Paying a Psychological Price

I am publishing a collection of short stories as an e-book. In this week’s blog posts I’m trying to work through the relevant pricing issues and set a price for that content.

When the stock market (meaning of course the industrial segment of the Dow Jones averages) passes through a big round number like 1,000 points, or 5,000 points, or, more recently (and repeatedly, in both directions) 10,000 points, everybody pays close attention. Why? Because people are stupid.

Okay…maybe that’s a little harsh. Better would be to say that people are conditioned to pay attention to such numbers. For example:

• 4,294? That’s just a number.
• 4,444? Wow!
• 9,303? Nothing.
• 9,000? Wow!
• 10,605? ZZZZzzzzzzz…..
• 10101? Spooky! Digital! Buy tech!!!

Numbers in and of themselves usually have no meaning. They quantify, but they do not evoke. Precisely because of the abstract relationship between our numbering system and the way we usually employ it (to count things) the door is left wide open for extraneous associations to creep in, even if we are guarded against them.

As you can see from the above examples, our psychological make-up affects how we view numbers in a variety of ways. Some of these misplaced associations may be obvious, some may be obscure, but it should be quite clear that none of them have anything to do with what the numbers actually mean.

The people who sell you products know all about these extraneous associations and routinely use them to advantage. Some of this is simple deception. When you buy gas at $2.82 per gallon, you do know from previous experience that there’s an itty-bitty, ninety-nine-hundredths-of-one-cent hiding at the end of that price, but because it’s such a pitifully small number it doesn’t seem important. Which is why the gas industry adds that almost-penny. The big sign says $2.82 per gallon, but the other signs at the pump remind you that the actual price is $2.8299, meaning the seller is making almost a full cent more than the stated price. Why do gas sellers do this? Because it works.

But it’s not just the fact that the amount is small that convinces you it isn’t important. It’s the number itself. Anything ending in ’99’ is considered a de facto savings, because ’99’ so immediately evokes ‘100’. Not only is that ‘100’ a big round number, but it include an entirely new digit. ’99’ is a miserly two-digit number, whereas ‘100’ is a budget-wrecking three-digit number. The actual difference between the two numbers for any unit is 1%, but the psychological difference is closer to 100%.

And you know this. It’s why the couch you just bought was selling for $999 instead of $1,002. It’s why the car you’re thinking of buying costs #29,860, instead of $30,081. It’s why the bottled water you grabbed is selling for $0.99 — even though it’s going over $1.00 with tax. As a consumer you see these numbers everywhere, you figured them out a long time ago, you know what the pricing elves are up to, and yet it still works.  

Psychological pricing, and psychological barriers to sales, are real. They have nothing to do with the value or utility of a product being sold, but they can make or break a product’s profitability. Perhaps even more surprising is the fact that psychological pricing may end up being the main basis by which a product’s price is fixed.

True story (at least true as I remember it). Years ago a small software company created a new application. It met an existing need across a wide range of potential markets, from home users to business users. When they were ready to sell the app, however, they had no idea how to price it. $20? $90? $350? (I don’t remember the exact numbers, but that was the approximate range.) In order to get some feedback they placed three different ads at those price points in publications aimed at different markets. Amazingly, the only replies they got were from B2B customers who had seen the $350 ad.

Why did that price point work? Because the B2B customers assumed that if the app cost that much, it must have some commensurate value to their organization. Customers who saw the lower-priced ads either assumed that because the app was cheap it was also worthless in terms of productivity gains or savings, or they simply didn’t have the same pressing need for the product that the B2B respondents had. In any case, the important point here is not about the outcome of the price testing, but the fact that it needed to be done at all. Even the people who created the application had no idea how to price their product — and in the end it turned out that psychological factors were as important to the product’s price as anything else.

How does this relate to book prices? Well, it’s entirely possible that the same thing happens when you price your book at $0 or $2. Some segment of the book-buying public may make a negative value judgment about the content based on the price, which is not what you want. It’s even possible that this kind of psychological bias affects different genres differently. For example, mainstream fiction (entertainment) may not be viewed negatively when discounted, while literary fiction (art) could take a snob-appeal hit. (I’m speculating: the bias could easily be reversed, if it exists at all. )

But it gets worse. As noted in the software example, it’s entirely possible for the market price of something to be completely divorced from any metric other than psychology. (The spread between the prices they tried was almost absurd, yet they were obviously right to try such a wide range of prices.) By the same token, it’s possible that book prices have little or nothing to do with perceived value. Or — and this may take a moment to get your head around — it’s possible that book prices may have a varying relationship to perceived value.

