Tuesday, August 10, 2010

Anchoring Is Back: Meet the $69 Hot Dog

Pity the summer tourist in New York, the city where everything is more expensive than it is back home. Last month, Serendipity 3, an East Side eatery popular with visitors, introduced a $69 hot dog. Call that a leading indicator: Several Manhattan restaurants introduced $100+ hamburgers prior to the 2008 meltdown, but not many have since — maybe lest the masses storm the place with pitchforks. Like the hamburgers, Serendipity 3's "Foot-Long Haute Dog" attempts to justify the price with the garnishes. The hot dog comes with medallions of foie gras with black truffles and caramelized Vidalia onions. The accompanying ketchup is said to be made from heirloom tomatoes, and the Dijon mustard is spiked with truffle shavings. Foodies are left to ponder how well the flavor of truffles and foie gras stands up to a good slathering of condiments.
Serendipity 3 is a dessert-heavy place popular with tourists wanting to see celebrities. The fanfare over the $69 hot dog was transparently a way of getting that crowd's attention. The new dish was introduced on National Hot Dog Day with a representative of the Guinness Book of World Records on hand to "certify" it as the world's most expensive hot dog. The restaurant's very busy press agent, Joe Calderone, talked up the $69 frank and the alleged celebrity clientele to anyone who would listen. ("Cher is a regular who always get the regular foot-long. Now we will offer her the most expensive one.")
Absurdly priced menu items are more than a publicity gimmick. They're an application of "anchoring," a cognitive phenomenon discovered by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just considered. In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The familiar prices back home don't apply. That diner isn't going to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger almost anywhere else). In scores of careful laboratory studies, price contrasts like that affect decisions. Restaurateurs and consultants believe it works on menus, too.
The hot dog isn't the most expensive thing on the Serendipity 3 menu. They have a $1000 chocolate sundae, a legacy anchor introduced before the Great Recession. Its agenda is to boost the amount spent on desserts. The $1000 price, printed in big type, convinces average folks that it's sensible to pay $15.50 for a "fruit and fudge" confection, or $22.50 for a "Cheese Cake Vesuvius." Menu anchors in the $1000 price range are in the semi-mythic category. It doesn't cost anything to have them on the menu, and Serendipity 3 even demands 48-hours notice. (How many billionaires plan an ice-cream sundae 48 hours in advance?) The Golden Opulence Sundae is said to be Tahitian vanilla ice cream lavished with edible 23-carat-gold leaf and caviar and chocolate — another dubious combination. Would Serendipity 3's chef make one if you ordered it? You bet! The profit margin must be astronomical. Does anyone order it? How often does that happen? Calderone told AOL News that that the restaurant sells about one $1000 sundae a week. If you believe that, you don't know much about how press agents make a living.

