Pricing psychology - 33% more beats 33% off | Hacker News Reader

Pricing psychology - 33% more beats 33% off

moneyland.time.com

79 pointsasanwal70 comments

The costs of shopping is more go beyond money, there's time and bother, too. If I'm out of coffee on Sunday morning, I have an extra trip to the grocery at an inconvenient time. If it's Tuesday morning before work, then my options are more constrained.

The larger amount allows a person to hedge against a future shortage for the same cash outlay. The shopper already planned to spend $10, and getting more today gives them flexibility in the future, e.g. the regular weekly shopping trip can be moved from Saturday morning to Monday after work because there is adequate coffee on hand thereby allowing Saturday morning to be spent gardening.

Conversely, in terms of flexibility, the discounted coffee does not offer any direct correlation to convenience - I cannot hire someone to go coffee shopping for me on Sunday morning with the savings. Furthermore to achieve the flexibility offered by the larger size, I have to spend significantly more than the $10 I intended and purchase two 10 ounce packages - doubling my coffee expenses for the week -- storing an 10 additional ounces may also be more inconvenient than storing 3.3 additional ounces.

People pay for convenience all the time and doing so is economically rational. Without an accounting of how such habits may impact purchase decisions in the overall conclusions are not quite justified.

But more importantly, the design of the study based upon an undergraduate student population performing an activity at which they have little experience - grocery shopping - does not necessarily reflect the purchasing habits of more experienced shoppers with a life time of coffee addiction behind them.

And this is why many of the poor stay poor, and many in the middle class stay middle class. The poor don't have the capital to take advantage of the greater discount and the middle class tend to value short term "convenience" over long term savings.

If a poor family of four spends $600/month on groceries at standard pricing, their inability to "afford" the 33% discount costs them $2376 a year. For a middle class family spending $1200/month, that's $4752.

Many of the successful poverty programs try to elevate the savings of poor families so that they can stop buying groceries and supplies at the "convenient" prices.

And this whole time I thought it was about jobs and education.

Funny how much education you can afford when you're not overpaying for basic necessities.

Assuming you save all of the $4752 a year, which is dubious, that's barely enough to send you to a low-tier university or community college. Mind you, that's better than nothing, but if you think the opportunities open to students who go to lower-tier universities are the same as those available to students who were able to afford top-tier universities' egregious tuition, then you've got another thing coming.

In short, it's a cycle: Those who can't afford to go to a good college have less career opportunities open to them, ensuring they have a hard time sending their children to a good college.

The solution, of course, is a wide and far-reaching scholarship program that lets students not worry about their socio-economic status when applying to colleges, but that's "socialism".

If you were to invest that at 6% for 18 years, (say when your child was born), you'd end up with $155K before adjusting for inflation. That would pay for a lot of college.

And for the poverty family, this would be about $77K.

That would be great, if you were living sometime between the years 1960 and 2000. I don't know if you've heard, but we've had a rather spectacular economic downturn since then. 5-year CDs are less than 2% interest; 1-years are a little less than 0.8%. (The corresponding rates for the stock market are too volatile to quote.)

I'm not convinced by the argument that the middle class stay middle class because they spend too much on convenience. $4752 a year extra will not make me rich, far from it. $475,200 a year extra WILL make me rich.

Plug $400/month into an investment calculator (@6%) and see what 40 years would do you... You'd be surprised how much a modest amount of savings can do when compounded over time.

If you are 30 today, then in 40 years you would be 70. Good time to get rich

:-)

I'd rather be rich at 70, than poor...

You are not going to get rich for free. That would require extra effort over 40 years. You can put that effort elsewhere, for example launch 5 startups, or have 5 more kids, or extra vacation every year.

After investing $4700/year for 40 years you still won't be rich. The amount I could withdraw each year would still be much less than my current middle-class salary. In other words, I'd have less income than I do now.

In fact, I need to squirrel away a very large proportion of my salary to retire and be better off than I am now. I can't afford that, which is the point. The middle class is too poor to ever be rich.

Cut that daily $5 latte adored by the middle class, let the savings compound annually at 6% for 40 years, and you end up with $300,000.

