Sneaky Price Increases

The holidays are prime-time for retailers to drive sales with timely product selection, marketing, and promotions. Leaving aside how companies get us to make a purchase in the first place, this season reminded me that pricing is in large part behavioral. What the consumer is able to bare really is as much a psychological question as it is an economic one. Companies are savvy and will always figure out the least intrusive way to increase the price on us, but how often do we notice?

While shopping for presents, I noticed that the discounts advertised were not as generous as presented. Many of the products had new list prices that were higher than normal such that the post-discount price was hardly a bargain. Yet I was drawn to the perceived discount and felt I was somehow cheating the market and getting a great deal. Anchoring is a powerful force.

Salience is another. Companies will frequently hold the list price of a product constant, and instead reduce what is included since volume is not as salient as price. This is effectively a price increase though. For example, the remote-controlled car that I bought last year is the same price even though it no longer includes batteries. This is common practice in the food industry where volume and contents are fungible. The average consumer does not notice that there is one fewer chicken tender or Doritos chip in a bag that cost the same as last time.

The last price increase I noticed this season related more to technology than to psychology, specifically that we accept small price increases if it is convenient for us to do so. We have a lot to be grateful for in the shift away from cash to credit and mobile payments, but there are some draw backs. Salience is at play since we are more likely to buy and accept higher prices when we do not physically see the money leaving our wallet. But beyond salience, the ubiquity of new payment methods allows price increases to be more gradual and convenient than ever before. The tennis club near my house has several vending machines. For as long as I can remember, water was $1.25 and soft drinks $1.50. It was that way for a while since raising the price by the only increment available, the quarter, would have caused a revolt. Now the vending machines are equipped with fancy credit card readers, and the prices are now $1.37 for water and $1.69 for soda. Perhaps I am okay with it since the credit card masks my actual cash outlay (salience), but I think it is more so the case that I was prepared for a price increase, but I just wanted it to be smaller and convenient (hunting for loose change is never fun). Smoother, gradual price increases are not new since credit cards have been around for a while, but since vending machines are largely behind the times, I experienced first-hand the coin-to-card phenomenon.

The list of our cognitive biases is long, so I'm sure there are many more techniques companies use to raise the price (and get us to buy things in the first place), so please share!