Tuesday, May 18, 2010

Why No One’s Saying What Charlie Sheen Got

At the moment — but probably not for long — the biggest secret of TV is how much money CBS had to pay Charlie Sheen to continue his hit sitcom, Two and a Half Men. Sheen was reportedly making just under $1 million an episode when his contract expired last month. He hinted he was ready to call it quits. That would have been very bad news for CBS, which draws 15 million viewers an episode. It’s been claimed that the actor was asking for $2 million an episode, and that the talk of quitting was just a bluff.
How much is a sitcom star worth? Answer: Nobody has a clue. It's one thing to compute the revenue stream from Two and a Half Men. It's another to apportion that between Sheen, his co-stars Jon Cryer and Angus T. Jones, the other actors, the writers, and directors. How do you discount for Sheen's much-publicized personal demons and the uncertainties they raise?
One thing's for sure: CBS doesn’t want a repeat of the Seinfeld fiasco. In 1997 Jerry Seinfeld announced he was quitting his hit sitcom, Seinfeld, whose importance to NBC then was much like Two and Half Men’s importance to CBS now. Unlike Sheen, Seinfeld meant it. He was quitting… walking out the door. Really.
Seinfeld was then making $1 million an episode, an unheard-of sum. NBC dangled an offer of $5 million an episode, to do one more season.
Seinfeld said no. Inevitably, word of the NBC offer leaked out. The network brass must have hoped that everyone would appreciate that Seinfeld was a special case and that the $5 million offer did not set a precedent.
Actors thought otherwise. Over the next few years, star — and sidekick — salary demands escalated as never before. In 2002, the leads of Friends collectively bargained their way to $1 million per episode, per “friend.” Ray Romano was making $800,000 an episode for Everybody Loves Raymond, and Frasier’s Kelsey Grammer was the leader with $1.6 million an episode.
NBC’s failed bid to make Seinfeld stay ended up being hugely expensive for all the networks, broadcast and cable. You may ask how that can be. Sitcom salaries are a classic example of what economists call “coherent arbitrariness.” No one knows exactly what a TV star is worth. Given that uncertainty, people are influenced by any salient numbers that are out there. The mere knowledge that NBC had offered (not paid!) $5 million an episode caused everyone to raise their estimates of what TV actors are worth.
This is the "arbitrary" part. Estimates of actor salaries are also coherent, in that everyone appreciates that a star should make than a supporting player; a hit show's actors should make more than those in a dud. Indeed, James Gandolfini once shut down The Sopranos after he found out he was only making as much money as the housekeeper on Frasier.
In an April statement, Charlie Sheen said, “All of the numbers reported in the press are false. Claims from ‘inside sources’ regarding offers from the studio as well as my salary, on their best day, are without merit.” True or not, Sheen’s new salary can't stay secret for long. When it leaks out, it’s likely to generate another wave of aggressive demands by actors — at all levels of the TV food chain.

Friday, May 14, 2010

Article in Playboy

I've got an article, "How Much Will You Pay?" in the June Playboy (yes, the issue with the 3D centerfold).

Wednesday, April 28, 2010

Monetizing the Male Ego

Every marketer has to decide how much product to sell and at what price. Few are as fortunate as condom makers, whose customers are glad to pay a premium for a product that isn't much bigger or better. Consider the Magnum line of plus-size condoms, a sub-brand of industry leader Trojan. Magnum's share of the market has surged (if you'll excuse the expression) from 4.6 percent of the market in 2001 to 18.8 percent today. The size of the American male has not seen a similar increase.
"Bigger than most condoms, it is designed to fit those that find normal condoms too constricting," reads one website's copy for Magnum. It closes on the tantalizing note: "These are a little smaller in Width and length than the Magnum XL's."
Oh, yes, then there are Magnum XL's. The copy tries to upsell the Trojan customer to Magnum, and the Magnum customer to XL. It's easy to see why men fall for this particular sales pitch. It's also easy to see why Trojan loves Magnums. A box of 12 regular Trojans retails for around $5.99; a box of Magnums is $7.99. That's a 33 percent premium. Then there's Magnum Ecstasy, at $10.99 for a box that contains only 10. I doubt that anyone buying a product called "Magnum Ecstasy" does the math, but that's over twice the unit price of the regular Trojans.
Were these gloves instead of love gloves, "small," "medium," and "large" would retail for the same price. So the Magnum premium is pure profit. Furthermore, Trojan has never advertised Magnums. It doesn't have to.
What's not so obvious is the smoke and mirrors behind the Magnum brand. Jim Daniels, vice-president of marketing for Trojan, confessed to the New York Times that Magnums are basically the same size, just a little wider in the middle.
The regular Trojan, the Magnum, and the Magnum XL all measure 2 inches wide at the base. The base has to cinch snugly to keep the thing on. There's a slight difference in length. A Trojan Non-Lubricated is 7.8 inches long, vs. 8.12 inches for Magnum. The 0.32-inch difference qualifies as a rounding error in anyone's night of pleasure. As to the Magnum XLs, well, they're 8.12 inches long, too.
The difference is in width of the shaft. Measured at the head, Trojans are 2 inches wide, Magnums are 2.5 inches, and Magnum XL's are 2.75 inches. Well okay, that's a difference. But since all the condoms taper to 2 inches at the base, the Magnums have a rather bizarre shape. It's less a beer can than a very fashionable cocktail shaker of the 1930s.
A rival brand, LifeStyles, has a "King XL" size whose vital statistics are virtually the same as the regular Trojans. There's no policing of the XL designation. And that's probably fine with all parties concerned. This is America, the land where any man can be an XL. All it takes is a little extra cash.

