Power of Price – The Psychology of Cost and Value

My girlfriend and I recently moved house. In between arguments about how many scatter cushions and scented candles two people really need, we’ve gradually been filling our new home with furniture.

Let’s talk about sofas.

We recently spent an entire bank holiday weekend in a retail park trying out sofa after sofa like we were hosting our own traumatic, upholstery-focused spin-off of the X-Factor. By the middle of the Monday afternoon, we’d narrowed the search down to the final two.

One of these sofas was a masterpiece; a game-changing leather recliner that would revolutionise our sitting-down experience forever, a bearded sales assistant named Mark assured us.

The other sofa wasn’t quite as impressive and the material would probably wear out a bit quicker, but it was a nice sofa, comfortable and – crucially – about half the price of the first one.

The problem wasn’t the sofas themselves. We knew which of the two was ‘better’. We just couldn’t work out if it was worth the money.

We were already contending with Fear Of Missing Out, as (by incredible coincidence) the better sofa was available at a reduced price until the end of that day. But now we also had a value problem.

Adam and his girlfriend were nowhere near this friendly as they entered day three of sofa-gate.

Adam and his girlfriend were nowhere near this friendly as they entered day three of sofa-gate.

How do we calculate value?

Logic tells us that the cheaper a good product is, the better value it represents. But how much better? And what is the point at which value compensates for a lower quality of product? It’s an almost impossible calculation to make, so we end up guessing.

Certain psychophysics studies, such as a particular one by S. S. Stevens from his Harvard classroom, suggest that for a cash incentive to be twice as enticing as another, the actual value offered needs to be closer to four times that offered by the original.

William Poundstone’s Priceless is a goldmine of a book for behavioural decision theory in relation to purchase price. The Stevens study proposes that while, for example, a bank might offer customers £125 for switching to its current account while the rest of its competitors are offering £100, customers may not be much more likely to choose the higher offer.

If true and all other elements were basically equal between the two offers, that might mean the providers offering £100 had found the right financial reward to coax a customer into the perceived hassle of switching their bank account, while the bank offering £125 was giving away more margin than it needed to in order to attract a proportion of customers they could have largely converted with £100.

However, perception of the offer’s value isn’t the only element in the conversion equation. Visibility is another factor, and the right price increases the potential for you to get your offer in front of customers.

That’s because, in these savvy-customer days of comparison and cashback sites, being top of the pile can count for a lot in terms of exposure – and usually clicks. Frequently, these kinds of sites order their offers from highest to lowest value to the user, and therefore the most lucrative sits above the fold and gets the most visibility. Would beating the next-best offer by £1 or £5 actually drive a better overall profit margin than beating it by £25? That would be an interesting test.

To avoid damaging their new investment, the couple now sit exclusively on the floor.

To avoid damaging their new investment, the couple now sit exclusively on the floor.

How to leverage your customers

In other contexts, businesses can construct their price lists to point us towards particular choices without us even realising. For instance, a restaurant will often display its most expensive dish in the top-right corner of its menu, as this is where our eyes often tend to move first.

This is anchoring, a classic technique in negotiation. The pricey dish and its location are designed to set an initial tone to make the rest of the dishes on the menu appear more reasonable by comparison. As a result, the restaurant will typically surround their most expensive dish with their most profitable dishes – the ones they really want you to buy. Their least profitable items are usually displayed much further down the menu, and often in a less prominent font size.

Other studies have proven that – in specific scenarios – the more expensive a product is, the more likely customers are to believe it is of a higher quality. For instance, a hotel that served its guests differently-valued bottles of wine (for free) found that the more expensive the label on the wine, the more likely the guests were to rate it highly – even when the values presented to them were completely made up.

Like most things in life, the impact of price on perception depends heavily on context. Understanding your context and the users entering it will help you to hone the price (and value) of your product to attract profitable conversions, great reviews and repeat purchases. Most importantly, it’ll help you make your customers’ purchase decision easier.

(In case you’re wondering, my girlfriend and I opted to buy the cheaper sofa in the end. This was mainly a damage limitation exercise – pricing psychology aside, we both have a history of spilling things onto the most expensive item in any given room.)

To learn more about making your web journeys as persuasive as possible, drop us a line on [email protected] for a chat about our UX & CRO services.