Painful Sushi and Other Pricing Blunders

What’s the worst way to sell something? According to Carnegie Mellon University economics and psychology professor George Loewenstein (see The Pain of Buying and Brain Scans Predict Buying Behavior), selling products in a way that the consumer sees the price increase with every bit of consumption causes the most “pain”. This isn’t physical pain, of course, but rather activation of the brain areas associated with physical pain. In an interview with SmartMoney, Lowenstein noted,

[Consumers are] not weighing the current gratification vs. future gratifications. They experience an immediate pang of pain [when they think of how much they have to pay for something]. That perspective has a lot of implications. For example, it helps to explain why credit cards encourage people to spend; they anesthetize the pain. Paying with a credit card makes you feel like you’re not really spending money when you buy something.

It also explains why AOL switched from pay-per-hour Internet service to pay-per-month. When they did that, they got a flood of subscribers. They were caught totally by surprise by the overwhelming consumer demand. Why do people love to prepay for things or pay a flat rate for things? Again, it mutes the pang of pain. The worst-case alternative is when you pay for sushi and you’re paying per piece. Or watching the taxi meter; you know how much every inch of the way is costing you. [From Professor: Pain, Not Logic, Dictates Spending]

Marketers have realized this for years, and have responded with offers designed to minimize the pain associated with buying their product. A few current, heavily promoted offers include all-inclusive dinner prices (TGI Fridays and others) and a monthly price for any number of movies (Netflix, Blockbuster). In each case, the marketer offers a single, relatively attractive price that removes additional pain from the buying experience.

Interestingly, it’s possible that in many cases, the single price is actully higher than the amount the consumer would have spent on individual food items, movie rentals, etc. Nevertheless, the all-inclusive number is likely to appeal to many consumers, particularly those that Lowenstein would identify as being most sensitive to the pain of buying.

The message to marketers is clear: try to avoid multiple individual “pain points” in the buying process when possible. Obviously, some situations make individual purchases unavoidable – it’s hard to visualize a grocery store that could offer fee-based shopping instead of item-by-item pricing. Other business situations, though, may permit some experimentation with a single price approach for multiple items usually purchased separately, a monthly or annual fee instead of individual transactions, etc. Such an approach may not only boost sales, but in some cases profit margin as well.

We’re glad to see neuroeconomics (and, by extension, neuromarketing) get some thoughtful coverage in the popular press.

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Roger Dooley writes and speaks about marketing, and in particular the use of neuroscience and behavioral research to make advertising, marketing, and products better. He is the primary author at Neuromarketing, and founder of Dooley Direct LLC, a marketing consultancy. Follow him on Twitter.

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9 responses to "Painful Sushi and Other Pricing Blunders" — Your Turn

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Greg Grimer 29. March 2007 at 5:45 am

I am not sure that this applys in a B2B content since a buyer in a business is not spending their own money but their firm’s money. In fact the opposite might be true, since a la Carte pricing firstly gives them the impression that they are only paying for what they need rather than a single price for a package of extras, (some of which they might wish to do themselves or feel they don’t need). Second buyers often have a budget and the purchasing decision involves spending up to that budget. If by a la carte pricing you can get under the threshold and get more money for additional services next quarter then it is far better than the sticker shock of the holistic price and the inevitable no or haggle.

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Roger Dooley
Twitter: rogerdooley
29. March 2007 at 7:48 am

Good point about B2B, Greg. I’ve encountered all types of business purchasers – those who treat the company’s money as carefully as if it was coming out of their own wallet, and those who don’t care a bit about spending company funds.

It probably goes without saying that the “pain” from spending company money is almost always lower than from using your own hard-earned funds. To that extent, the process should be more rational and a la carte pricing more attactive if it results in a lower total purchase price.

One other effect of all-in-one pricing (that might apply to business buyers) is that it prevents evaluating the cost of each option. Automakers now group multiple options into a “luxury package” not just to simplify manufacturing but to avoid making the consumer ponder whether, say, keyless entry is reallyworth $500. Instead, you have one group of options for $3500 like leather seats, power windows, and half a dozen other items that muddle the whole price issue to the point where determining value isn’t easy.

Thanks for dropping by, Greg. I hope that we see some neuromarketing studies of business purchasers before too long – that would be quite interesting.

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Leo Piccioli 31. March 2007 at 8:55 am

I work in a B2B company (we sell office products), and most customers are either:
a) “penny counters” that compare prices line by line, just to tell their bosses they saved 1 dollar this week
b) “value seekers”, that pay whatever you charge but expect a great service
Probably the biggest challenge is how to cater to both categories with a price meno.

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Quintius 10. October 2007 at 3:10 pm

This would suggest that some Internet sellers have their business model wrong. I was looking at prices for some item (don’t recall what) with a $450 MRSP. The price search resulted in amounts like $300, $375, $400, $430. The middle one were well known companies and the shipping was $30-40. The cheap price had a shipping of $130!

I’d never buy from the $300 guy. Who does? Are there actually people who click on the first price and don’t compare the total cost?

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Roger Dooley
Twitter: rogerdooley
11. October 2007 at 2:17 am

I think there are probably a few customers who DO fall for it. The low price and upsell used to be far more prevalent, particularly in products like cameras and computers. Now, with comparison shopping engines that calculate delivered price, that’s less common.

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Heidi 25. February 2008 at 5:14 pm

An excellent example of the “package pricing” that appeals to both the individual and the business customer is Logoworks – http://www.logoworks.com. They kind of take the car manufacturer route, with different levels of packages. It feels much less painful to go with a design package from Logoworks as opposed to paying an individual designer. And no, I am in no way affiliated with Logoworks; I just thought they have a great business model, even before I read your blog.

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QlubbAndy 1. August 2008 at 12:58 pm

For pay as you go of course there are ways to make it less painful such as creating an extra mental layer. They do this at carnivals all the time of course by having you exchange money for tickets because it’s less pain to see a paper ticket go than “real cash”. With sushi, I’ve seen a lot of sushi boat places that will have one boat with the prices but you see it floating around every so often and you have to gauge the price by the color of the plate it’s on. You’d probably get less consumption if you put a sign with the actual price on every plate.

Another side note about b2b. A lot of pricing today is moving towards a service/recurring revenue stream model where you pay by the month rather than a lump sum. In fact much of software today is sold through term pricing and not perpetual and so you experience the “pain” a lot more frequently. The benefit of lower up-front cost, and pay as you go outweighs seeing the frequent pain in this case.

Andy

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Andre Thomas 5. August 2008 at 12:48 am

But doesn’t charge the whole amount upfront result in a large sum to pay for in the first transaction? I think a low price to hook people in, and further upsell would work better.

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Shriram R 14. August 2008 at 12:58 pm

I am wondering how this concept can be applied to pricing during inflationary times.
I have linked this post to our blog site . I hope its okay.
-Shriram R

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