Tuesday, April 6, 2010

Pricing the eBook

The iPad's release has renewed the question, what should an eBook cost? Answers range from “free” to “whatever the market will bear.” Psychologists would say the operative word is “whatever.” At issue is the phenomenon of “anchoring,” discovered by Amos Tversky and Daniel Kahneman. When people don’t know what a fundamentally new product should cost, they are strongly influenced by the first price they encounter. It’s like the way a baby chick decides that whatever creature it sees first is its mother.
For Kindle readers, that all-important first price is likely to be the $9.99 price that Amazon pioneered. Publishers fear those readers will thereafter take that as the “fair” price for eBooks and resist any attempt to charge more. What’s wrong with that? Well, Amazon is using another, more familiar pricing trick, the loss leader. It’s been reported that Amazon is losing money on each eBook sale, as it’s paying publishers more than $9.99. This tactic is probably a smart way to promote sales of the Kindle and to burnish Amazon’s reputation for low prices.
Apple's new iPad Bookstore allows publishers to set prices. Contrary to early speculation, Apple is selling many bestsellers for the "Amazon" price of $9.99. Otherwise $12.99 is a common price point at the iPad Bookstore. Meanwhile, Amazon has quietly raised prices for many eBooks — often inscrutably — as a result of new agreements with publishers. (My book Priceless originally sold for $9.99 in a Kindle edition. Amazon raised the price to $14.99, then cut it to $12.99. That's three prices in the two weeks it's been out. By the way, don't blame me: Authors have nothing to do with setting prices.)
The net effect of the iPad so far: There's a wider range of eBook prices and less price difference between Apple and Amazon than the pundits predicted.
We would like to believe that the free market, and not corporate posturing, sets equitable prices. On closer inspection, the “market” price of a book has always been a chimera. Should Don Delillo’s Point Omega cost less because it’s only 128 pages? Should Stephenie Meyer’s Twilight books cost more because some of her fans would pay almost anything? For the most part, the publishing industry says no. In defiance of economics, there is only a limited attempt to price by wordage or reader demand. This is another demonstration of how peculiar a business book publishing is.
Any discussion of eBook pricing now has three psychological anchors. They are the current price of hardcover books (let’s say around $27), the once-standard Amazon Kindle price ($9.99), and the “information wants to be free” price of zero. All agree that the price of an eBook should be a good deal less than the price of a hardcover. There are no trees to cut down, and no boxes to ship. Everyone in the book business also agrees that the price of a new book must be a good deal more than zero. (We may or may not be heading towards an age of free information, but there will be no publishers, booksellers, or professional authors in that digital nirvana.) A reasonable person might ask, what does it cost to produce and market an eBook? But that's like asking what does it cost to make a movie. The answer can be zero (YouTube) or $500 million (Avatar).
The biggest unknown of all is what the consumer will pay. I remember a time in my twenties when I realized, with delight, that I could afford to buy all the books I could read. I imagine I’m not atypical of avid readers in saying that I wouldn’t read any more books if they were all free, and I wouldn’t read much less if they cost twice as much. An economist would argue that most of the “cost” of a book resides in the precious leisure time expended reading it. Figure how many hours you spend reading a book and multiply by your billing rate. It’s going to be a lot more than $12.99. We’re dickering over the tip, not the restaurant bill.
But most people don’t think like economists. The value of one’s own time is not so easily quantified as a price printed on a jacket. That price carries disproportionate weight in purchase decisions, and people can get upset over the most incremental increase (“it’s the principle of the thing!”) Confirming the anchoring theory, it’s reported that some readers are upset at Apple for trying to raise prices above the God-, or Amazon-given $9.99.
Psychologists say that prices have an element of confabulation. We spin a mental narrative in which the prices we set are exact, rigorous, and inevitable —oblivious to how arbitrary those prices actually are. I suspect that everyone involved in the eBook price war would be just as upset, had the line in the sand been drawn at $4.99 or $19.99. I don’t know what eBook prices we’ll end up with, but I’m reasonably sure of one thing: If we think there’s an entirely logical price for a digital book, we’re only fooling ourselves.