That sounds like a lot. Would you say that the middle class is hamstringing their upward mobility by drinking lattes? There are several issues with this simplistic analysis. Here are just two. One, it's ignoring inflation and risk. Two, it's playing a psychological trick on readers (and perhaps on yourself) by asking them to superficially compare the utility of two things, $300,000 in the hand 40 years from now vs 14,600 lattes spread over 40 years, that will make the money seem like the obviously better choice to most people.

Actually, it's exceedingly difficult to get a handle on sparse, spread-out utility like in the latte scenario. Eliezer has the thought experiment where he asks you to compare the disutility of one person being tortured vs a million people suffering some trivial inconvenience like having a dust speck in their eyes. There he is spreading the utility over many people rather than over many years for one person, but the issues are strikingly parallel.

"Cut that daily $5 latte adored by the middle class"

In theory (as presented by David Bach's latte factor (haven't read it but have heard of it)) but in practice unless it's forced savings people tend to spend differently if they have money and resources just because they feel secure and have a safety net. So they can take more risk.

The other thing that the "latte factor" doesn't take into account is the positive benefits of that $5 purchase. You go somewhere, you feel good perhaps that has an impact greater than just drinking coffee that you make yourself. There is a psychic benefit.

Not hamstringing their upward mobility, but definitely hamstringing their retirement (assuming they're not funding it adequately). Of course inflation and risk are factors. I didn't realize that I need to include footnotes and references when discussing a common idea, that of investing for long term goals.

And I think Eliezer's experiment is a load of crap, imho.

Show me an investment right now that is returning 6% per year without substantial risk, also to be fair in 40 years $300k is highly likely to be worth much less.

For instance, 40 years ago, $3000 would buy a competent sports car, new, (MGB), and $7500 would buy a V-12 Jaguar (Source: http://www.teglerizer.com/new_car_prices_in_1972.htm). Imagine telling some in 1972 that if they put $50 a month in an investment account, in 2012 they'd have $37,500. That's sound like an enormous sum to them (10 new sports cars!), but when they cashed out this year I bet they'd be underwhelmed with the buying power of all that saving.

There is no investment without risk. And in fact, volatile times (as well as recessions) are some of the best times to invest. I wish I had had more liquidity in 2009.

And when comparing inflationary effects, I bet if you gave a true comparison between the quality of the cars available in 1972 and 2012, adjusted for inflation, that the 2012 cars would win out.

$4,752 of extra savings a year is an absolutely MASSIVE amount for a middle class person. For example, if you're already saving $20k a year, that will bump up savings to almost $25k.

Then, this is just one source of additional savings. Cut further on services you don't really need (coffee at $4 a pop, $150/mo cable TV bill, etc.) and now we're talking some serious money.

If people stop buying things, they won't get the 33%-off savings. Don't double-count.

Middle class people don't spend enough in a year ($40k per person, tops?) to be rich even if they spent NONE of it. And if they "got rich" saving money, what is that money for? To be spent on desirables.

None of this is going to make me rich though. Not by a long shot. Not even a tiny way there.

Poor people are poor because they don't make as much money as the middle class. Middle class people are middle class because they don't make as much money as the rich.

You can't explain that away by criticizing questionable spending at the margins.

I'm not criticizing them for questionable spending at all. They simply don't have the capital to take advantage of better purchasing options.

"They simply don't have the capital to take advantage of better purchasing options."

Similarly they will buy a used car at an inflated price because they are lacking the dollars to purchase a new car and/or have the credit to do so.

Having more money gives you the flexibility to consider all options at least. If you don't have the money you're not even in the game.

I get that you're trying to make a larger point, but this isn't a very good example with which to do it. Used cars are nearly always a better value than new cars.

Look,

(a) you screwed up the numbers. You should not be comparing, in this hypothetical scenario, 1.33 with 1, but rather 1/(1 - 0.33) with 1.33, which is instead 0.1625. That is, "these people who don't understand the numbers involved" in the above article includes you. :P And the article above does not make the pretense that this is a uniform problem affecting all of the consumption of the poor; rather just that certain deals may be irrationally treated because of how they are phrased. There is no mythical 33%-across-the-board discount for the poor at stake here; at best it's a 16.25% discount available in very limited circumstances.

