Loading summary
Transcript31 lines
- [00:00]
A
To start today's episode, I want to share a snippet from one of my favourite news clips of all time. It is a News clip from March 1988. ITN are reporting on a notoriously hazardous A19 road in North Yorkshire.
- [00:18]
B
This latest section of safety barrier stretches four and a half miles south from Peter Lee. It should make this section of the notorious A19A safer road.
- [00:28]
A
The road is really dangerous. There are loads of crashes reported on the road, but local councillors are very resistant to install safety features. They refuse to put in safety barriers, speed cameras and even signs to remind drivers what speed to drive. Here is local councillor Mr. Davidson defending the council's actions. I will not accept that it's a highly dangerous road. The road, obviously, like other roads, gives cause for concern when accidents do occur. Right behind Mr. Davison's head as he says that, a light blue Volvo 240 estate veers off the road, crashing into the side of the hill. Right after that, a grey Ford Sierra smashes into a slow moving car in the lane ahead. It is carnage. And it all happens during the live interview.
- [01:17]
B
Luckily, no one was hurt in the crash. It was just another example of of how hazardous the A19 can be.
- [01:23]
A
I love this clip. The eye roll from Mr. Davidson as he watches the driver crash right after he tells the reporter that the road is safe. That's just golden TV. But that was the 1980s. Roads have got much safer today. And yet getting in your car today and driving down the A19 or any other road for that matter, is probably the most dangerous thing you will do. Around 1,500 Brits die driving each year and that is way more than workplace injuries or homic. Many deaths are due to speeding and the British government rightly has spent millions on speed cameras, speed bumps and road design to quell speeding. But what if there was a way to lower speeding without redesigning the road or installing costly cameras? All the costly things that Mr. Davidson wanted to avoid? Well, that's what six researchers from Padova and Trento University set out to test in 2021. They paid 32 licensed drivers to drive around a 30 kilomet track in a high fidelity dynamic driving simulator. Each was told to drive normally and of course, adhere to the speed limit. The speed limit signs were placed every 500 metres around the track so you couldn't miss them. However, in the experiment, some drivers saw standard speed limit signs, signs which read 50km h or 70km an hour. But others saw signs that always read just one kilometre less instead of saying 50 km h it'd say 49 km h rather than 70 km, it would be 69 kilometres an hour. See, the researchers hypothesized that drivers would slow down more if the left digit dropped, even though the actual difference in speed was just 1 km per hour. Now, the results were very clear. I should say this is a really small sample size and more needs to be done on this test. But the results, I think are very interesting and potentially suggest that there's some effect here. When the sign dropped from 50 to 49, drivers reduced their medium speed by roughly 2 to 3 km h. When it dropped from 70 to 69, speeds fell by 3 kilometres an hour. In other words, a 1 km reduction in the limit had an overpowered effect on reducing speed. Perhaps if the hazardous A19 road in North Yorkshire had signs reading 49mph, drivers wouldn't have sped into the backs of the cars in front of. But why does this work? Why do drivers slow significantly when reading a nine ending number compared to a rounded number? Well, it is all down to the psychology of numbers and the nine end effect. And we'll cover all of that in today's episode of Nudge. Apparently, most businesses only use 20% of their data. That's like reading a book with 80% of the pages torn out. The point is, you will miss a lot unless you use HubSpot. Their customer platform gives you access to the data you need to grow your business. The insights that are trapped in emails, in call logs, in transcripts, all that unstructured data can really make a difference to your business. Because when you know more, you grow more. You won't learn much reading 20% of a book. So why settle for just 20% of your company's data? Visit HubSpot.com today to learn more. To cover the nine end effect, I've invited the brilliant Markus Huseman Kopeski on the show.
- [04:57]
C
It's my pleasure and thank you for having me. I'm an expert in pricing, a guest researcher at Freijie Universitate in Berlin and the founder of the Price Management Institute.
