The Placebo Effect: Why Price Shapes Consumer Expectations

Imagine you’ve been getting these terrible migraines. Desperate for the pain to stop, you visit the doctor. He tells you that he has the perfect treatment, a pill that has been proven to eliminate migraines in 95% of patients. You fill the prescription and your migraines disappear. What if you found out the pill your doctor prescribed was simply a sugar pill that has no effect on migraines? Your migraines vanished, but how?

The reason is this—you expected to get better after taking the medication, so you did. This phenomenon is called the placebo effect and it is responsible for helping thousands of sick and ailing people every year. The placebo effect is what happens when a person’s condition improves after he or she takes a medication that has no proven therapeutic effect for that particular condition. The person’s perception and belief that the medication will help is what improves their condition, not the medication itself.

In this post, I am going to dig into this concept of the placebo effect, but with a focus on the role that price plays.

Price & Placebo Effect in Marketing

Price is the de facto placebo effect in marketing. It plays a very important role in influencing how people perceive a product and, in the end, shaping their expectations. This is why designer jeans fit so perfectly, why Nike’s make us run faster and jump higher, and why $5 Starbucks just tastes better.

It turns out that price affects not only perceived quality, but actual quality as well.

Research published in the Journal of Consumer Research explored whether marketing actions (such as pricing), can actually alter the effectiveness of the product.

In a series of experiments, researchers had participants drink SoBe Adrenaline Rush, a drink that claims to improve mental ability. To determine the effect of the drink on people’s performance, the researchers had the subjects perform a series of puzzles (unscramble words).

Participants were exposed to two variables. First was information about the effectiveness of the drink. The high expectancy group was told that drinks such as SoBe Adrenaline Rush create large improvements in thinking. The low expectancy group was told that the drinks provide only slight improvements in mental performance.

Participants were also given information about the cost of the drink. Half of the participants were told the regular price of the drink ($1.89), while the other half was told that the drink was purchased at a discount ($0.89).

The results (below) are surprising; those who got the discounted drink performed worse than those who received the full-price drink.

Takeaway

The takeaway from this study is the role that price can play in the experience customers have with your product. Price shapes expectations. When people pay more for a product, they find greater enjoyment because they believe and perceive that it will give them more satisfaction—the placebo effect. With this in mind, maybe you should consider raising your prices, it just might make for happier and more satisfied customers.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

Make What Your Selling as Risk-Free as Possible

Consumers are risk averse. This means that when making a purchase decision, people prefer certainty over ambiguity. This is why people often order an entrée they have tried and like rather than take a chance on a new dish.

Figure 1

One of the reasons so many people love Amazon is that there are customer submitted reviews for nearly every product. Given the option of comparable printers in Figure 1, which would you choose?

Personally, I would choose Printer A and happily pay the $30 premium. It’s not that Printer B is a bad printer, it just seems like much more of a gamble. The fact that Printer A has 156 reviews with an average of 4 stars lets me know that it is an all around good printer….it is the safe choice.

In my experience, consumers are driven by this idea of a ‘safe choice‘. They will often resist trying something new, because they don’t want to take a risk and end up regretting there decision. The strength of this resistance varies on factors such as price, switching cost, and product importance (i.e. new type of peanut butter vs. new computer OS)

Recognizing that consumers long for the ‘safe choice’, brand and business owners should make their products as risk-free as possible. One way to do this is with a great return policy.

As Roger Dooley noted in his blog Neuromarketing, consumers actually put a specific value on a store’s return policy, or more accurately, the option of returning an item. He writes:

A study by researchers at Northwestern and MIT found that consumers treated a return policy as equivalent to a price difference in the product. Not unsurprisingly, that value varied depending on how “risky” the purchase was. The paper goes through a whole lot of math to arrive at what the authors call an “option value” – more or less, how much more the consumer will pay for a strong return policy. They arrived at these values:

  • Men’s Top – $3.19
  • Women’s Top – $5.00
  • Women’s Shoes – $15.81

Takeaway

People are naturally risk averse. As a marketer or business owner, you should do everything you can to make trying your product as risk-free as possible.
  • Return Policy
  • Warranty
  • Free Samples
  • Product Demonstration
  • Customer Reviews

Make it easy for customers to give your product a try—make it the safe choice.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

The Anchoring Effect in Marketing

Anchoring is a term used in psychology to describe the tendency for people to over-rely on specific information when making decisions.

Anchoring was first theorized by Amos Tversky and Daniel Kahneman. They found that giving people a “starting point” can influence their decision making. They performed an experiment to demonstrate the anchoring effect:

Subjects were asked to guess the percentage of African countries in the United Nations. They were first given a percentage; they were then asked whether or not their estimate was higher or lower than that given percentage and to make a guess as to the correct value.

  • The group that was asked “Is it more than 10%?” guessed that 25% of Africa’s countries were in the UN.
  • Those who were asked “Is it more than 65%?” estimated that 45% of African nations were in the UN.

This study is a perfect example of the anchoring effect. The researchers were able to influence the subjects guess simply by adjusting the “starting point” number.

Familiar Products

Once we buy a product at a particular price, we become anchored to that price. Maybe you won’t pay more than $30 for a pair of jeans or $2 for a loaf of bread, this is the effect of anchoring. We use anchor prices to evaluate future decisions for that product or product category—it’s how we gauge whether or not we are getting a fair deal. In Predictably Irrational Dan Airely describes how people who moved and immediately bought a new home tended to spend the same amount on housing as they had before…even if this meant buying a home that was much bigger or much smaller than the one they left. They were anchored to the initial price of their home.

Lesson

Because customers have purchased the product before, they have an anchor price. This anchor price is the measuring stick which they will evaluate your offering against. If your price is lower than the anchor price, then customers should be attracted to your product. If you are priced above the anchor then you will need communicate why it is more expensive in order to disassociate that product with the anchor price.