Sunday, April 4, 2010

The Loser’s Curse

Richard Thaler has an article in today's New York Times on mispricing of NFL talent. In the NFL draft, losing teams trade away too much for "first pick" players, Thaler and Cade Massey argue in a recently updated paper.

"We found that the teams choosing early in the draft generally don’t, in fact, get the players that provide the most value per dollar. Our paper is titled “The Loser’s Curse” because we discovered that the first pick in the draft is, on average, the least valuable in the entire first round."
That surprising result has implications not only for football, but also for any domain where organizations try to select talent, whether C.E.O.’s or their own “rookies” — newly minted graduates."

In related news, the Times has an amusing graphic comparing some star CEOs' compensation to their companies' performance.

Thursday, March 25, 2010

“Priceless” Now on Kindle

In response to many e-mails: Priceless is now available in a Kindle edition. (The backstory on that here and here.)
Amazon's Kindle edition page uses a number of pricing strategems. They include—
• Charm prices. These are prices ending in 9, which often have an uncanny motivating effect on consumers debating whether to buy. Amazon's eBook price is a super-charming $9.99.
• Advertised reference prices. Amazon quotes a "digital list price" of $12.99. The "What's this?" button informs the curious shopper that "Digital List Price is the suggested retail price set by the publisher." But you don't pay that; instead, the "digital list price" presents an appealing contrast to Amazon's lower price. Lest anyone miss the point, Amazon crosses out the digital list price and gives the discount in dollars and in percent (computed from the not-so-comparable list price of the hardcover book, $26.99).
• "Free." You're just a mouse click away from sampling the book for free.
• "Don't wrap all the Christmas presents in one box." Coined by economist Richard Thaler, this dictum holds that a product's benefits should be enumerated rather than lumped together. Consumers are more likely to buy a Swiss Army knife than a penknife, all things being equal. Thaler's rule is practically the gospel of infomericals. So, if you buy Priceless now, we'll not only send you a fantastic book… we'll throw in "wireless delivery via Amazon Whispernet"… plus, it's "text to speech enabled"!

Tuesday, March 23, 2010

Cash and Calories

A little-noted feature of the new health care bill was inserted with no partisan rancor and the full support of industry. In the name of bending the cost curve, every restaurant chain with 20 or more outlets must hereafter post calories on its menus (and menu signs, for drive-thrus). "Nanny state" do-goodism? Not according to the National Restaurant Association, a lobbying group. The Association's Sue Hensley explained, "That growing patchwork of regulations and legislation in different parts of the country has been a real challenge, and this will allow operators to better be able to provide their information." New York City and California already require calorie information.
The point of the new regulation is to encourage healthier eating, of course. One recent study found scant evidence that New York's law had done any good. But there may be another reason why the restaurant industry likes the new law. It's more about the bottom line than waistlines.
Experiments in human decision making show that we're subject to information overload, especially where numbers are concerned. When calories are printed on the menu, the consumer has fewer cognitive resources to devote to judging prices. It's much like the "misdirection" employed by magicians. The sudden appearance of a scantily clad assistant in a puff of smoke gives the magician cover to slip a rabbit into his hat.
Above is a "Weight Watchers" menu from a popular restaurant chain. Notice that this includes not only calories but grams of fat and fiber — along with price. That's four sets of numbers for each item. (The prices are in smaller print than the nutritional data!) And of course, you have to factor in how much you like each item, too. Anyone who conscientiously tried to use all this information would need a spreadsheet. In most cases, we give up and just pick something we like. That's fine with restaurants. In that moment of capitulation, we tend to ignore price, often ordering something more expensive than we might have.

