Pricing has gotten more shelf space in the last few years. Through the lens of behavior science, Dan Ariely’s Predictably Irrational and Richard Thaler’s Nudge both provided glimpses into our limited ability to assess prices. Chris Anderson proposed in his book Free that 21st century companies would build business models around the price of zero. There seemed little room for another title.
Yet, Bill Poundstone proves us wrong in Priceless: The Myth of Fair Value (and How to Take Advantage of It). The book is a narrative that threads history, story, science, and business while complementing the aforementioned and others you will find in the business section.
Much of the work on modern day pricing theory started in a still obscure field known as psychophysics. Researchers in the field spent time studying sensory perception. Tests showed our sensory systems are highly dependent on contrast to create meaning. For example, if you want your house to look twice as bright as others in the neighborhood, it doesn’t twice as many lights; you’ll need to buy four times as many lights.
A number of researchers took these findings into the realm of decision making. Daniel Lahneman and Amos Tversky probably did the most to expand on these ideas.
Take a minute and answer this two-part question they developed:
1. Is the percentage of African nations in the United Nations higher or lower than 65?
2. What is the percentage of African nations in the United Nations?
It turns out that the answer you provide to the second question is heavily swayed by that first question.
When asked in research experiments, the average estimate for question two was above 45 percent. When the number in question one was lowered from 65 percent to 10 percent, the average estimation of question two dropped to 25 percent.
This effect, known as anchoring, has since been confirmed in hundreds of experiments. Real estate agents value homes based on the asking price. Negotiators make more profit on their transactions when they provide the anchor and then make the first offer. And retailers are smart to show the original price alongside the sale price than show the sale price alone.
Poundstone takes some great diversions into the design of restaurant menus, the fact or fiction of whether ending a price in ‘9’ helps improve sales, and the 20 years journey to sell Andy Warhol’s estate in Montauk.
One recommendation for readers is to take your time with Priceless. Over the fifty seven short chapters, Poundstone provides a dizzy array of permutations to consider and the slight varieties become hard to separate in the final pages. This is not an indictment of the book. Fewer examples would have removed precious nuance. A simple change in reading style will compensate.
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Priceless is featured in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.