Tis the season for fake savings

Savings is such a marketing game. Nothing is ever 30% or 40% off, and yet consumers respond in droves when retailers announce “savings” or “discounts.” Why is this so?

About 30 years ago behavioral economist Richard Thaler wrote the landmark papers on pricing psychology, with one beautiful premise: People are really bad at judging value so always need a reference point. If marketers control that reference point, they can also control how people feel about value.

Consider something 50% off. A reference point pushes your brain to make a snap decision on whether you’re getting a good deal or not. If you see a dress on sale, marked down from $140 to $70 — 50% off! — you immediately feel good, as if this bit of clothing were a bargain. What you are really considering is spending $70 on a bunch of stitched silk, but the clever marketers have set a high reference point — the $140 starting price that never really existed — to get your juices flowing.

Here are four ways marketers manipulate consumers’ price sensibilities:

1. Artificially high reference prices. If you find a leather coat priced at $300, marked down from $500 — you get $200 in savings! Nope. $500 never existed. The $200 in savings is fiction. $300 is actually leaving your wallet to go to the retailer, champ. But you just can’t help believing it, can you?

2. Price obscurity. That box of candy at the movie theater costs $5.00, but ooh, it’s such a strange, big size, in a box and not bag no less. Must be a good deal! Nope. The reason you never seen those strange candy-box shapes anywhere else is movie theaters are obscuring the fact that $5.00 box of candy has just a little more in it than the bag you get for a fraction of the cost at a drugstore.

3. Price bundling. If you’ve ever seen a TV spot featuring a bunch of acne medicine and skin scream and a special battery-powered forehead scrubber, you’re looking at a bundle of stuff cleverly designed to make discerning the value of the actual products impossible. Omaha Steaks is the king at this; for $89.99 you can order a bundle of steaks that come with burgers and pork chops and hot dogs and mashed potatoes and gee, all that feels like a deal. If you actually broke down the price of each component vs. your local grocery store, you’d realize Omaha is cleverly charging a premium price for each item.

4. Decoy prices. Decoys are products set at high prices that drive you to buy another product at a different price. Realtors do this when they show you a house that needs a new roof, right before they show you the home they really want to sell you. Apple does this by pushing iPods and iPhones with different price points; if you don’t want the most costly version, the “cheaper” one seems a bargain. The decoy is meant to turn you off, so you swing over to the next product that will turn you on.

This pricing irrationality is driven by our ancestral instincts, which help us make snap decisions on value. If you were in the wilderness, you’d only get a quick second to decide if the berries are nutritious or poisonous, or if that snake will bite you. For tens of thousands of years, we’ve had to use fast references from the world around us to discern what helps us survive and not die. Because we survived in clans, if another human told you this berry was better than that one, you’d go ahead and take a bite.

All of which explains the long lines at the mall.

Image: Voshie

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