at the cheaper stuff, and say, Oh, a $50 steak.

"Well, suddenly that doesn't seem quite so expensive, since you've got the contrast."

And then there are the things that money can't buy . . .

New York City restaurateur Danny Meyer remembers the old days when menus would try to trick you into thinking that you were paying less by charging $7.95, "as if $8.00 was going to put you over the edge."

But these days, Meyer says, consumers sometimes expect to pay top dollar.

"When you're in fine dining situation, $8.00 is $8.00, and let's not play games about it," he said.

Frank Luby agrees. In fact, he says, sometimes it's more than just a matter of money.

"If consumers want to place more emphasis on comfort or assurance and buy into a particular brand and pay more for it, that's a decision that they're making," Luby said.

So the next time you're out shopping, look around for all the subtle cues that help you decide whether the price is right.

For more info:
Jill Schlesinger: The Financial Decoder (CBS MoneyWatch.com)
"Predictably Irrational: The Hidden Forces That Shape Our Decisions" by Dr. Dan Ariely, Revised and Expanded Edition (HarperCollins)
predictablyirrational.com
"Priceless: The Myth of Fair Value (and How to Take Advantage of It)" by William Poundstone (Hill and Wang)
williampoundstone.net
Frank Luby