As a matter of fact, that’s pretty much what I think data that Mark Coker (CEO of Smashwords) reported a few weeks ago suggests. In a post (and presentation) fortuitously titled, How to Publish and Price an E-book, Coker states:

I expected to find a single price as the magic sweet spot, but instead, our data suggests there may in fact be a few sweet spots. $5.00 and $9.00, for example, look like promising price points that deserve further study.

The data is inconclusive for various reasons, but if you look at the chart that goes with the post you’ll see what he’s talking about: profit (sales x price) spikes at around the $5 and $9 price points. Except…the prices aren’t actually $5 and $9, they’re the more psychologically-friendly $4.75 and 8.75, respectively. What happens when the price rises to $5.25 and $9.25 in those same cases? Sales fall off — and in the latter case, precipitously, by what looks like 75%.

Seriously: take a look at the chart. In almost every instance where the price rolls past a new whole-dollar amount, you’ll see a decrease in total profit. Meaning demand fell off as prices passed those psychologically important milestones.

Why might this be happening at the level of the consumer brain? Well, let’s take a highly-speculative look inside the mind of an e-book-buying consumer as it confronts a range of price points:

• $0 — “Wow! Free! Sure, it’s probably crap…but still — it’s free! How can this hurt me? I mean, I’m losing the download time, and there’s a negligible bandwidth cost — but I’m not paying by the megabyte so that doesn’t hurt me… Hmmm…. Maybe this is a free as it seems! Oh: I’ll still have to read it, so the investment is the same, but then again I’d have to read it if I paid $AllTheMoneyInTheWorld, so this is clearly the better deal!”
• $1 — “What the hell? Why isn’t this free?”
• $2 — “What the hell? Why isn’t this $1?”
• $3 — “Three dollars? Who sells anything for three dollars? 666 is divisible by three! AAAAaaaaaaahhhhhhh!!!!!”
• $4 — “Hmmm…this is getting close to five dollars.
• $4.75 — “Wow…this is so close to five dollars that I feel like it’s even a better deal than four dollars would be, even though I’m paying an extra seventy-five cents. I know that’s dumb, but it’s how I feel.”
• $5 — “Hahahahaha! Five dollars? That’s half of ten! You want half of ten for that? Hahahahahahahaha!!!”
• $6 — “Hmmm…. There’s something about this price that feels as if it’s meaningful. I don’t want to pay it, but I can’t dismiss it outright, either. Dang.”
• $7 — “This is real money. Not real money in the sense that you could buy, say, a pair of pants with it. Or dinner at any place other than a dive or a corporate grease factory. But still. This isn’t six bucks.”
• $8 — “This is a reasonable price. Even if I don’t know what the product is, it’s reasonable. Except for gasoline. That would be an outrage. Or milk.”
• $9 — “Interesting. This could easily be ten dollars, but it’s nine. That’s a savings to me of one dollar, or more than ten percent, even though I’ve divorced that savings from any relationship to the underlying product.”
• $9.75 — “Holy cow! If I buy now I can get in on this thing before it tops ten dollars! Sweet!”
• $10 — “Hahahahahahahaha! Ten dollars! Guffawwwwwwwwww! You want ten dollars from me? In a base-ten numerical system? Seriously? HAHAHAHAHAHAHAHA!!!!!!”
• $11 — “I’m hungry.”

When the stock market first passed through 10,000 points on 3/29/99, the number of stories written about that psychological milestone reached such critical mass that additional stories were written about the number of stories that were being written. People debated the milestone, they debated the debates, and the debates about the articles about the debates. Yet even as most people said Dow 10,000 meant nothing about the future or past or even about the fundamental worth of the assets being valued, everybody was absolutely sure it meant something, even if only because it meant something to someone else.

In the intervening eleven years, the Dow (industrials) has moved through the psychologically important 10,000-point barrier more than ten times, half of those on the way down. And yet each time it gets talked about. 10,301 points? Nothing. 9,882 points? No articles. 10,000 points on the nose? That’s the power of psychology in the marketplace.

As discussed earlier this week, the price range for an e-book is pretty small. I’m not going to have to worry that my ideal price is $80. Still, even though the range is small, the meaning of the individual price points in that small range can be incredibly varied. Choosing a price for my e-book may have more to do with picking the right psychological price point than with any other variable, and that’s a little bit unnerving.

Who do voodoo? You do.

— Mark Barrett