Unfamiliar Products

But what about unfamiliar or rarely purchased items where we have little or no anchors? We often accept the first price that we see because we really have no idea what it costs. Let’s say you go to the electronics store because you are thinking about buying a 3D TV. You see a 60” one you like that costs $2,500. Though you may not purchase that particular TV, that $2,500 now becomes the anchor price against which you will measure all other 3D TV’s in the future.

Lesson

Start with a high price point. Don’t get fooled into thinking that you will be able to up-sell customers after luring them in with low prices. The more effective (and profitable) strategy is to establish a high anchor price. Introduce new customers to your higher priced offerings. Once you have established a high anchor price in their minds, lower-priced options will be much more attractive.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

Decoy Pricing — Helping Customers Make the ‘Right’ Product Choice

In today’s post I will be looking at decoy pricing. As the name infers, decoy pricing involves adding a ‘decoy’ item to your product lineup, which leads customers to purchase the option you want them to buy.

ADD AN INFERIOR OPTION
In his brilliant book Predictably Irrational, author Dan Ariely shares a great example of the effect of decoy pricing. He ran an experiment using subscription offers to The Economist magazine. Participants were given one of two offers.

Offer A
$59 – Economist.com subscription (16% chose)
$125 – Print subscription (0% chose)
$125 – Print & web subscriptions (84% chose)

Offer B
$59 – Economist.com subscription (68% chose)
$125 – Print & web subscriptions (32% chose)

The results from this experiment are quite stunning. The only difference between the two offers is the inclusion of a third “decoy” choice print subscription in Offer A. No one chose the decoy item, but its mere presence made the print & web subscription option look like a no-brainer. Offer B takes a bit of thinking, whereas Offer A made the decision easy by giving consumers a default option. This experiment is one of many that show that presenting one option as a default option increases the chance it will be chosen.

ADD AN EXPENSIVE OPTION
In the above example, adding an inferior, but similarly priced product (print only subscription) helped increase sales of the more attractive print & web subscription by reinforcing its value. Another decoy pricing strategy is to add an expensive option.

Let’s say for example you sell watches; $100 for the basic and $200 for the premium version. Some people buy the premium option, but most elect for the basic. You could add a decoy super-premium option priced at $500. Shoppers probably aren’t going to buy it, but it will boost sales of the $200 option because it suddenly seems like a great value.

TRADE CUSTOMERS UP
Steve Jobs and Apple are genius when it comes to decoy pricing. Let’s take a look at pricing for the iPad:

A shopper goes in thinking an iPad will only cost them $499 because 16GB is all they need. But for $100 they can get double the storage amount and $200 more will get them 4x more storage. Many end up with the most expensive 64GB option because it would be silly to purchase one of the other options. Apple’s decoy pricing strategy trades shoppers up by making the most expensive version the “right choice”.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

The Framing Effect — Influence Purchase Decisions with ‘Framing’

We tend to think that we are logical creatures, that we make rational decisions based on the information that is available to us. But the reality is that all human beings have common biases that can lead to poor judgment and irrational decisions. These inherent biases that influence our thinking are what psychologists refer to as cognitive biases.

There are a number of different cognitive biases that influence our thinking. Confirmation Bias involves the tendency to seek out information that supports our own preconceived notions. The Bandwagon Effect describes the tendency to act or think a specific way because other people do. The cognitive bias that I’ll be looking at here today is framing.

Framing describes that our choices depend on how the problem is presented, the way the question is “framed”. Let’s look at a classic set of experiments on framing:

Participants were offered two alternative solutions for 600 people affected by a hypothetical deadly disease:

  • Option A saves 200 people’s lives
  • Option B has a 1/3 chance of saving all 600 people and a 2/3 possibility of saving no one

72% of participants chose option A.

They offered the same scenario to another group of participants, but worded differently:

  • If option C is taken, then 400 people die
  • If option D is taken, then there is a 1/3 chance that no people will die and a 2/3 probability that all 600 will die

However, in this group, 78% of participants chose option D (equivalent to option B)

The above experiment explains the very essence of framing. The two groups favored different options because of the way the options were presented. The first set of participants were given a positive frame (emphasis on lives saved), whereas the second set were given a negative frame (emphasis on lives lost).

The Takeaway

Marketers and business owners can influence purchase decisions by the way they frame their offers. Here are some ways to apply this idea of framing:

Percentages and Absolute Numbers

In his blog Neuromarketing, Roger Dooley examines the effects of using percentages versus real numbers. It’s the difference between saying:

      • 90% of customers are satisfied with our service.
      • 9 out of 10 customers are satisfied with our service.

Real numbers tend to have a much stronger impact on people. Conversely, if you must present negative information, use percentages for a lesser impact. “Only 1% of our products have a defect” does’nt sound nearly as bad as “1 out of every one hundred products have a defect”.

Break it Down

Breaking down the cost for the product in terms of pennies or dollar per day will make your product much more appealing to consumers. 83¢ per day for a gym membership sure sounds more feasible than $25 a month.

Aggregate

Conversely, sometimes it is beneficial to aggregate a cost. For example, $400 for an espresso machine sounds like a large investment when presented with no framing. However, it is much more feasible when you compare it to the aggregated yearly cost of visiting Starbucks. (i.e. $800)

Price Format

Research shows that price format can also influence a purchase decision. A paper put out by the Harvard Business School compared all-inclusive pricing (e.g., the price of a TV is $500 including shipping) versus partitioned pricing (e.g., the price of a TV is $490 and shipping is $10). They found that price format is an effective way to shift attention from one type of component (the actual price of the TV) to another (the great deal on shipping)

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

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