The reason is this—you expected to get better after taking the medication, so you did. This phenomenon is called the placebo effect and it is responsible for helping thousands of sick and ailing people every year. The placebo effect is what happens when a person’s condition improves after he or she takes a medication that has no proven therapeutic effect for that particular condition. The person’s perception and belief that the medication will help is what improves their condition, not the medication itself.

In this post, I am going to dig into this concept of the placebo effect, but with a focus on the role that price plays.

Price & Placebo Effect in Marketing

Price is the de facto placebo effect in marketing. It plays a very important role in influencing how people perceive a product and, in the end, shaping their expectations. This is why designer jeans fit so perfectly, why Nike’s make us run faster and jump higher, and why $5 Starbucks just tastes better.

It turns out that price affects not only perceived quality, but actual quality as well.

Research published in the Journal of Consumer Research explored whether marketing actions (such as pricing), can actually alter the effectiveness of the product.

In a series of experiments, researchers had participants drink SoBe Adrenaline Rush, a drink that claims to improve mental ability. To determine the effect of the drink on people’s performance, the researchers had the subjects perform a series of puzzles (unscramble words).

Participants were exposed to two variables. First was information about the effectiveness of the drink. The high expectancy group was told that drinks such as SoBe Adrenaline Rush create large improvements in thinking. The low expectancy group was told that the drinks provide only slight improvements in mental performance.

Participants were also given information about the cost of the drink. Half of the participants were told the regular price of the drink ($1.89), while the other half was told that the drink was purchased at a discount ($0.89).

The results (below) are surprising; those who got the discounted drink performed worse than those who received the full-price drink.

Takeaway

The takeaway from this study is the role that price can play in the experience customers have with your product. Price shapes expectations. When people pay more for a product, they find greater enjoyment because they believe and perceive that it will give them more satisfaction—the placebo effect. With this in mind, maybe you should consider raising your prices, it just might make for happier and more satisfied customers.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 2: The Framing Effect
• Part 3: Decoy Pricing
• Part 4: The Anchoring Effect
• Part 5: Minimize Risk

Figure 1

One of the reasons so many people love Amazon is that there are customer submitted reviews for nearly every product. Given the option of comparable printers in Figure 1, which would you choose?

Personally, I would choose Printer A and happily pay the $30 premium. It’s not that Printer B is a bad printer, it just seems like much more of a gamble. The fact that Printer A has 156 reviews with an average of 4 stars lets me know that it is an all around good printer….it is the safe choice.

In my experience, consumers are driven by this idea of a ‘safe choice‘. They will often resist trying something new, because they don’t want to take a risk and end up regretting there decision. The strength of this resistance varies on factors such as price, switching cost, and product importance (i.e. new type of peanut butter vs. new computer OS)

Recognizing that consumers long for the ‘safe choice’, brand and business owners should make their products as risk-free as possible. One way to do this is with a great return policy.

As Roger Dooley noted in his blog Neuromarketing, consumers actually put a specific value on a store’s return policy, or more accurately, the option of returning an item. He writes:

A study by researchers at Northwestern and MIT found that consumers treated a return policy as equivalent to a price difference in the product. Not unsurprisingly, that value varied depending on how “risky” the purchase was. The paper goes through a whole lot of math to arrive at what the authors call an “option value” – more or less, how much more the consumer will pay for a strong return policy. They arrived at these values:

• Men’s Top – $3.19
• Women’s Top – $5.00
• Women’s Shoes – $15.81

Takeaway

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 2: The Framing Effect
• Part 3: Decoy Pricing
• Part 4: The Anchoring Effect
• Part 6: The Placebo Effect

Anchoring was first theorized by Amos Tversky and Daniel Kahneman. They found that giving people a “starting point” can influence their decision making. They performed an experiment to demonstrate the anchoring effect:

Subjects were asked to guess the percentage of African countries in the United Nations. They were first given a percentage; they were then asked whether or not their estimate was higher or lower than that given percentage and to make a guess as to the correct value.

• The group that was asked “Is it more than 10%?” guessed that 25% of Africa’s countries were in the UN.
• Those who were asked “Is it more than 65%?” estimated that 45% of African nations were in the UN.

This study is a perfect example of the anchoring effect. The researchers were able to influence the subjects guess simply by adjusting the “starting point” number.

