Pricing Principles from Psychology for Agricultural Organizations with Market Power

A recent review of food retailer pricing found evidence that much of the behavior was inconsistent with traditional economic models (Li, Sexton & Xia, ARER 2006). These inconsistencies may stem from the theoretical foundation that firms use to guide their pricing. When firms can influence price, they often use pricing principles from psychology, based on buyer behavior instead of utility maximization. These principles have been incorporated into the marketing approach to pricing. A comparison of the economics and marketing approaches toward pricing found important differences and concluded that marketing principles provide: a richer and more empirically based treatment of the pricing issue from the buyer's perspective . . . ' (Skouras, Avlonitis & Indounas, JPBM 2005, p. 362). This paper reviews more than twenty different pricing principles, developed by psychologists and consumer behaviorists, that may appear inconsistent with some traditional economic theories and that could help increase the profits of agricultural organizations that have enough marketing power to affect price. These pricing principles can be grouped into four main categories. The first category is called 'framing.' Framing refers to the way something is depicted or what is emphasized (e.g., telling buyers that hamburger is 25 percent fat or 75 percent lean). Price framing deals with how the price is described to customers. Incorporating 'free' into an offer, describing a price in terms of multiple units (e.g., three for a dollar), specifying purchase limits, adding an anchor (e.g., suggesting a number to buy or a reason to buy more), highlighting the price in terms of spare change, encouraging purchases on credit, and reframing ( e.g., specifying the cost per day, comparing the purchase with other small regular expenses, or using two different currencies) have been shown to increase willingness to pay. The next second category is called 'congruency.' Marketers strive to make all their messages to prospective buyers consistent. Congruency means that the signals sent by the price should match the messages from other sources. Within this category, there are principles dealing with packaging (e.g., size and shape) and with the terminology, font, and typeface size that are used to describe the product and its price. The next group is called 'context.' Researchers have found that the information people see around an item and the sequence they see this information can influence prospect willingness to pay. Adding an external reference price to advertisements or store signage, striving to make key information first or last in the viewing sequence (e.g., primary and recency), separating shipping and handling charges from product costs, and striving to be perceived as the premium product because asymmetric competition may exist are the pricing principles in this group. 'Signaling' is the last category. The principles in this group involve the messages that buyers receive from the price. One pricing principle involves the effect of certain price endings, often called the effect of nines. A common belief in economics is that if all other things are held constant, lowering the price should generate a downward-sloping demand curve. However, at certain price points, the quantity demanded is likely to be sharply higher, and if price is lowered below a price point, the quantity demanded may fall. Instead of being downward sloping, the demand curve may have segments with a positive slope. Other principles within this group involve the sensitivity of buyers to the frequency distribution of past prices, the ability of buyers to recall past prices, the awareness of buyers to the cost of a product, the number of syllables in the price, the ability of higher prices to suggest higher quality, and the ability of higher prices to improve a product's perceived performance (e.g., the price placebo effect). By including these marketing-based principles in their tool kit, applied economists can better understand the pricing behavior they observe in the marketplace and can provide more practical advice to agricultural organizations on what they should consider when developing their pricing strategies.