How companies use behavioral economics to squeeze your wallet

The very best behavioral economic “parlor tricks” aren’t all used for good. In fact, it’s often the marketing departments of consumer goods companies that implement new research the fastest. Behavioural economists study the psychology of economic decision-making, and if they are any good at their task they will discover something the unscrupulous salesman could use to his advantage. You need to protect yourself.

Some companies, like airlines, are unbundling prices to make decisions for consumers more difficult. Other companies, like retailers, artificially inflate prices so that 50% off sale seems so sweet. Other companies, like Car manufactures, use drip pricing and milk those extra charges.

Here are some excerpts from an article at popeconomics on how companies use behavioral economics to make your wallet a little lighter:

“On sale”, “50% off”, and anchoring

…One clever strategy the marketer employed was to set his course price extremely high in the beginning, but offer a seemingly steep discount promotion after a couple weeks. The course started at $1,000, but by the next month, it dropped to $500. Since I, and his other targets, already thought of his course as a $1,000 investment. Five hundred seemed like a great deal.

The technique is called anchoring, and it’s one of the older tricks in the book. You give the target a “reference point”, and then negotiate around that reference point to achieve your desired effect.

Drip pricing: Pile on the little charges after the decision to buy

Ever bought a car? Maybe you negotiated hard down from the sticker price (probably already facing anchoring bias). But after the dealer shook your hand and said “We have a deal”, the extra charges started to pile up. Water-proof seat treatments, a delivery charge, rust-proofing…you name it. The charges didn’t seem big relative to the overall purchase, but they probably added up to several hundred dollars.

You see, the best time to hit someone with nasty surprises like that is after they’ve already decided to buy. Once that decision is made, the target starts to think as if he already owns the car. Even though no money or product has been exchanged yet, it’s hard to back away from that decision in the face of new information.

…But second, we also tend to have trouble with “complex pricing.” Unless it’s added up for us, we don’t make the connection that a $500 purchase—with $15 S&H, a $40 warranty, and a $50 required battery charger—is actually a $595 $605 purchase. (One of my all time favs on complex pricing is — What the airlines learned from cell phone companies )

Creating a sense of urgency

This was also something the guy with the $1,000 course employed. “This course becomes unavailable at midnight. I’ll probably never sell it again, but if I do, the price will only go up.”

Of course, that was a few days before he cut the price in half, but putting that aside…

Loss aversion also extends to a perceived lack of availability or exclusivity of a product. On T.V., you’ve probably seen dozens of products “not available in stores.” The Nintendo Wii stayed hard to buy for years after its debut (though Nintendo would argue that was because they couldn’t keep up, not because they wanted to create a sense of urgency to buy).

Continue Reading @ Pop Economics.

The best way to defend yourself to these attacks is to read Robert Cialdini's books Yes!: 50 Scientifically Proven Ways to be Persuasive and Influence: The Psychology of Persuasion.

Other, hand-picked, articles I recommend reading:
How Apple Plays the Pricing Game
How Williams and Sonoma Sells More Bread Machines
Why Infomercials Always Offer More than One Thing
The Dark Art of Drip Pricing
How Subway is using Anchoring to Raise Prices
Why do we prefer Coke over Pepsi? Hint, there is a lot of psychology involved.
What's the most recognizable Scent In the World?
Unpopular pricing and the megapixel bias
Manufactured Uncertainty: What the Airlines Learned From Mobile Phone Companies