The real point of the original article was that many people seem unable to determine the difference between 1/(1-0.33) and 1.33, which is only a 16% increased-cost gap

(b) It would be very tough to make these economics work out in the present market where even 5% returns seem overoptimistic. Suppose you could reliably convert a poor person into a rich person (and I'll take a modest $200k/year income to define "rich"), by giving them $5k per year and making sure that they spent it on "the right sort of thing," banks could probably do it.

I mean, just imagine making this pitch to a poor person: "I'm going to make it so that in 10 years you are earning $200k/year, and then I will take $20k of those every year for 20 years -- so that you only earn $180k/year -- as payment." To a poor person that's an unbelievably sweet deal. They would take that offer and might even offer a much larger cut of that salary to that bank. Suppose that with oversight the cost to the bank is as much as $10k/year, of which $5k goes directly to the person and $5k is administrative losses in making sure people don't misspend the money. From the bank's perspective that's a 10% return on investment, which is not amazing but not too shabby. Even if it only works 50% of the time, in today's economic climate that easily beats treasury bonds as investments go. It's in the bank's financial interests then to lift people out of poverty with this mechanism.

I don't see any banks doing this, and while it may be possible I would guess that it takes much more money to do it.

a) The article didn't say anything about the poor, nor did I say that it did. I simply made a correlation about how the poor are unable to take advantage of significant discounts due to capital constraints. And the example I was using didn't use the phony discount but the true discount offered by volume. Pay attention... :p I understand the differential between the two pricing strategies perfectly well.

b) I also never said nor implied that saving $200/month would make someone rich. But to dispute that there would be no improvement in a family with an extra $2400/year is silly. If you believe that to be the case, please send me a check in that sum. ;p

And further, you can't use the present market to determine long term returns. Today's market is quite lucrative if you pick the correct investments. If you just follow the Dow or NASDAQ up and down, day trade, or let management fees eat up your seed corn, you're at the whim of the market.

That's clearly true, but the following statement:

And this is why many of the poor stay poor, and many in the middle class stay middle class.

...does not follow.

The outlook for a typical working-class family living paycheck-to-paycheck isn't going to be materially improved by better purchasing options (because they don't have a lot of money with which to purchase things in the first place).

As a sort of reductio proof, imagine I gave you $500 to live on for an entire year. What good would better purchasing options do you? If you're merely trying to say that you'd be better off with more money, well, yes. But better purchasing options aren't going to move you into the middle class.

Sure you can. Being bad at earning and saving means you are always struggling, stuck in that state.

A poor person wins the lottery, and is poor again in a year. So habits work that way too. If you can't plan for the future, consider interest and principle and the time value of money, then you're doomed to poverty.

He's not criticizing the poor or middle class. He's simply noting that they frequently lack the resources to take advantage of these types of discounts. Even a 99% discount is useless if you don't have the resources to afford the 1% post-discount cost.

"This numerical blind spot remains even when the deal clearly favours the discounted product" [1]. Thus, it is an irrationality and not calculated convenience.

[1] http://www.economist.com/node/21557801

You might be right in a general shopping scenario, but (perhaps) the professor deliberately has chosen “loose coffee beans” experiment. Thus, eliminating all arguments about convenience. In this experiment, one may buy in 1oz increments.

Also, people think they're getting a deal when they buy bulkier items. For example, here in my town, you can buy a five ounce can of tuna for, say, 79 cents. That's 15.8 cents per ounce. The twelve ounce can goes for $1.98. Although the tags on the shelf mention the per-ounce price in addition to the full price, people will buy the twelve ounce can. Now maybe there are other reasons to over pay- don't want to open two cans later; 10 onces is too little, 15 ounces is too much. But it's probably the psychology of "more is better" overriding reason's "lower price per ounce."

It's not necessarily about "bad at math" - it's about psychology. Ask Wal-Mart - there's a reason all their prices end in certain numbers and seldom the 'standard' numbers. For example, you'll often see $x.44, or $x.92, but seldom x.95 or x.99. I don't know the precise reasons because Wal-Mart won't discuss it. Suffice it to say "psychology."

What ultimately irritates me about this, the price will go up on a box of Cap'n Crunch over the course of three months. Then suddenly "20% more for free!" get stamped on a larger box at that higher price.

