Pricing, The Secret

The secret to pricing is its arbitrariness, subjectivity. What disrupts this is anchoring, a preconceived benchmark of what should be the price. Classical economics describes consumers as rational purchasers of goods and services weighing benefits and costs. In reality, that weighing is just a rational wrapping for subjective tendencies. Traditional pricing methodologies attack the weighing. If we believe our product is better, we price higher, if more economical, lower. However, contemporary ones aim for disrupting or leveraging the benchmark.

It’s very difficult for us to objectively determine value. For instance, in classical economics value in terms of supply and demand sets prices.  In truth, price influences value. Not only does price influence tasters of wine, but that influence shows up in their brain scans. Price influences the most discerning assessors of value. In violins, experts often deem higher priced ones possessing better sound even though blind tests show differently,  “Fiddling with the Mind” (The Economist, January 7, 2012 edition).

Dan Ariely, George Loewenstein and Drazen Prelec, in their paper “Tom Sawyer and the Myth of Fundamental Value,” show how malleable value can be when we disrupt our pricing benchmarks. For example, if we sell people something for $6 and then return the next time to charge them $8, fewer will buy than if we had sold it to them for $10 first and $8 second.

“Clawback” (New Yorker, August 26, 2013 edition), James Surowiecki, illustrates how transferrable benchmarks can be. Even though lobsters’ market costs are extremely low, restaurants don’t pass these on because lobster benchmarks the value of other entrées. A lower cost lobster entrée suddenly decreases the value of other entrées by making them appear more expensive.

Pricing’s secret is admittedly involved, but it expands our opportunities. But, the real question is, “When’s your wine taste test?”