The Myth Of Fair Value

To prepare for the upcoming holiday shopping season, I’m reading ‘Priceless: The Myth of Fair Value (and How to Take Advantage of It)‘ by William Poundstone. Poundstone references a wide variety of psychology studies which show consumers are unable to accurately estimate fair prices and are “strongly influenced by the unconscious, irrational, and politically incorrect.” In fact, he makes the enticing claim that prices are a collective hallucination.

One of my favorite stories describes what happened when Williams-Sonoma added a $429 premium breadmaker on the shelves next to their normal $279 model. While they sold very few of the premium model, sales of the $279 breadmaker more than doubled. In post-purchase surveys, shoppers reported the lower-priced model seemed like a bargain.

Poundstone also explains why nearly 2/3 of all retail prices end in the number 9 and why the profit margin of the 99 Cents Only store is twice as high as Wal-Mart. Here’s a video of him discussing the phenomenon:

Decision theory tries to explain these examples of people making seemingly illogical buying decisions. As Poundstone himself says,

although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.

Poundstone has lots of stories, including why a $69 hotdog increases sales of an $18 hamburger. These are examples of the cognitive phenomenon of anchoring. When we try to estimate a numerical value, we are unconsciously influenced by related numbers. An $18 hamburger seems reasonable compared to a $69 hotdog, even through it’s probably not fairly priced.

Now that I better understand the myth of fair value, I feel better prepared to resist those holiday shopping bargains.

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3 Responses to The Myth Of Fair Value

  1. Raunak September 9, 2012 at 10:07 pm #

    Jonathan, thanks for sharing such an informing post and also the link to Poundstone blogs.
    I love the breadmaker example and it makes a whole lot of sense. Budget buyers would like to associate with a brand that they perceive to be high end. Seeing an expensive option on the shelf builds that perception. It is then easier to sell the less expensive product.

  2. joshuafeltsrn September 10, 2012 at 9:28 am #

    Johnathan –

    I appreciate your commentary. As you mention it, it seems like fairly common sense, but most things are if you actually take the time to reflect on it and think about it. Perhaps the reason why things ending in 9 sell better is simply because it hasn’t yet been rounded to the next whole number. It makes us feel like we’re buying something cheaper than we really are. I’ve always noticed the 9/10 at the end of the whole number at a the gas station, I just never thought about it as a marketing strategy until now.


  3. Anonymous December 16, 2012 at 9:18 pm #

    @joshuafeltsrn ALL pricing in an open marketplace is a marketing strategy.

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