Based on Marketing Science 29(1), 2010 article by
Thomas, Simon and Kadiyali
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4 Steps in Price Setting
Cost-based
Pricing
Min Price: The minimum price below which the
product will make a loss (or unacceptable profit)
Value-based
Pricing
Max Price: The maximum price above which the
buyers will not consider the product to be of
acceptable value
Profit
Optimization
Profit-Optimizing Price: Choose a price between the
Min-Price & Max-Price to optimize profits based on
demand & competitive factors
Price Framing
Framing: Frame the profit-optimizing price to elicit
the most favorable psychological response from
buyers
This paper illustrates a tactic that sellers can use in the fourth step of price setting
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Let’s say the seller has decided that her
house should be listed at about $340,000…..
 This price is based on various considerations
 The cost of buying this house for the seller (cost-based pricing)
 Assessed value of the house by county tax office (value-based
pricing)
 Price of similar homes sold recently (competitor-based pricing)
 Now, should the price be $340,000 or a more precise price of
$341,450?
 How will framing the price as a precise price influence buyer
behavior?
 Note that while we’re talking about houses, the same logic applies
to cars, groceries, etc.
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How will a buyer respond when she see a
precise price of $341,450?
Price Precision influences buyers’ responses in several ways:
 Precise prices are a less familiar and therefore less “fluent” than round prices.
This disfluency triggers a series of attributions in the buyer’s mind.
 Attribution 1: Precise numbers are normally used for smaller magnitudes; larger
magnitudes are usually rounded
 A baby weighs 7 lbs 6 oz, whereas a grown-up weighs about 145 lbs.
 A gallon of petrol costs $2.79 but a car costs about $25,000.
Therefore a precise price reflects a smaller magnitude
 Attribution 2: A precise price reflects seller’s unwillingness to negotiate because
it has been carefully calculated
 Attribution 3: A precise price reflects a fair price because it has been carefully
calculated
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 So, when a buyer sees a (disfluent) precise
price,
 They have to think harder about what these prices
mean, and hence are more uncertain about the
magnitude of this price
 They tend to use heuristic rules to resolve their
Seller sets
precise list price
Buyer’s
Uncertainty in
judgment
Uncertain
Heuristic
Judgment
feeling of uncertainty
 This leads the buyers to believe that these precise
prices are smaller than round prices of similar
magnitude; that is $341,450 seems smaller than
$341,000
Precise
numbers are
usually smaller
Buyer judges precise
prices to be lower
 And hence buyers are more likely to buy the item
listed for a precise price
Precision increases WTP
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Results of Empirical Studies
 Testing Causality: Laboratory and on-line experiments showed
the price precision affects magnitude judgments.
 Testing External Validity: Also verified this on about 16,000
completed home sales in Florida and New York state. Regression
models revealed that houses with precise prices sell at a higher value
than houses with round prices
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Results of
Regression
Analysis
Consider two houses in Long
Island in the same zip code,
with the same number of
rooms and other features, one
with a list price of $485,000
and the other with a more
precise list price of $484,880
or $485,120. Our results
suggest that the house with
the more precise list price will
sell for about $1,200-$1,450
more.
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