That reminds me of the offer you can still see in Camden (London). There are street booth selling calling cards: 1 card for 2.99, 3 cards for 8.99 :-)

In the UK they also show the price per unit for all the packaging. There is just one caveat: they don't do it with the discounted prices, only the base price.

My favourite London based pricing quote was on the pub just leading out of Carnaby Street for years.

  Buy one pint for the price of two, and 
  we'll give a second pint absolutely free !

Loved it for years. Never went in.

Re: odd pricing. I've seen in store saying "discount bla-bla-bla do not applies to items with price ending with .94." So they used price as unique feature to see if item was already discounted.

At Dixons in the UK (when I briefly worked there 10 years or so ago) the pence were used in a similar way to signal things to floor staff. For example, IIRC, prices ending .98 signalled a discontinued product.

Additional staff signalling was provided by messages on price tags. For example, 'please ask if you need help' meant 'high-margin, high-commission item', whereas 'have you remembered your spares and accessories?' meant 'low-margin, low-commission, item'.

That is actually still in use today.

Working part-time in retail at Staples Canada, I can tell you that all of our prices ending in $x.97 or $x.x7 are clearance; and therefore subject to an additional discount if there is a current promo going on.

As for the random prices, I have no idea. Although it does make it easier when doing prices changes for flyers, because in each section, no two products have the same price (cent wise).

This basically confirms that getting rid of the penny and the nickel is a good idea.

Just round everything to one decimal place. If retailers don't care about amounts under $0.10 then there is no need for such a currency.

pointer tagging!

I wouldn't quickly assume Walmart's strange pricing practices are psychological.

I know that Walmart uses advanced analytics for doing pricing and expectation of sales. So it could be possible that these odd cent items aren't for psychological purposes but instead for building accurate pricing models. I can only speculate though but this is what I do and I know that's why we like odd cent items. My company helps eCommerce shops with pricing.

Articles such as this on Wikipedia (http://en.wikipedia.org/wiki/Psychological_pricing#Historica...) can give you an idea about how much speculation there is in pricing.

While I don't have the study readily present, there was actually one done where 7th and 8th graders were shown a number of items with "odd prices" most notably "x.99" prices and were asked later on if they could recall the prices, the distribution were heavily weighted against odd pricing. Most of students recalled either the exact price or rounded up. Very few rounded down.

The Time article is a rewrite of the original article from The Economist

http://www.economist.com/node/21557801

If you find this interesting, there is a great book called "Thinking, Fast and Slow" by Daniel Kahneman[1]. Highly recommend it if you're interested in understanding buying behavior and the psychology behind many of these economic decisions. It's also largely based on the research from Richard Thaler in his book Nudge.[2]

[1]- http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/...

[2]- http://www.amazon.com/Nudge-Improving-Decisions-Health-Happi...

What kills me is Time's air of surprise. The point of so much of marketing, especially price promotion, is exactly to confuse people into buying. So of course this stuff will be phrased in ways that are hard for people to evaluate.

Even the "price per unit" stickers on shelves are done this way. One says "price per ounce" and the larger item next to it with a different price has "price per pound."

So are the price per unit stickers in U.S. stores voluntary or is there some consumer protection law that forces them to be there? In Sweden they have to have them by law, and there are specific units that must be used by product category (generally the SI base units, and then for things like washing powder "$/wash").

They are required in the US. Apparently, requiring specific units would be onerous.

The units are SI in the UK, but retailers appear be allowed to mix and match. This is particularly noticeable with milk in Tesco, at least last I looked - the price of the 1pt and 2pt milk cartons were priced in pence/100ml (~£0.09/100ml, I think), and the 2L+ ones were priced at £/L - ~£0.55/L ;)

I now buy the 2L cartons...

I often see the following in the UK that appears to work around this.

Fruit items in a pack (e.g. 6 oranges) - price per unit is shown.

Fruit items loose - price per weight shown.

So you can't compare which is cheaper. I assume loose...

It is state law. Some states require every individual unit to have a price tag on it, not a shelf tag, for example. That sounds awesome for consumer protection but realize it means that Home Depot has to individually wrap and price individual screws.

Are many people buying only one screw at a time?

Sure. If you only need one screw to fix something, then you only buy one.

