If you follow behavioral economists like Dan Ariely, who I recently interviewed as part of the CMO 2.0 Influencer Conversations, you will know that there is such a thing as anchoring when it comes to pricing. Basically you can set an anchor for the value of a good and then have people judge all offerings within that space against that anchor. Anchoring is especially important for new product offerings – the ones for which people do not have an assigned value for – like the iPhone when it came out or the Amazon Kindle.

Let’s take a look at the differences between the product pricing strategies for those two products. The iPhone was introduced at $600, only to be reduced two months later to $400. Of course $400 looked like a great deal – when the anchor had been set at $600. And as Dan Ariely explains in a recent MIT Sloan Management Review interview $200 iPhones today look like an even better deal.

The Amazon Kindle on the other hand was announced with books at $9.95 – a subsidized price as Amazon is paying publishers more than that. But that set the anchor for the value of a book on Kindle in the mind of consumers. Now that they raised many books to $15 and up, it does not look like a good deal anymore – in fact it looks like it’s not worth switching to electronic versions of the book anymore. And the Amazon Kindle boards are full of protests by angry customers who are calling for boycotts.

Would Amazon have sold fewer Kindle’s if it had set the price of a book at $15 to start with, and tout some of the other benefits of reading on a Kindle – like searchability, note taking, etc.? It’s hard to prove of course, but I do believe that I would have bought the two Kindles that I bought so far with books at $15 and not feel as bad as I did when they increased their price. Subsidizing prices in a new product category is as bad a strategy as having free offerings to stimulate usage in a new category.

Starting with the premise that advertising is always designed to increase consumer awareness and to persuade users that the brand is superior, a new research study by a team of researchers from by Stanford University tested the impact of advertising on both awareness and perceived quality. What they found is that “advertising has consistently a significant positive effect on brand awareness but no significant effect on perceived quality.”

An interesting side finding from the study is that share-of-voice does not impact brand awareness – in fact, if you outperform your competitors with advertisement it will have a slightly negative impact on your brand awareness.

The research paper also mentions empirical studies that show that advertising lowers price sensitivity – again confirming that pricing may be controlled more by the supply side rather than the demand side.

All that being said, the study confirms that advertising has little effect on sales.

(via Strategy+Business)

Another great experiment by MIT behavioral economist Dan Ariely as described in his book “Predictably Irrational” shows that it is not the product that counts but the information about the product.

In one experiment, they sold SoBe drinks to two groups of students who were about to exercise. The first group paid full price, while the second group got a 30% discount. After exercising they asked the students whether they felt more or less fatigued than usual – and all reported that they were indeed less tired. Except that the group which paid full price was less fatigued than the group which paid less. The 50c aspirin does work better than the 5c aspirin…

They then did an experiment where they sold students SoBe, which claims to provide “energy for the mind,” before administering a 15-word puzzle. Again, one group paid full price and another paid less. They also baselined the experiment with a group that did not take SoBe. The group that paid full price solved as many word puzzles as the group that did not get the drink, while the group which got the discount solved about 30% less word puzzles.

WOW…we are doomed.

But wait! It gets better. They then performed the same experiment except that this time they printed the following message on the cover of the quiz booklet “Drinks such as SoBe have been shown to improve mental functioning, resulting in improved performance on tasks such as solving puzzles.” They also stated that the SoBe web site referred to 50 scientific studies to support these claims – information which was totally fictional. The results? The ones that paid full price solved 33% more puzzles than the ones who did not get the drink, and the ones that got the discount solved 7% more word puzzles.

And who said that messaging was dead? The things you say about your product may indeed be more important that the product itself…