Sunday, May 31, 2009

Are Two Prices Better Than One?

In Australia, it's been the custom for home sellers to list two prices, a minimum and a maximum. The practice has turned up in suburban Long Island, reports Marcelle S. Fischler in The New York Times.

…Ms. Karekinian has joined a small group of pricing pioneers on Long Island: Rather than settling on one number for her five-bedroom colonial, she opted for a “value range price” of $999,000 to $1,194,876. She decided to adopt the tactic in listing the property last fall with Carol Poetsch of Prudential Douglas Elliman’s East Meadow office.
“I am not just going to say I want $1.3 and that’s final,” Ms. Karekinian said, signaling her flexibility but vowing that she won’t sell below the range. “Now I’m flexible — not stupid flexible, but flexible.”

Prudential Douglas Elliman is said to have begun using the strategy in 1996. The Times says that 180 homes in Nassau County and 360 in Suffolk County are currently listed by a range.
One advantage is obvious: Buyers scanning listings online usually set a minimum and maximum price, and these are round numbers (often chosen from a menu on the listing site). In the example above, a buyer whose maximum price was $1 million would presumably see a house listed at "$999,000 to $1,194,876," but not a house listed at a single price higher than a million. (Of course, this depends on listing sites being able to handle price ranges.)
I can think of a couple of other reasons why this may work. The range probably acts like an advertised reference price. Discount stores will have price tags saying something like "$14.99 COMPARABLE VALUE OF $25.00." Empirical studies and retail practice confirm that customers, even those who know better, are more likely to buy at $14.99 when reminded that they could be paying more elsewhere. In the case of a house, buyers will figure that if they can get it near the low end of the listing range, it's a bargain.
I suspect the biggest advantage of this trick may be simple confusion. Just about everyone knows that a listing price of $X typically signals that the seller is willing to accept a good deal less than $X. In this market, few sane buyers are going to offer list price. Having two prices upsets this comfortable strategy. Do you offer the low price of the range? Less than the low price? Or do you make an offer somewhere in the range? Maybe you really, really want the house and want to make a preemptive offer. Do you offer the high price?
All of the above make a certain amount of sense. Range pricing is likely to spread out the bell curve of offers. Since sellers choose an offer from the high end of the bell curve (or did, back when there were buyers) that ought to result in higher transacted prices.
Prudential apparently has some weird algorithm for devising its range prices. Another example given in the Times article is a Cape Cod listed at $399,000 to $458,876. The $399,000 is easy to understand. But where did they get $458,876, with six significant figures?

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