The headlines after Steve Jobs unveiled the iPad mostly focused on how inexpensive it was. Only $499! That's a good price for a ...
... wait -- for a what? The thing didn't exist before that day. That's actually more than a netbook costs. It's more than a phone. So how did we decide $499 was a good price? Good question.
Also, why are we still doing the $_99 thing on our prices? Instead of just saying "It'll be five hundred dollars" we still frame it as $499, even when addressing a crowd full of educated, savvy consumers? As if we're too stupid to realize $499 is only one dollar less? We've surely figured that out by now, right?
Humans are really bad with numbers, and it manifests itself in a whole bunch of different ways in the world of retail. It's the reason you will patiently wait for a sweater to go on sale so you can get it for 10% off, then buy it with a credit card and wind up paying more than the original retail price once the interest is figured in. It's the reason we'll take a longer mortgage on a house in exchange for a lower payment, because we can't wrap our minds around the idea that the longer mortgage means over time we're going to pay $50,000 more for the exact same house.
By the time you actually own this place the roof will have burrito stains.
So when it comes to setting prices, sellers know that it's mostly up to them to frame for us what the price should be. In the biz they call this price anchoring. So you'll go to Best Buy and see a new TV that's 25% off of the "Regular Price" or "MSRP." Then you Google around and find that what they're claiming is the "regular price" is in fact not the price, anywhere. You're saving 25 percent over an imaginary number.
As for the iPad's pleasant surprise price of $499? That was due to rumors leading up to the launch that it would cost $1,000 from sources like Apple Insider. Then in the unveiling, Jobs was sure to mention how everyone expects the device to cost a thousand bucks. He plants that idea in your mind and suddenly $499 looks like a steal.
Why It Works:
Picture three golf balls, lined up in a row.
Now picture a box full of 4,258 golf balls.
Not only can you not see in your head what 4,258 balls looks like, you probably don't even have a ballpark idea of how big of a box it would take. Our brains just aren't equipped to handle numbers instinctively. From an evolution standpoint, it's no surprise -- complex numbering systems weren't even invented until 5,000 or so years ago and sexual selection doesn't exactly favor math geeks, if you know what we mean.
The $499 vs $500 thing is a perfect example. Even though you know on a conscious level that there is no important difference between those two numbers, your perception of them is radically different because your brain just is not very good at equating those digits with a real world quantity. One study suggests it's because your brain is reading the price like it reads everything else: left to right. It puts a higher value on the first thing we see so no matter what comes after that, you still wind up relating it to the first digit. No matter how much you tell yourself otherwise, $499 still registers as "in the $400 range" rather than "essentially $500."
Or "enough Ramen to get you through graduate school".
But to really drive home how much we suck at math, this study found that the harder we try to keep track of what we spend, the worse we are at it. Budget-conscious shoppers who tried to track every penny in their cart wound up wrong by up to 20%. Why? Because the .99 thing makes doing the math almost impossible. Quick, how much does it cost for three cans of beer at $2.00 each? Six bucks, you knew that instantly. How much does it cost for three cans at $1.99 each? Most of you have to get out a pen and paper.
Strangely, the shoppers who weren't watching their budget actually did a better job of estimating their bill. They tended to just shrug and round the price up instead of doing the precise math and getting confused. Yes, they became better at math by admitting they sucked at math.
Hooray for ignorance!
Brand loyalty makes perfect sense, to a degree. If you were happy with your last Toyota, it's perfectly reasonable to buy another car from the same people who built that one. Even the Apple fanboys got to where they are by, once upon a time, buying an apple product and having a positive experience with it.
Probably not the Pipp!n.
But then there's a point where the sight of a label starts playing tricks on you, overriding any actual enjoyment you get from the product. And no, we're not referring to those vapid brand-obsessed Sex and the City types always talking about their Gucci shoes and Prada jockstraps -- they're often sporting labels to impress other people. That's more of a peer pressure thing.
No, here is where it gets weird:
Back in the 1970s Pepsi built an entire ad campaign around taste tests they called the Pepsi Challenge. They'd simply pit their sweet diabetes water against Coca-Cola's and asked people which one they preferred after sampling both in a blind taste test, where the labels were hidden. Most Americans chose Pepsi, so the campaign was a complete success and Coca-Cola went down in a burning heap of sugary black syrup, never to be heard from again.
At least that was what was supposed to happen. Instead, Coca-Cola went on outselling Pepsi around the world, to this day, despite people admitting repeatedly that they liked Pepsi better.
Even worse, in a test where they could see the labels, the results were completely reversed: people loved Coca-Cola, when they could see the familiar logo and red can. This became known as the Pepsi paradox.
Likewise, in taste tests people will consistently prefer a $90 bottle of wine to a $10 bottle, even if the only difference is the price tag. In China, they have a very expensive beer ($44 a bottle) that if you were to taste it you might recognize as Pabst Blue Ribbon, a dirt cheap beverage westerners enjoy only ironically. They just stick a gold label on the bottle and jack up the price. And the Chinese pay it, because the label overrides their sense of taste.
Why It Works:
Basically you're involving separate areas of the brain, one that recognizes sensations (like taste) and another that does thinking and categorization (like remembering which brands make the good stuff). The second one can override the first, if you create a positive enough association with a brand or label.
Scientists figured this out by redoing the Pepsi challenge with the added fun of an MRI machine scanning volunteer's brains.
In the test without the labels showing, researchers noticed Pepsi stirred up the ventral putamen (brain chunk related to reward) more than Coke did. With the labels revealed, however, the medial prefrontal cortex (brain chunk related to, among other things, figuring crap out) suddenly got in on the action, drawing on the implanted knowledge from countless ad campaigns that Coke is Good and You Like It. It overruled the part of the brain that dealt in mere sensation. Yes, they can in fact brainwash you into liking something.
Thankfully, science went even further and found a solution. According to another study, those with damage to their ventromedial prefrontal cortex (brain chunk related to emotion) lose their brand loyalty and actually pick Pepsi even after seeing the labels.
In a few seconds, he won't care that he's using a Black and Decker.
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