Last Updated May 2, 2011 11:32 AM EDT
The psychology of pricing explains why we do many of the silly things we do with our money. Retailers work hard to manipulate us, tweaking price tags and offering "special" promotions to get us to spend more than we normally would.
Why are we so vulnerable? In part, we're just wired to think in certain ways, experts say. But the other problem: We're usually far too busy and distracted to pick up on all the nuances working on our subconscious.
I recently interviewed a couple of behavioral science and marketing experts and reviewed some academic studies to round up the most popular pricing tricks. Hopefully this list will come in handy next time you come across a "deal."
1. 'Free' Stuff
When retailers and shops offer merchandise and services for "free," there's almost always an ulterior motive. "The notion of a 'free lunch' - as in, 'there's no such thing as--' - comes from old New York, where Bowery taverns would offer free lunches, on the firm understanding that diners would wash it down with their overpriced beer," says William Poundstone, author of Priceless: The Myth of Fair Value and How to Take Advantage of It. "That's still pretty much the way it works. Free things draw you in to a store or Web site where you're likely to buy other things," he says.
Psychologically speaking, the word "free" implies no downside or risk. Even a buy-one-get-one-free deal or an advertisement for free shipping â€" which still requires us to spend money â€" are marketing gimmicks businesses bank on, knowing that consumers simply can't resist.
2. Bye, Bye, Dollar Signs
Prices marked with dollar signs have been proven to reduce consumer spending. For example, a 2009 Cornell University study found that diners in upscale restaurants spent significantly less when menus contained the word "dollars" or the symbol "$." In a society where we're overloaded with information, consumers tend to follow the path of least resistance, says Poundstone. "Expensive restaurants usually have minimalistic prices like "24" -- meaning $24.00 -- because they want you to focus on the food and not the price." (Check out fellow MoneyWatch blogger Marlys Harris' piece, Tricks of the Restaurant Trade: 7 Ways Menus Make You Spend")
3. '10 for $10'
You may see this at supermarkets: "10 boxes of cereal for $10." Consumers often think they have to buy 10 items to get the deal - but sometimes it's just another way of advertising 1 for $1. "You don't have to buy 10 to get the price, but some people do - or at any rate, they buy more than they would have, convinced that they're getting some kind of great deal, says Poundstone.
4. Per-Customer Limits
You may also see this type of pricing at the supermarket: "Limit 5 per customer."
"This leads people to think 'Oh, this is scarce, I should buy this,'" says Vicki Morwitz, Research Professor of Marketing at the Stern School of Business at New York University and president of The Society For Consumer Psychology. Some stores also do this to avoid products getting sold on the gray market, but it does tend to entice people to buy more than they would.
5. The 9 Factor
"Prices ending in 9, 99, or 95 are called 'charm prices,'" says Poundstone. "Apparently, we've been culturally conditioned to associate 9-ending prices with discounts and better deals."
Also, because we read numbers from left to right, we encode a price like $7.99 as $7 - especially if we read too quickly. It's called "left-digit effect": "We encode it in our minds before we read all the digits," says Morwitz.
6. Easy Math
Some stores will put a product on sale and show you what price it was marked down from. The sign might say "was $10, now $8." But you'll rarely see the sign saying, "was $10, now $7.97." Why? "If the difference is easy to calculate, we tend to think it's a better and bigger deal," says Morwitz. It's called "computation fluency."
So even though a $7.97 deal saves you more money (and has the number 9 in it, which we like), the math is a little more involved - and as Poundstone stated earlier, we like to take the path of least resistance.
7. Price Font Size
Marketing professors at Clark University and The University of Connecticut found that consumers perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface. This is actually something marketers often get wrong, says Morwitz. We tend to see sale prices with large fonts relative to their original prices on a price tag or sign, all to grab people's attention. But that only confuses consumers because, "in our minds, physical magnitude is related to numerical magnitude," says Morwitz.
Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv, and on Twitter.
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