Monday, June 20, 2011

Psychological pricing in action

Shalimar (Indian restaurant) in Nashville (try the Tikka Masala) gives you a discount if you pay cash instead of charging a premium if you pay with a credit card.  This is consistent with the predictions of "loss aversion," a part of Prospect Theory that says people will go to greater lengths to avoid losses, than they will to realize gains.  So even though the two pricing schemes--cash discount vs. a credit card premium--are identical, the former "frames" the pricing policy as a gain, which brings in more business.    

7 comments:

  1. It's also probably the only way they can do it. Visa, in particular, comes down really hard on merchants who try to add on fees for credit card payments.

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  2. Is there anybody left in this country that knows it is I before e except after c -- recEIve.

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  3. I think it has to do with the customer receiving a discount while the merchant avoids paying taxes. A far trade for the merchant.

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  4. I don't know if it was true or not, but when I had a shop in Texas I was told it was illegal to charge more for credit card payments and that we could only give cash discounts because it didn't capture sales tax correctly. This is also a typcial situation in the NYC bodega where they take cash and don't ring it up. The tax man watches for this!

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  5. Such a pricing strategy is a smart move in favor of the businesses surplus. Most consumers are looking for value and very satisfied when they don't have to pay full price for a good. Consumers are looking to get the most for their buck and will continue with such a strategy if they feel they are receiving value in their favor from a specific transaction.

    Psychological manipulation plays an important role in pricing as you always want the consumer to feel as they are getting a good deal. An example that I would use has to do with gas prices where certain gas stations have one price regardless of cash or credit. I'm more inclined to go to this station than others that have different prices for cash or a higher price for credit. I'm more inclined to continually go back to the first station because I feel as if I'm getting value. This business now has a steady flow of repeat customers who are more inclined to purchase other things they normally wouldn't because of the psychological value of this discount.

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  6. Is it really any different than a 1% 15, net 30 type pricing model? While here it's avoiding an expense rather than delaying payment, the real intent is to get (more) cash in hand as quickly as possible.

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  7. Someone should forward this post to the Vanderbilt financial office who charges a 2.65% processing fee on tuition payments made with a credit card. This can be quite substantial when you're making single payments in the tens of thousands. I suppose once you've accepted and enrolled in classes your demand becomes very inelastic.

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