Familiar Products

Once we buy a product at a particular price, we become anchored to that price. Maybe you won’t pay more than $30 for a pair of jeans or $2 for a loaf of bread, this is the effect of anchoring. We use anchor prices to evaluate future decisions for that product or product category—it’s how we gauge whether or not we are getting a fair deal. In Predictably Irrational Dan Airely describes how people who moved and immediately bought a new home tended to spend the same amount on housing as they had before…even if this meant buying a home that was much bigger or much smaller than the one they left. They were anchored to the initial price of their home.

Lesson

Because customers have purchased the product before, they have an anchor price. This anchor price is the measuring stick which they will evaluate your offering against. If your price is lower than the anchor price, then customers should be attracted to your product. If you are priced above the anchor then you will need communicate why it is more expensive in order to disassociate that product with the anchor price.

Unfamiliar Products

But what about unfamiliar or rarely purchased items where we have little or no anchors? We often accept the first price that we see because we really have no idea what it costs. Let’s say you go to the electronics store because you are thinking about buying a 3D TV. You see a 60” one you like that costs $2,500. Though you may not purchase that particular TV, that $2,500 now becomes the anchor price against which you will measure all other 3D TV’s in the future.

Lesson

Start with a high price point. Don’t get fooled into thinking that you will be able to up-sell customers after luring them in with low prices. The more effective (and profitable) strategy is to establish a high anchor price. Introduce new customers to your higher priced offerings. Once you have established a high anchor price in their minds, lower-priced options will be much more attractive.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 2: The Framing Effect
• Part 3: Decoy Pricing
• Part 5: Minimize Risk
• Part 6: The Placebo Effect

ADD AN INFERIOR OPTION
In his brilliant book Predictably Irrational, author Dan Ariely shares a great example of the effect of decoy pricing. He ran an experiment using subscription offers to The Economist magazine. Participants were given one of two offers.

Offer A
$59 – Economist.com subscription (16% chose)
$125 – Print subscription (0% chose)
$125 – Print & web subscriptions (84% chose)

Offer B
$59 – Economist.com subscription (68% chose)
$125 – Print & web subscriptions (32% chose)

The results from this experiment are quite stunning. The only difference between the two offers is the inclusion of a third “decoy” choice print subscription in Offer A. No one chose the decoy item, but its mere presence made the print & web subscription option look like a no-brainer. Offer B takes a bit of thinking, whereas Offer A made the decision easy by giving consumers a default option. This experiment is one of many that show that presenting one option as a default option increases the chance it will be chosen.

ADD AN EXPENSIVE OPTION
In the above example, adding an inferior, but similarly priced product (print only subscription) helped increase sales of the more attractive print & web subscription by reinforcing its value. Another decoy pricing strategy is to add an expensive option.

Let’s say for example you sell watches; $100 for the basic and $200 for the premium version. Some people buy the premium option, but most elect for the basic. You could add a decoy super-premium option priced at $500. Shoppers probably aren’t going to buy it, but it will boost sales of the $200 option because it suddenly seems like a great value.

TRADE CUSTOMERS UP
Steve Jobs and Apple are genius when it comes to decoy pricing. Let’s take a look at pricing for the iPad:

A shopper goes in thinking an iPad will only cost them $499 because 16GB is all they need. But for $100 they can get double the storage amount and $200 more will get them 4x more storage. Many end up with the most expensive 64GB option because it would be silly to purchase one of the other options. Apple’s decoy pricing strategy trades shoppers up by making the most expensive version the “right choice”.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 2: The Framing Effect
• Part 4: The Anchoring Effect
• Part 5: Minimize Risk
• Part 6: The Placebo Effect

There are a number of different cognitive biases that influence our thinking. Confirmation Bias involves the tendency to seek out information that supports our own preconceived notions. The Bandwagon Effect describes the tendency to act or think a specific way because other people do. The cognitive bias that I’ll be looking at here today is framing.

Framing describes that our choices depend on how the problem is presented, the way the question is “framed”. Let’s look at a classic set of experiments on framing:

Participants were offered two alternative solutions for 600 people affected by a hypothetical deadly disease:

• Option A saves 200 people’s lives
• Option B has a 1/3 chance of saving all 600 people and a 2/3 possibility of saving no one

72% of participants chose option A.