Friday, March 19, 2010

Sticker Shock Hits Disneyland

In 1955 Walt Disney opened the first modern theme park in Anaheim, Calif. The meticulous showman made sure that every detail was carefully engineered, down to the ticket pricing. The 1955 Disneyland admission was a modest $1. That's about $8 in today's dollars — and yes, it's vastly cheaper than today's adult admission price of $72. The park also sold tickets, costing 10 to 35 cents, for rides. The tickets were offered in books so that a family could purchase a book once and tear out tickets as needed. Psychologically, the tickets were a guilt-free currency. You weren't spending money, you were simply tearing tickets out of a book. America's families thought it was a fantastic deal — so much so that one huckster charged $5 to let overflow crowds in via a ladder.
In 1982, Disneyland dispensed with the ride tickets. Of course, you still had to pay $12 admission (about $27 in 2010 dollars). Over the past 28 years, the admission has more than doubled in real terms.
That's starting to have an effect. A recent Los Angeles Times article reports that Disney's theme parks saw a 7 percent drop in revenue for 2008-2009. Meanwhile, recession-weary families are returning to the Ferris wheel and boardwalk parks that some, including Walt himself, thought obsolete.

Small, privately owned seaside parks, such as Pacific Park at the pier in Santa Monica, Belmont Park in San Diego and the Santa Cruz Beach Boardwalk, don't have multimillion-dollar advertising campaigns or 3-D attractions as do Disneyland and Universal Studios Hollywood. But they boast something even more appealing to penny-pinching tourists: Free admission.…
Pacific Park on the Santa Monica Pier, for example, offers 12 rides on 2 acres of sun-baked boardwalk. But in 2009, it drew nearly $18 million in revenue, a 5% increase over the previous year, on top of a 5% increase in 2008.
"In this economy, we've actually done OK," said park spokesman Jeff Klocke.…
"We came here because it didn't cost anything," said Leila Nightingale, a tourist from England, who visited the park with her friend Jessica Townsend. "We are traveling around the world and we are trying to save money."

"Free" is the eye of the beholder. Small parks are free as long as you don't get on any rides. The Disney parks are free once you get past the turnstile. Behavioral economists have long been aware of a so-called flat-rate bias. Since surrendering hard-earned cash is unpleasant, we prefer to do it as little as possible — as if gulping down a distasteful medicine. Disneyland's post-1982 pricing is a perfect example of flat-rate pricing. Pay once and get the bad part over with — then everything is free! This appealing thought is also the basis of unlimited calling plans, health club memberships, Netflix, and luxury cruises' "free" food.
At his park's opening Walt Disney dedicated a plaque reading: "Disneyland is dedicated to the ideals, the dreams and the hard facts which have created America." As I remark in my book Priceless, the flat-rate bias figures prominently in the American dream of home ownership. Americans love owning a nice home in the suburbs and driving everywhere in private cars. It isn’t that owning is cheaper than renting, necessarily. It’s just that with renting the cost is more apparent. (“All you’ll end up with is a pile of rent receipts!”) Many urbanites would find it cheaper to sell their SUV and take taxis everywhere. But the thought of paying $15 cab fare to go to the supermarket is unconscionable. No one likes to hear the taxi meter running.
So where did the Disney parks go wrong? Obviously, admission prices have gone up a lot faster than inflation. The reason isn't hard to fathom. Today's Disneyland is a very different place from the 1955 version. The original park was low-key affair with no thrill rides. Expectations were different. To the teacup ride's first patrons, Disney's 1951 animated Alice in Wonderland was cutting-edge entertainment. Today's park has to stand up to Tim Burton's $250 million 3D extravaganza. Disneyland costs a lot more to run these days, and that has to be passed on. A family of four can pay $268 or more. Even the cleverest psychological pricing can't soft-pedal that.

