Pricing often generates emotionally charged responses from customers. Customers will look at a price and something tells them whether the price is fair or not. It is very intuitive to assume that customers have a good idea of the fair price of the items of their use. Right?
Let's check out if it is so. To understand customer fairness scale, I carried out a small experiment with my students. I showed them a GPS unit listed on Amazon at $249, and asked them what would be the fair price of this product in India. I told all students that the currency conversion rate is $1 = INR 44.5. I further divided the students into two groups. I showed the first group the prices of Papa John's 12" Large Pizza in Seattle, Washington ($17.99) and in Bangalore (INR 259). The second group was shown the prices of Toyota Corolla in US ($18,000) and India (INR 1,450,000).
The two groups were intentionally anchored with prices of products that have little to do with prices of hi-tech/electronic products. QSR and Auto pricing don't have much to do with electronic product pricing. So logically, the participants will use their fairvalue meter and ideally both groups should give almost similar levels of fairvalue for the GPS unit in question.
Here's what happened. The group that was shown Papa John's prices, the fair value responses were in the range INR 1,000 to INR 8,000, averaging at INR 6,000. The group that was shown Corolla prices, the fair value responses were in the range INR 9,000 to INR 60,000, averaging at INR 20,000. Comparing the averages between the two groups, one group values the same GPS unit more than 3 times the value placed by the other.
The Pizza group was anchored on lower conversion rates in practice, and was shown smaller number (2 and 3 digit numbers). This lowered their reference prices and this group was biased towards the lower side of the scale. The Corolla group was anchored on higher conversion rates in practice, and was shown larger numbers (5 and 7 digit numbers). This raised their reference prices and got them biased towards the higher side of the scale.
When I shared the results of the experiment with the students, they had difficulty believing the fair value estimates of each other, and were fully convinced they had the right estimate. And we are told to believe that customer is ALWAYS right! Really??
Let's check out if it is so. To understand customer fairness scale, I carried out a small experiment with my students. I showed them a GPS unit listed on Amazon at $249, and asked them what would be the fair price of this product in India. I told all students that the currency conversion rate is $1 = INR 44.5. I further divided the students into two groups. I showed the first group the prices of Papa John's 12" Large Pizza in Seattle, Washington ($17.99) and in Bangalore (INR 259). The second group was shown the prices of Toyota Corolla in US ($18,000) and India (INR 1,450,000).
The two groups were intentionally anchored with prices of products that have little to do with prices of hi-tech/electronic products. QSR and Auto pricing don't have much to do with electronic product pricing. So logically, the participants will use their fairvalue meter and ideally both groups should give almost similar levels of fairvalue for the GPS unit in question.
Here's what happened. The group that was shown Papa John's prices, the fair value responses were in the range INR 1,000 to INR 8,000, averaging at INR 6,000. The group that was shown Corolla prices, the fair value responses were in the range INR 9,000 to INR 60,000, averaging at INR 20,000. Comparing the averages between the two groups, one group values the same GPS unit more than 3 times the value placed by the other.
The Pizza group was anchored on lower conversion rates in practice, and was shown smaller number (2 and 3 digit numbers). This lowered their reference prices and this group was biased towards the lower side of the scale. The Corolla group was anchored on higher conversion rates in practice, and was shown larger numbers (5 and 7 digit numbers). This raised their reference prices and got them biased towards the higher side of the scale.
When I shared the results of the experiment with the students, they had difficulty believing the fair value estimates of each other, and were fully convinced they had the right estimate. And we are told to believe that customer is ALWAYS right! Really??
Anshu: Thanks for sharing the insights from your experiment.
ReplyDeleteYou are welcome Raj!
ReplyDeleteHope you found it useful.