They offered the same scenario to another group of participants, but worded differently:

• If option C is taken, then 400 people die
• If option D is taken, then there is a 1/3 chance that no people will die and a 2/3 probability that all 600 will die

However, in this group, 78% of participants chose option D (equivalent to option B)

The above experiment explains the very essence of framing. The two groups favored different options because of the way the options were presented. The first set of participants were given a positive frame (emphasis on lives saved), whereas the second set were given a negative frame (emphasis on lives lost).

The Takeaway

Marketers and business owners can influence purchase decisions by the way they frame their offers. Here are some ways to apply this idea of framing:

Percentages and Absolute Numbers

In his blog Neuromarketing, Roger Dooley examines the effects of using percentages versus real numbers. It’s the difference between saying:

• 90% of customers are satisfied with our service.
• 9 out of 10 customers are satisfied with our service.

Real numbers tend to have a much stronger impact on people. Conversely, if you must present negative information, use percentages for a lesser impact. “Only 1% of our products have a defect” does’nt sound nearly as bad as “1 out of every one hundred products have a defect”.

Break it Down

Breaking down the cost for the product in terms of pennies or dollar per day will make your product much more appealing to consumers. 83¢ per day for a gym membership sure sounds more feasible than $25 a month.

Aggregate

Conversely, sometimes it is beneficial to aggregate a cost. For example, $400 for an espresso machine sounds like a large investment when presented with no framing. However, it is much more feasible when you compare it to the aggregated yearly cost of visiting Starbucks. (i.e. $800)

Price Format

Research shows that price format can also influence a purchase decision. A paper put out by the Harvard Business School compared all-inclusive pricing (e.g., the price of a TV is $500 including shipping) versus partitioned pricing (e.g., the price of a TV is $490 and shipping is $10). They found that price format is an effective way to shift attention from one type of component (the actual price of the TV) to another (the great deal on shipping)

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 3: Decoy Pricing
• Part 4: The Anchoring Effect
• Part 5: Minimize Risk
• Part 6: The Placebo Effect

There’s actually a science called Behavioral Economics that seeks to explain why people behave the way they do. Behavioral Economics combines psychology and economics to understand the purchase decision. It looks at how customers make decisions and why they make them.

I’m sure many of you are wondering whether or not science done by some university Ph.D. is applicable to real world business– my answer to you is absolutely! (at least in this case)

Understanding why consumers buy what they buy is extremely valuable knowledge. In my next few blog posts, I am going to look at some interesting findings on consumer behavior and how you can apply them to your business.

Let’s get started…

Fewer Choices

Too many choices can overwhelm customers and make them less likely to purchase. A study done by Columbia University psychologist Sheena Iyengar found that too many choices can actually cause a type of “information overload” in the mind of consumers. The classic experiment offered grocery shoppers a selection of 24 varieties of jams one day and only 6 the next. 30% of shoppers who were faced with the limited selection of 6 made a purchase, whereas only 3% given the 24 variety selection made a purchase. That’s right—fewer choices led to 10 times more sales.

The Takeaway

Choice isn’t always good. In fact, too many options can actually reduce sales by forcing customers to think too hard. Because of this, offering fewer choices can be a huge differentiator. Apple, Trader Joe’s, and In-N-Out Burger are a few brands that have adopted this approach and made the purchase process easier.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 2: The Framing Effect
• Part 3: Decoy Pricing
• Part 4: The Anchoring Effect
• Part 5: Minimize Risk
• Part 6: The Placebo Effect

No one seeks out failure. Marketers aim to sell more products, trauma surgeons strive to save lives, and lawyers fight to win client’s cases. Seeking to fail is just non-sense; however, failure seems to find us eventually.

Each of us have experienced failure and we’ve “learned from our mistakes”. Unfortunately, the primary learning we taken away from these negative experiences is that failure sucks and we want to avoid it at all cost. This fear of failure makes us hesitant to try new things and we miss out on some great opportunities as a result.

The history books are littered with individuals who encountered adversity, but were able to move beyond their mistakes to achieve great things. Abraham Lincoln, Albert Einstein, and Henry Ford are among these individuals.

How can you overcome failure to achieve your potential?

I believe the key lies in changing what you believe about failure. We tend to view failure as an all-inclusive term, but there are different kinds of failure. Designer Jamer Hunt calls this a “Failure Spectrum” (see infographic below)

I believe this concept of a Spectrum of Failure is just as applicable to design innovation as it is to personal and professional growth.

