An alert reader sent in an article from the Wall Street Journal (free for one week) called The Psychology of the $14,000 Handbag, which delves into why stores offer, well, $14,000 handbags, and what this means for the rest of us, even if we might prefer to buy a car instead of a bag. The article raises the concept of price “anchors” or “reference points.”
Some people cut and run when confronted with prices that seem crazy. But many of us experience a sudden emotional-mathematical transformation. We set a new ceiling for a “reasonable” price. Disinclined to go all the way to buy the trophy, we instead settle for a consolation prize. Mr. Schwarz, a jeans-wearing type, walked out of Boyds with a suit that cost merely $800 — the most he’d ever spent on an item of clothing.
“If you’re in that world long enough, $800 stops even feeling like a lot of money,” Mr. Schwarz says.
This concept is one of the reasons for the proliferation of $300 designer sunglasses these days. The fact that Ralph Lauren is charging $14,000 or so for an alligator “Ricky” handbag makes it easier for a consumer to justify in her mind paying $300 for a rather simple sweater. Many Chanel sunglass owners are actually would-be owners of Chanel suits. Something similar has happened to many owners of Tiffany keychains, Prada legwarmers, Coach wallets, and Frette tea towels.
Of course, this thinking is not limited to fashion. Mercedes makes $150,000 cars in part to indicate that a $50,000 vehicle is not that expensive. By framing the comparison as “less than our $150,000 model” rather than “twice as much as a Honda”, many buyers will be more likely to accept the price. The customer ultimately controls which prices serve as reference points. However, most buyers are not consciously aware of how they think about relative prices. Even those who understand how reference prices work, like Mr Schwarz, a psychology professor, who earlier in the article marveled at $3,000 suit before selecting his $800 purchase. So sellers have the ability to influence reference points. One way a lot of retailers reduce their pricing power is by establishing their own low reference prices– by featuring clearance merchandise right at the front of the store. It may get people in the door, but everything else in the store looks expensive in comparison. As I’ve noted before, Apple does a good job of retail pricing, in part by putting clearance merchandise in a low prominence position at the back of the store. Some retailers may complain they don’t have iPhones to sell, but hey, in fashion– you’re supposed to have something new to sell all the time.
Studies have documented that having 2 price points (high, low) results in lower sales, particularly of the high-priced item than 3 price points (highest, high, which is the new “medium”, and low).
Another way to think about this is to ask yourself how you’ve made decisions based on price in certain situations where you have little other information available. Ordering wine at a restaurant, buying some technical gadget that you don’t really understand, or a piece of clothing from a seemingly similar array? Some people gravitate to the lowest price point possible, some to the highest, many to some comfortable middle ground. This often works even in business-to-business settings, where many buyers don’t want to go for the “cheapest” option, in case something goes wrong, nor for the most expensive option, for fear of getting past the purchasing committee.
As Homer Simpson once said: “Garçon! Another bottle of your second-least expensive champagne.”