[photopress:irrationalsm.jpg,full,alignright]That is the question that MIT professor in behavioral economics Dan Ariely tries to make his readers think about in his new book, Predictably Irrational: The Hidden Forces That Shape Our Decisions, as he proves that most people are indeed predictably irrational.
Take the following experiment as an example. In the experiment, students were introduced to six products – two different wine bottles, a trackball, a wireless keyboard and mouse, a design book and a box of Belgian chocolates. Students were then given a form that listed all the items and asked to write the last two digits of their social security on top of the form and also next to each item in the form of a price. So, if someone’s last two digits was 23, they were asked to put $23 next to each item on the form. Next they were asked whether they would pay that price for that item with a simple yes or no. When the students finished that, they were asked how much they would be willing to bid for each item. Well guess what? The students with the highest-ending social security digits (from 80-99) bid highest, while those with the lowest-ending numbers (0-20) bid lowest. In the case of the cordless keyboard, the top 20 percent bid an average of $56, while the bottom 20% were willing to pay an average of $16. Overall the top 20% were willing to pay prices that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20%.
And that is just one of the many examples given in Prof. Ariely’s book.
So what does this all mean? As an economist, Ariely believes that fundamental economic principles like the one where supply and demand determine pricing, or the claim that free markets and free trade benefit everyone involved in those transactions, may in fact be bogus. The first one is based on the assumption that the supply and demand forces are independent from one another. The second is based on the assumption that all players in the market know the value of what they have and the value of the things they are considering getting from the trade. But if our choices are affected by random initial anchor prices as demonstrated in the experiment above as well as other experiments listed in the book, then the price that I am willing to pay (demand) can be heavily influenced by the supply side through MRSP (manufacturers suggested retail price), promotions, discounts, etc. So it is not the consumers’ willingness to pay that influences the market price, but instead the market prices themselves that influence the consumers’ willingness to pay. And for the same reason, the choices and trades we make in free markets may not at all reflect the true benefit that we would derive from the things we trade.
So what does that mean from a marketing perspective? For starters, and as it relates to pricing, it means that marketers may in fact have more control over buying behavior than they are currently given credit for. Additional research described in the book as well as on Ariely’s web site and blog, indicates that marketers may in fact be able to influence much more than the price a consumer is willing to pay for something, but also influence their general buying preferences.
In the end, the consumer may not be as much in charge as you think…