Trust the Price Tag?

new-price-red-tag_mark-mozThe concept of a price tag is only about 140 years old. Prior to that transactions were a negotiation between buyer and seller. Basically, everything was a yard sale, with haggling expected.

Today of course, haggling about the price of an airline seat or an entree at your favorite restaurant is a lost cause. The price tag has evolved as a matter of convenience, almost a social contract, because we would rather not have to negotiate the price of a Big Mac every time we want one, even if the price might vary from one city to another.

, based on computer pricing models, demographics, economic conditions nationally and locally, and what competitors are doing.

Rational or not, we expect—or hope—the price is fair, or the inducements (BOGO, free fries with purchase) worth it. Behavioral economists such as Herbert Simon and Daniel Kahneman received Nobel prizes by showing that

. (See Medium’s Nov. 2017 article, “The behavioural economics of an A$1,800 iPhone”.)

What are the economic and cognitive biases that go into the decision to purchase, for example, the latest iPhone at $1,000 (or more) on the day it is released? Is the latest upgrade demonstrably superior and really worth the premium involved? Is it worth it to be the first to have it? For many the answer is yes and is based on emotion and need, rather than rationality.

Peter Earl built on those ideas, recognizing that we make decisions by following rules, responding to emotion, satisfying needs, and following the dictates of a particular identity. Kahneman offers sage advice in his book, Thinking, Fast and Slow , writing that we should consider the way the mind works so that our rational side can put the brakes on the quick and simple, rules-based side, whether it’s what’s on the price tag or in the contract.

So, what to do about price tags? My take? They work fabulously when you are dealing with a commodity (Big Mac). They trick us when we get into big ticket items (iPhone or a new car). And they are basically worthless when dealing in complex services deals where buyers and sellers together should shift to a “pricing model” (Rule 4 of establishing a Vested deal), instead of focusing only the “price.”

Image: New Price Red Tag by Mark Moz via Flickr CC

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