Monday, March 1, 2010

Unpopular Pricing

We've heard a lot about one health insurer raising its rates by up to 39 percent. Yet in the past year, the price of another widely used commodity has gone up 50 percent industrywide. Not only that, it's for something that was free prior to 2008: the privilege of checking a bag on a U.S. airline. The average price for the first bag is now around $25.
Everyone hates paying to check bags — so much so that we're breeding a wrinkled generation of travelers living out of a carry-on and washing clothes in expensive hotel sinks. People who could well afford the fees refuse to check bags — "it's the principle of the thing!"
Charging for bags is an example of what price consultants call unbundling (and everyone else calls "nickel- and diming.") Instead of offering checked bags (meals, headphones, blankets, etc.) for "free" with the ticket, they price them separately. The reason is simple: Most travelers pick an airline based on the lowest fare. Think what the hotel business would be like if everyone refused to pay a penny more than the Motel 6 rate.
Some quick math suggests that a $25 baggage fee isn't excessive. That's something like a dollar a pound. If airlines charged passengers by the pound, $1 a pound would be a good deal for cross-country travel (even for Kevin Smith). But that's logic, and emotion is something else again. We all remember the days when baggage was free. That makes any charge seem like a gouge.
Unbundling is a powerful technique for drawing customers. They just might not be happy customers. The people who pay the fees resent them, and the people who refuse to pay resent the airline for making them live like hobos. The culprit may not be the airlines so much as human nature. Because prices are quantitative and easily compared, they carry undue weight in our decision making. We don't pay quite enough attention to the intangibles of comfort and convenience, simply because they are intangible. In another context, this is known as "megapixel bias." Camera buyers favor cameras with more megapixels, even though such cameras don't necessarily produce the best pictures. But megapixels are numbers, and everyone knows an 8 megapixel camera has more of something important than a 7 megapixel model does. (They know this, even if they couldn't begin to define the word "megapixel"). In reality, picture quality is determined by many subtle factors that aren't easily compared on a spec sheet.
In a recent New York Times piece, airline industry analyst Robert W. Mann asked, "How do you run an industry where people hate you?" It's a good question, and so far, no one's found the answer.

Thursday, February 25, 2010

CBS News Sunday Morning

I did a segment on shopping mall and restaurant prices for CBS News Sunday Morning, set to run this Sunday. Air times are here.

Wednesday, February 17, 2010

Offers You Can’t Refuse

Don't think of an elephant! Oops, you just did. As this demonstrates, there are some limits to what we like to call "free will." A largely robotic, automatic part of our minds helps determine what we think about and what we notice. Some tricks of psychological pricing exploit this. They present offers you can't refuse.
Take a look at this sign advertising a hand soap and sanitizer, at an upscale mall in California. The soap is $3 a bottle… or, buy three bottles and they'll toss in two more for "free." Most shoppers would be inclined to buy a bottle or two. But the offer-you-can't-refuse makes you feel like a complete fool for buying two. Buy one or two, and you're paying $3 a bottle. Buy three, for $9, and they give you five, resulting in a cost of $1.80 a bottle. So practically everyone walks out the door with five bottles. The store expects that and factors it into the price.
One reason the trick works is that shoppers know they can always use more soap. (It wouldn't likely work with wedding gowns or coffins.) Were this a big-box store like Sam's Club or Costco, customers might have bought a six- or twelve-pack of hand soap without batting an eye. But this sign is in front of a shop surrounded by high-priced boutiques. In that context, the natural impulse is to buy one or two bottles, as if it were a precious perfume or vintage wine. Instead, the promotion prods shoppers to think, "well, I can always use more soap." They can't not think that, any more than they can not think of the elephant.
Price consultants call this tactic "nonlinear pricing." The price per bottle drops, provided you buy more… more than you probably intended to buy. It's an incredibly effective tactic, used by businesses ranging from cell phone companies (with their flat-rate plans) to all-you-can-eat restaurants.
America is the land of the free. We have free will, free speech, free enterprise — and sometimes free hand sanitizer. The way that freedom plays out is constrained by the quirks of human decision making. No store can order us to buy five bottles of soap. But with the unrefusable offers of price psychology, they don't have to do that. In many cases, the thriftiest shopper can be persuaded to spend more — all in the name of "saving money."