- [05:08]
A
And Markus has written one of my favorite books on pricing.
- [05:11]
C
When I. Many, many years ago I did my doctoral research, I came across so many psychological pricing topics that I. I put on a pile and thought at one point in my life I will put all these psychological pricing effects into one book. And this is what happened. This book contains more than 100 psychological pricing effects and it is very dense. So I took 30 pages of academic writing and distilled it into half a page.
- [05:39]
A
Marcus's book, titled the Handbook on the Psychology of Pricing, is a brilliant book. It covers hundreds of pricing tips. But to start today, I want to focus on just one pricing principle. Markus and I call it charm pricing.
- [05:54]
C
Charm pricing pretty much means prices end in 99. So what do pricing 99 do to people? They do two things. First, they contain a meaning, a connotation. So they see a price ending in 99 and you think it must be cheap because all prices are on sale are ending in 1990, and that's why you conclude from 99 price they must be on sale.
- [06:21]
A
As Markus says, charm prices look cheap because we've become familiar with the idea that a 99 ending price is a sale price. And thus when we see it, we assume it's cheap. But that's not all a charm price. Does charm prices benefit from something called the left digit bias? In pretty much all Western languages, we read from left to right. So when reading a number like 49.991, we read the four first. That anchors our perception. So if we read 49.99, we immediately note quickly in our head, almost without thinking, that it is obviously cheaper than 50.00, even though there's only a penny difference or a cent difference in those two prices.
- [07:03]
C
Interestingly, this is very convincing. So in one study, they randomized price endings in 88, 99 and round prices and checked what customers buy and how many bought. And very interestingly, the same number of customers bought. But given that 99 communicates the meaning of low prices, those customers at 99 bought just more. So the per capita spending increased over the same number of capita. Like the number of clients remained the same.
- [07:38]
A
This is a 1996 study by Schindler and Kiberian. These researchers ran an experiment in cooperation with a direct mail women's clothing brand. With the brand, the researchers distributed three versions of an otherwise identical catalogue to three segments of 30,000 customers each. In the catalogues, they either set the prices at a rounded amount, so $23 or $0.01 below, so $22.99 or $0.12 below, so $22.88. The researchers found that all three versions would make roughly the same amount of customers buy. So there was no statistical difference there. It wasn't like the 99 ending price made a single customer more likely to buy. However, a 99 ending price and an 88 ending price led to higher spending per capita compared to a rounded number. So Those who saw a 9. 9 ending or an 88 ending spent more than those who saw the rounded numbers. Now, you might think that this research is from the mid-90s, so that's out of date. But in 2020, one paper titled the Left Digit Bias revisited the findings. In one part of a series of five experiments, people were shown jam jars priced at either $2.99 or three do. And it turns out independent populations rated the price as 15% lower when it was priced at $2.99 than those who saw it was priced at $3. We read from left to right. That's why a $2.99 jam jar seems significantly cheaper than a $3 one, and it's why drivers slow down considerably more when the speed limit is set to 49 miles an hour rather than 50 miles an hour. However, the left digit bias isn't the only factor. Richard Shotten, in his book the Choice Factory, shared a study also with a mail order retailer. Here they studied the impact of charm prices on dresses. Schotten writes how the retailer created three different versions of their catalogue but only tweaked the price for four of the dresses. In the control version of the catalogue, the prices were set at 39, 49, 59 and $79. And in this scenario they sold 66 dresses in total. In a variant where all of the dresses were priced at $5 more, so $39 became $44. Sales dropped from 66 dresses to 45, sort of what you'd expect. It's more expensive, so people buy less, although that's quite a lot less considering it was only priced at $5 more. However, in the final test catalogue the dresses were sold for $5 less than the control, so rather than $39 they were priced at $34. So here you would think people bought a lot more, but they didn't. Here only 46 dresses were sold. And remember, in the control with the nine ending prices, 66 dresses were sold. So the left digit effect explains why the 39 price point sold more than the 44 one, but not why the 30. $49 variant outsold the $34 one. Another factor must be at play and Shotton writes that the most likely explanation is what Marcus said earlier. Our repeated exposure to sales and prices ending in nine has led us to a really strong association between that price, a 9 ending price and thinking it's a bargain. However, that causes a problem. If a high quality product has a price ending in nine, nine customers might actually assume it's worse quality than it really is.
