Price Signals: Lover’s Glances and Placebos

As I wrote in my last blog post, an understanding of the psychology of pricing can help you earn the margins you deserve. Even the most analytical buyers are not rational calculating machines, so if you understand the psychological levers that affect their willingness to pay, you can raise your chances of getting the margins you deserve. We’ll start with the concept of signaling.

Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a display case full of slow-moving turquoise jewelry. Before leaving town, she left a note for her assistant to mark down all the prices in the case by ½. The assistant misread the note and doubled all the prices. The entire lot sold out within days.[1]

That story illustrates an important point about pricing. In a world of perfect information and completely rational buyers, classical supply and demand curves would make perfect sense. As prices for a good go up, demand will go down. But in the real world, sometimes raising prices can make demand go up. That’s because buyers rarely have perfect information, nor do they decide on pure logic.

Let’s look first at information. Like a lover’s glance, a single number can speak volumes.

Imagine that you go to a store to buy a new set of pots and pans. You like to cook, and hope to get better at it, but you’re by no means a professional chef. As you examine the three different sets on offer, you peruse the small placards that list the features of each, but they don’t mean much to you. But of course you notice the prices, and chances are very high that you will not select the lowest-priced set; or if you do, you will think hard about what you’re giving up to save a few dollars. Without realizing it, you are interpreting the signals that the price tags are sending you.

Signaling works because it can simplify your decisions and short-cut your search for information. As Daniel Kahneman, one of the founding fathers of behavioral economics, reminds us, “If a satisfactory answer to a hard question is not found quickly, System 1 will find a related question that is easier and will answer it.”[2] So, rather than trying to tackle the question “what is it worth?”, we ask instead, “what does it cost?”

Also, we implicitly assume that something is priced based on how much it cost to produce, if one set of pans costs twice as much, it must have superior materials and craftsmanship, so it’s going to cook our food more evenly, look better in our kitchen, and last longer. We draw all those conclusions

Finally, price can send a signal about relative supply and demand. If the price of something goes, up, it must mean it’s in greater demand, which can make it seem more attractive to a potential buyer. When Chivas Regal was faced with flat whiskey sales in the 1970s, they increased sales significantly by changing the label and boosting the price by 20%.[3] (There’s even a prestige factor, in which some people will pay exorbitant prices for luxury goods precisely because they prices are exorbitant, but that’s outside the scope of this book.)

Since it’s so difficult to do all the research and weigh all the different factors that affect value, we also gut feel to help us decide, and one of the most important emotions associated with buying decisions is fear/confidence dynamic. That’s why confidence is one of the greatest assets a salesperson can have. Those who act more assertively and confidently tend to be accorded higher status, and in general are perceived to be more competent than they actually are.[4] If you come to the table unapologetically with a higher price, you send a strong signal about your belief in your solution, and that confidence can be contagious. That’s why I’ve advocated before that when your buyer objects that your competitor has a lower price, instead of getting defensive, ask them to consider why they place a lower value on their product.

Prices and confidence are strongly correlated—in plain English, we all believe that we get what we pay for. While that is not always true, it’s a powerful enough belief that it can even become a self-fulfilling prophecy. Dan Ariely, relates the results of an experiment he conducted at MIT in which participants were recruited to test a new painkiller, called Veladone-Rx, which they were told sold for $2.50 a dose. They were first subjected to a series of painful electric shocks. Then fifteen minutes after taking a tablet, they were shocked again. Almost all the participants reported that the perceived intensity of the shocks was reduced the second time. Another group went through the same procedure, but they were told that the Veladone sold for 10¢. About half experienced pain relief. The punchline is that the tablets that both groups took the same tablet—of Vitamin C!

That experiment demonstrates the power of the placebo effect in medical terms. Placebos work because we think they will, and it also shows the hold that prices can have on our expectations. The idea that you get what you pay for is strongly ingrained in our minds, that, “If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item—and then in fact we will make it so.”[5]

Similar effects have been found for cold medication and energy drinks. One experiment even found that the price tag associated with a glass of wine affected the perception of taste, and even showed up in increased activity in the pleasure centers of their brains.[6]

Ariely does go on to say that in further experiments he found that consumers who were asked to think about the relationship between price and quality were less likely to be affected, so it’s important not to read too much into this, because after all we’re assuming that B2B buyers will be more thoughtful or implement more safeguards against this type of thinking. Yet I’ve long had my suspicions that the credibility of many a consultant or speaker has been affected by the fee they charge.

Prices send signals that buyers receive loud and clear. Think about this before you decide to lower your price to win the business.

[1] Robert B. Cialdini, Influence: The Psychology of Persuasion, (New York: William Morrow, 1993), p. 1.

[2] Daniel Kahneman, Thinking: Fast and Slow, p. 97.

[3] Hermann Simon, Confessions of the Pricing Man, p. 28.

[4] Cameron Anderson, Sebastien Brion, Don A. Moore, and Jessica A. Kennedy, A Status-Enhancement Account of Overconfidence, 2012.

[5] Dan Ariely, Predictably Irrational, (location 2556)

[6] https://www.gsb.stanford.edu/insights/baba-shiv-how-wines-price-tag-affect-its-taste