Friday, February 5, 2010

Buy Buttons Are Back

Amazon has just restored the buy button for Priceless and at least some other Macmillan titles. I checked Wolf Hall and my own Macmillan-imprint books.

Monday, February 1, 2010

“Priceless” is Priceless, on Amazon

As you may have heard, a dispute over pricing of eBooks caused Amazon to stop selling all Macmillan books, electronic or not, this past weekend. That includes Priceless, in "a move not without humor," as blogger Peter Kelton notes. At issue is the charm price of $9.99 Amazon is using for eBooks. Amazon is said to be losing money on every eBook sold, in order to promote its Kindle. Publishers are uneasy about that, fearing it will create pressure to lower prices to unprofitable levels. That, combined with the "information wants to be free" ethos, leaves them feeling a bit like the Russian aristocracy before the revolution. The Apple iPad announcement brought matters to a head: Apple will let publishers charge higher prices such as $12.99 and $14.99 (still charm prices, you'll note).
The publishing world viewed Amazon v. Macmillan as a game of chicken: Amazon needs to carry all publishers' books as much as all publishers need to be carried by Amazon. As of this morning, the standoff has reportedly been settled in the publishers' favor. Amazon is promising to match Apple's pricing and restore the sale buttons to the delisted titles.
How much should eBooks cost? I suspect I'm not too different from most avid readers in feeling this way:

• If all books were free, I wouldn't read any more than I read now. My reading is limited by time and interest, not the cost of books.
• If books cost twice what they do now, I wouldn't read any less than I do now.
• Of course, there must be some price so high that it would cause even me to cut back on reading. I haven't a clue what that price is.

Priceless is collateral damage in all this. It is not presently available in an eBook, and there's no word from the publisher when it will be. Kelton reports that third-party sellers are offering Priceless at prices ranging from under the (former) Amazon price to $155.75. The latter is from a seller called Origin, which promises "Excellent customer service!"

Sunday, January 24, 2010

Does 9 Just Sound Cheap?

We have all heard of calculating prodigies, those rare souls able to perform astounding feats with numbers. For many of these individuals, numbers have colors, flavors, sounds, or other qualities alien to the rest of us. Mental calculator Salo Finkelstein detested the number zero and adored 226. The Russian mnemonist S.V. Shereshevskii associated the number 87 with a visual image of a fat woman and a man twirling his mustache. This is known as synesthesia, the association of sensory qualities with inappropriate objects. A recent study suggests that most people may have a bit of number synesthesia. It might help explain the mysterious appeal of "charm" prices ending in the digit 9 (as in $19.99).
Research by Keith Coulter and Robin Coulter, to be published in The Journal of Consumer Research, implies that certain numbers just sound bigger than others. This in turn can affect the perception of discounts.
Coulter and Coulter begin by citing decades of research claiming that sounds pronounced with the front of the mouth (long a, e, and i; fricatives like f, s, and z) trigger associations with smallness. (Think of words like tiny and wee.) The vowels pronounced at the back of the mouth, like the oo in foot or goose, are linked to largeness. (Think huge or crowds oohing and ahhing something really big.) Crazy? Well consider how it applied to discounts in the study. Subjects were given "regular" and "sale" prices and asked to estimate the percentage discount. The guesstimated discounts were skewed by the sound effect. For instance, people estimated that a $3 product marked down to $2.33 was about a 28 percent discount. But when the product was marked down to $2.22, the estimated saving was only 24 percent. It was a bigger discount, really, but it didn't seem that way.
One explanation: Three, with a long e, sounds small, and two, with a back-of-the-mouth vowel, sounds large.
That doesn't prove the sounds were responsible. In one of the crucial experiments, Coulter and Coulter tested perceptions of the prices $7.01 and $7.88 with English and Chinese speakers. In English one is pronounced with the back of the mouth, and eight with the front. In Chinese, this is reversed. So were the perceptions of how big or small discounts were. The researchers use this to argue that it is indeed "phonetic symbolism" at work.
"Nine" has a long i, so it's one of the small-sounding digits. Assuming the hypothesis is right, prices ending in 9 would seem a little smaller than they would otherwise, enhancing the quick, largely unconscious perception of a good deal. But 9 isn't unique: it would seem that all the digits from 3 on up have a vowel or consonant sound supposedly associated with smallness. (Ironically, the truly bigger digits sound small. Zero is a problematic case: The fricative z might put it in the small category, but most people say "o" when reciting a phone number, and zeros at the end of a price aren't pronounced at all. $70 is "seventy dollars," not "seven-zero dollars.")
Obviously, retailers want to charge the largest "small-sounding" price (the sound they care about is ka-ching.) From that perspective, the use of 9 makes sense.
This study adds another to the growing list of guesses about how 9-ending prices "work." Coulter and Coulter believe that shoppers must "rehearse" prices — say them to themselves, at least silently — for the sounds to affect them. In the experiments, participants were told to repeat the sale prices to themselves. It's not clear whether this would apply to silent reading of a fast-food menu. Still, the experiment hints at what unexpected layers of meaning we may attach to simple numbers — including the ones with dollar signs.