- [10:54]
C
Sometimes a 99 appears cheap and in some cases you don't want to have your products appear cheap. So Researchers found that 99 price is particularly particular useful for FMCG products like fly spray and so on. But as soon as the price increases to 50. So the number 50 or beyond 95 is more convincing and attractive for two reasons. First, it still has this appearance of being cheap but not quality wise. So it's not communicating not cheap but a bargain. And that's why 95 and 5 is also kind of a magic number. It is close to representing a 0 around price, but not quite so. That's the perfect compromise for higher priced Items.
- [11:48]
A
Jendal in 1998 found for higher quality items that cost more than $50.99, ending prices don't work. Instead, retailers should use a 95 ending. In the study, high end durable electric kettles sold more when priced at $49.95 than at $49.99. But Marcus says the use of charm pricing shouldn't just depend on high quality and low quality products. It should also depend on how customers plan to use those products. For example, is the product you're selling a hedonic product, one where it's bought for pleasure like champagne? Or is it a utilitarian product bought for practicality, like a calculator?
- [12:30]
C
For example, you want to make a gift either to someone else or to you. And if you treat yourself nicely, like with a nice candle or bottle of champagne, this bottle of champagne should not be cheap because you don't want to connect the concept of cheapness with making you a personal gift. So a bottle of Champagne should be €40 or €40 instead of 39.79 or 14.99. Now this should be round so that the price feels right and conveys the concept of wholeness and high quality. For utilitarian products, you want to feel as a smart shopper, it's a useful product and you want to get the same good product and same value at the lowest possible price. In this case, the concept of cheapness or a bargain should be communicated, for example, with odd prices.
- [13:27]
A
In his book, Marcus cites a 2015 study which researched this. Here, the researchers Wadhua and Z used champagne as the hedonic product and a calculator as the utilitarian product. Prices were either rounded like $40 or non rounded like $39.72 or $40.28. Turns out participants were more likely to buy the hedonic product at a rounded price, so more likely to buy the champagne at $40. But they preferred non rounded prices. For the utilitarian products, so more likely to buy a calculator at 7,999 pence. There was no difference between the two non rounded prices. So assuming you're selling a hedonic product, then charm pricing works. It makes your product seem cheaper, it can be used for high quality items if you use a 95 ending, and it even helps drivers reduce their speed. And yet, when Richard Shotton analysed 650 supermarket prices, he found that prices are three times more likely to end in a zero than a nine. He concludes that although the concept of charm pricing is well known, it isn't widely used. Many marketers discredit the tactic. They think it's gimmicky. And yet study after study proves that it works. And at least unsurprisingly for me, some of the world's biggest brands, like Amazon and Apple, use it for pretty much all of their prices on their sites. That was charm pricing. And after the break, Markus will cover three more pricing tips backed by scientific evidence that are proven to improve your price. The podcast I'd like to recommend to you today after you finish listening to Nudge, is the Hustle Daily Show. It is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. The Hustle Daily show brings you a very healthy dose of irreverent, offbeat and informative takes on business and tech news. If you'd like an interesting episode to get you hooked on this podcast, there's a recent episode called the AI App that makes your dream vacation a digital reality. If you want to listen to that, just go and search for the Hustle Daily show wherever you get your podcasts. Hello and welcome back. You're listening to Nudge with me, Phil Agnew. Today I'm joining Marcus, the author of the fantastic handbook on the psychology of pricing. So far he's listed the benefits of charm pricing, but next up, here's a pricing tip for those selling multiple products. He calls it the Noticeable Difference Tip.