The underlying concept is that not all failure is created equal. Some failure leads to growth and advancement, whereas other types of failure can lead to disastrous outcomes. Sometimes making a mistake really isn’t a big deal (burning your morning toast) and other times the learning benefits of failing outweigh the consequences, as Seth Godin discusses in the below video:

Now Craftsman is turning it’s attention to those of us who can’t be trusted with power tools and are totally screwed when it comes to DIY projects. (I say us because I too am tool-challenged)

This summer, the tool brand will be launching SCREW*D, an online reality show where Craftsman will take one tool-challenged individual and make them the ultimate handyman (or woman). For 10 weeks, the chosen individual will be put through a series of intense tool and survival challenges with a chance to win up to $50,000.

Here’s what I love about this idea:

1. Those of us who aren’t so handy would love to gain the know-how to complete DIY projects. I would love to know how to build a deck or remodel my kitchen…heck I would be ecstatic just to learn what certain tools are used for. This contest/ video series will help people like me learn and in an engaging way.

2. The second thing I love about this idea is that it also appeals to Craftsman’s core-users. Ryan Ostrom, VP for digital marketing for the Craftsman brand, explains in the New York Times “The No. 1 attribute of our core users is that they love to share their knowledge and to teach other people.” In addition to appealing to the non-handy, this series will also engage the handy. The challenges will be broadcasted live through Facebook, where DIYers can interact by sharing their knowledge with the contestant in a live-chat format.

SCREW*D is Craftsman’s attempt to solve one of the most difficult challenges in marketing—how to attract new customers without alienating your base. If they are able to execute this idea, I have a feeling that SCREW*D (and other similar events) will bode well for the 84-year-old tool brand.

Kohl's Department Store

A while back I wrote The Double Edged Sword of Discounting in which I warned brand marketers and small business owners about the danger of relying on discounting to attract customers. In short, deals and discounts will breathe life into your short term sales, but can lead to detrimental long term effects.

My perspective on discounting, though, is continually challenged by the consumer in me. You see, I have this whole Dr. Jekyll & Mr. Hyde thing going on. As a marketer, I am a big proponent of adding value (as opposed to discounting). But as a consumer, I am always on the lookout for coupons and deals.

No one brings out the Mr. Hyde “Deal Hunter” in me quite like Kohl’s department stores. To say the retailer is highly promotional is putting it mildly:

• New charge card customers are offered 20% off entire purchase the day they open an account.
• Kohl’s offers extra discounts to charge card holders ranging from an extra 15% – 30% off all regular, sale, and clearance merchandise.
• Regularly send “$10 off everything” coupons.
• Frequently offer $10 in Kohl’s Cash for every $50 spent.

This discounting strategy has helped Kohl’s cope better in the recessionary environment than many of their competitors (see below)

Source: NRF 2010 Top 100 Retailers ¹

Kohl’s success, however, has come with a steep price.

As a consumer, I love the deals. But as a marketer, I am concerned for the retailer’s future. Why? Kohl’s has essentially made discounting and price promotions their sole marketing strategy, which, as history shows us, is neither smart nor sustainable. The retailer has trained their customers to shop on price….and that’s never a good thing.

¹ 2010 Top 100 Retailers

For the past seven days, the subject of consistency has weighed heavily on my mind.

In fact, I have been reminded of it every time I look in the mirror; that’s because last week I was the recipient of the dreaded “bad haircut”. Even though I pay the same amount every time, I never quite know what I’m going to get when I go to the salon…sometimes a great cut, other times a pretty bad one. Oh, what I would give for consistency.

This idea of consistency often gets lost in the shuffle, especially among small business owners. This is surprising because consistency really is the key to success. Even with a mediocre product, you can be tremendously successful if you are consistent and reliable.

Just look at McDonald’s. Their food is average at best, however they have found nothing but success over the past 50 years. Why? Because they are consistent. Whether in Tokyo, New York, or London, you always know what you are going to get when you eat at a McDonald’s.

More than a great product, customers long for a consistent product. They want the same quality, the same service, and the same experience every time they come to your business.

As a business owner, you should create processes so that you can deliver this consistency. Make it impossible to be inconsistent and make it impossible for your employees to make mistakes. This example from Andy Sernovitz sums it up best:

How do you prevent your dental assistant from frying herself with X-rays all day?

The “on” button is OUTSIDE of the exam room.

There is no way to do it wrong. You have to leave the room to turn the machine on.