They are sold in bulk from drawers so you can buy as much or as little as you want. (You put them in a bag and write the item number and quantity on it, and they charge you whatever you wrote.)

Sounds like another advantage of the metric system to me. Comparing prices per 100g, per 1kg and per 1l is doable.

That could merely be because we've not been exposed to "33% more" as much, at least I haven't noticed it. I don't really buy advertising-driven food though..

Anyone who enjoys reading about the psychology of pricing should immediately check out Predictably Irrational by Dan Ariely if you haven't already.

See the outline/overview here:

http://bookoutlines.pbworks.com/w/page/14422685/Predictably%...

It's all about how people (irrationally) make price comparisons / value judgements / set expectations / etc, and how you can use this knowledge for good (or evil). Great reading for any B2B startup (or B2C I suppose!)

I'll put on a vote for Priceless by William Poundstone, too (I haven't started predictably irrational yet because someone else had it on loan :)

I think there's a point at which people simply stop caring about the details and follow their gut. If you were to try to find the best deal for every grocery item you purchase, you'd spend a lot of time comparing prices per unit/weight, and how available deals affect those prices. People probably rather spend and extra 50 cent and save themselves 5 minutes of comparing numbers on tiny stickers. From that perspective, math skills are irrelevant.

It's also the reason why it's so important in investing not to lose your principle (Warren Buffet's #1 rule - don't lose money #2 - see #1):

If you start with $100 and you want to make $150 you need to make a 50% return. If your $100 drops to $50 you need to make a 100% return just to get back where you started, let alone where you want to end up at $150.

Here's a question... now that we know that this is a psychological "trick" played on people to get them to spend more of their money, is it morally wrong for those of us "in the know" to price things this way? Marketers are essentially trying to deceive people into spending more money. Yes, there is an argument that people are free to act as they please and that enough information is afforded them to make the right choice. But we wouldn't be talking about this if people actually acted rationally most of the time when it comes to this stuff. So at what point does taking advantage of irrational people cross a line from ok to wrong? Or does it? What implications would this have on businesses today if the tricks stopped?

If you wanted to stop psychological tricks, then most of advertising/marketing as we know it would disappear.

That said, it seems that people actually enjoy playing this game. Like the customers prefer convoluted schemes like this. It's not like they are completely oblivious to the tricks going on. I think it's fair to say that the vast majority of the western world is actually pretty savvy at spending their money.

But anyhow, remember what happened to JC Penny when they tried to simplify their pricing (no more sales!). They basically got murdered. Now it's partly their fault for not marketing it well (ha! look at that, you have to advertise that you're not screwing with your mind), but it's also cause it takes some of the 'fun' away.

Here's an analysis. http://www.moneytalksnews.com/2012/06/05/what-shoppers-can-l...

This is true, there is definitely a lot of fun that people have trying to hunt down a "bargain". They like to feel like they got the best of those bastards that are always screwing them! Or did better than their friends, like a competition. So I do get that. But that's not the case when buying the staples of life like food and laundry or dish soap, at least not in my mind since you are forced to buy that stuff... you need it. That takes some of the fun out of it for me anyway... feels more like a bill then a choice to spend.

The editorialised title on HN is a bit ambiguous, it doesn't specify whether "beats" is for the shopper or the shop. As the article is written from the point of view of shoppers, I would say that 33% off beats 33% more.

They mean an implicit "for most people ...", i.e. it is how the shopper perceives things, not how they really are for them.

Had he chosen $9 for his example, it would be much much simpler :)

Or 50% :P

I'm sure that people suck at math and that indeed the conclusion of the article are mostly correct.

However, there are genuine cases where getting more is more cost efficient than a discount. It all depends on the quantity you need - sometimes, a little bit more is just all you need to avoid buying 2 units. Especially in the UK where you almost never get 33% discount but instead "buy 2 get 1 free" offers.

"one with 33% more beans for free, the other at 33% off the price"

I don't know if it matters, but to me "33% more for free" presents more information. It tells you that the quantity has increased and the cost has stayed the same. "33% off" just tells you the price change but nothing about quantity. Now I have to figure out if I'm actually getting the same volume I did last week.

same story in the Atlantic: https://news.ycombinator.com/item?id=4209205

I love this kind of content :D

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