- [15:46]
C
Disabled products where customers are not heavily involved in a buying decision. In in this case, it was about chewing gum.
- [15:55]
A
In his book, Marcus asks you to imagine two packets of chewing gum on sale at your local store. The packets have similar branding, the same flavour, same attributes. Which one do you pick? Most people don't want to think hard about this decision.
- [16:09]
C
We don't have the mental bandwidth, or at least we don't want to invest so much mental bandwidth to decide which kind of chewing gum should we buy.
- [16:20]
A
Kim Novembsky and Dar in 2013 ran a study with chewing gum on participants in South Korea. Participants were given 1000 won, which is about $1, and asked which gum they would like to buy. Participants could also choose to keep the money and not buy the gum. When both gums were priced at 6.3 won, only 46% of participants decided to buy. But when the prices were slightly different, one at 6:20 and one at 6:40, the amount of customers who chose to buy rose from 46% to 77%. Marcus writes that adjusting the prices of similar options so that they are slightly different rather than the same dramatically increases the likelihood that a customer will buy.
- [17:01]
C
But if you just have $0.01 or $0.02 higher price or lower price, okay, that's enough. This appears to be the difference. Let's buy this or that one compared to not buying at all.
- [17:15]
A
If you have two similar products, never give them the same price. Make it slightly different and you'll increase sales. Okay, time for tip number three. Say you're running a promotion. Should you just offer money off? Or instead of money off, should you give an equivalent freebie? So for a cafe, should you run a promotion where caffeine hunters get 50p off a latte or should you give them a 50p biscuit for free with each purchase? Well, Marcus says you should give the freebie, especially if your discount is low.
- [17:47]
C
It works in particular if the discount that you give is very low. For example, you are selling TV sets and you sell your private label products which have a very low margin and your TV sets cost, let's say 500 pounds and you want to give five pounds off. Of course you can say hey, it's a five pound off coupon or discount and this might appear a bit cheap. It's just 1% and are you kidding me? I mean 5 pound. But if you would get them a TV set and a bucket of popcorn for 5 pound, they place a higher value on this 5 pound popcorn compared to the monetary value of 5 pounds off.
- [18:35]
A
Nunoz and park ran a study testing this back in 2003. Working with a pet shop, they ran two promotions over three months for the control, the $11 dog food was discounted by $2 and in the variant the dog food was kept at $11. But buyers would get a free $2 pet food can opener. They found something really interesting. The sales discount didn't stimulate sales at all. Dropping the price by $2 didn't have an effect on sales, but giving away the free can opener did help stimulate sales. Marcus writes that if the monetary value of your price discount is relatively small, then consider giving away a free product instead.
- [19:13]
C
They focus more on the value of this freebie. The freebie is perceived as more attractive.
- [19:20]
A
Time for one final example. Okay, imagine you were about to buy a mattress. Two models made it to your final decision and after lying down on each of them for a few minutes, you don't feel any difference. The first is $300. The second is $330. But it comes with a money back guarantee so you can return it without any hassles within 30 days if you're not satisfied. Marcus writes that Suelak, Hogreave and Hoyer, three researchers in 2011 studied the impact of money back guarantees for products like mattresses. Here's what they the money back guarantee
- [19:54]
C
is very helpful and even counterintuitive. So a money back guarantee has a connotation of being very credible. So if you buy something, they take the risk that something goes wrong and it's kind of an insurance. In particular, if this money back guarantee is credible, it is more effective.
- [20:16]
A
Specifically, the researchers found a number of results. They found that money back guarantees reduce the perceived financial risk. They lower the anticipated regret and increase product liking. They increase purchase intention and willingness to pay. They are more effective for experience good and longer evaluation periods increase money back guarantee credibility. All in all, they found that people will probably pick a $330 mattress over a $300 mattress if it has a money back guarantee. But that's not all.
- [20:44]
C
The stricter this money back guarantee is, the more credible it is. So if you have some caveats around this or some conditions, you perceive the company of being very serious about their money back guarantee. And this increases the credibility. So it's less easy to invoke. It is more attractive.
- [21:05]
A
Money back guarantees increase purchase likelihood and willingness to pay if customers perceive them as fair and credible. And a stricter money back guarantee might even increase that credibility perception. And that brings us to the end of our pricing tips. Today we've covered how effective charm pricing is, how a 9 ending price increases purchase intentions and makes a product look cheap. For higher quality items, it should end in 95. But avoid 9 ending prices if you're selling a hedonic product like roses for a Valentine's date or champagne for your partner. If you have two very similar products, make sure to give them slightly different prices. That was tip number two. And with small promotions, don't give money off. Offer a small freebie instead. And finally, money back guarantees really do work. But counterintuitively, the stricter you are, the more credible your money back guarantee will seem. That is all for today folks. Thank you so much for listening and I'm fairly certain that if you liked today's episode, you will really love Marcus's book. I've left a link to the book in the Show Notes if you'd like a copy. It is a cracking book. It's helped me with my own pricing. I use it myself. So do go and check out the link in the Show Notes if you want to buy a copy. Hopefully you'll be happy to hear that Marcus is coming back on the show in a few weeks to talk about more pricing tips. To make sure you don't miss that, please do subscribe to Nudge wherever you get your podcasts and follow The Nudge newsletter. 10,000 of you subscribe and those who subscribe get an email from me every single time an episode goes live. I can email you directly and tell you when it's live and you can reply and tell me what you think, which is always nice as well. So click the link in the Show Notes to subscribe to the newsletter. Now I reckon many of you are probably thinking, Phil, that episode was great. It's given me some ideas to improve my price, but I want more. I really want to use a tool that helps me adapt these tips for my own price. Well, I don't actually imagine you're thinking that, but if you are thinking something similar to that, you will probably really like the Nudge Vaults the Nudge Vaults is what I've spent really six years working on. It is a collection of 448 insights that I have collected from hundreds of research papers covering everything I know about applying behavioural science to businesses. In the vaults there are at the time of writing, 79 different insights specifically about pricing. So you can go in there and find a bunch of different tips all about pricing in particular. Plus, I've built a ChatGPT plugin that lets NudgeVault users ask the NudgeVault database questions. For example, right now I can write this is just an example, but my coffee shop sells coffees at pound three. Can you use behavioral science to improve my price within a few seconds? Wait for an answer and it will analyze the whole nudgevault database and pulls back a bunch of tips. For example, it tells me to use anchoring in the decoy. Specifically it says in addition to your £3 coffee, you should have a decoy price. So a signature reserve with a this is specifically what it's telling me. A signature reserve with specific coffee beans and charge that about £4.80 and that'll make your three pound price seem cheap in comparison. It goes on, it says, you know, higher prices lead to a higher perceived quality. So it suggests actually maybe just raising the price from £3 to £3.30. Teach me about the rule of 100. So this is the rule of 100 in discounts. It says rather than offering like 50p off, if I was to do a discount, it says it'll be more effective if I say 70% off your morning coffee and links to a load of insights which explain that. And it really advises me to use precision pricing. So rather than using the rounded number, this is what we spoke about today, it says use a specific price like 295 or if I increase it, go for 329, for example. It also talks about time promotions and gives a bunch more insights as well. So. So if any of that sounds interesting, if you want to apply these principles to your own business, go and check out Nudge Vault. As I said, there are 79 insights about pricing. You can get your first 50 insights for free. You can just go to nudgevault's website. You can just click the link on the show notes to go to Nudge Vaults website, sign up for free and get 50 insights at no cost. So if that sounds interesting, go to nudgepodcast.com and click Vaults in the menu. That is all for me, folks. I've been your host, Vilagne and I'll be back next week for another episode of Nudge Cheers.