Coulter, Keith S., and Robin A. Coulter (2010). "Small Sounds, Big Deals: Phonetic Symbolism Effects in Pricing." The Journal of Consumer Research.

Thursday, January 21, 2010

Priceless Trailer a Huffington Post Fave?

In the Huffington Post, Denise Brodey has a piece on book trailers. She praises one of the Priceless videos, which is also is rated #1 by reader votes (for the moment, anyway).

Macmillan did something right when they made the video trailer for ebay guru William Poundstone's Priceless. He has this professorial smart cookie approach that makes him watchable and leaves you wanting more.

Just for the record, I've never thought of myself an "eBay guru." While I'd like to believe Brodey's kind words, I'm pretty sure that the high rating of the video on the Huffington site comes down to three simple words: Star Wars underwear.

Addendum: The Zen of Toilet Tissue

I found in James Vicary's papers at the University of Connecticut a weirdly poetic list of suggested names for a new brand of toilet paper. Some of the names:


Maddest of the “Mad Men” (Part 3)

From today's perspective, James Vicary was looking through the wrong end of the tachistoscope. He assumed, as did those duped by him, that an agent of unconscious influence would have to be a technological marvel, invisible and faster than the blink of an eye. In fact the important kind of “mind control” is human, lo-tech, pervasive, and in plain sight.
By coincidence, Vicary's alma mater, the University of Michigan, was a cradle of behavioral decision theory. This has demonstrated that the act of choosing is subject to all sorts of “hidden persuaders.” In a 1999 experiment, A.C. North, D.J. Hargreaves, and J. McKendrick had a supermarket play French background music one day and German music the next. The research team kept track of the type and amount of wine the market sold. The French music gave sales of French wine a statistically significant bump, and the German music boosted sales of German wine.
If you think this is completely absurd, you are not alone. The researchers interviewed some of the shoppers. Most said they paid no attention to the background music — criminy, who would? It's elevator music! When asked whether the store’s music could influence their choice of wine, the answer was a most definite no.
The music wasn't "subliminal." It was played at the normal volume for background music. Yet the effect was as sneaky as anything Vicary contemplated. Music that no one pays attention to made people buy something they wouldn't have bought otherwise.
You may be saying, "I'd never buy a bottle of Bordeaux just because the store was playing 'La Marseillaise'!" Indeed so, if you despise Bordeaux or have a compelling reason to buy something else. But most of the decisions that fill our days, and our shopping carts, are not so clear-cut. (Should I have another cup of coffee or check my e-mail? Skippy or Peter Pan?) In these situations, as Stanford psychologist Robert B. Zajonc dryly noted, “no cognitive mediation, rational or otherwise, is involved." Environmental factors can then tip the balance.
The effect of such things is statistical, of course. It took carefully designed experiments to prove the effects were real. Today, the digital age is making it easier than ever to do marketing experiments. Google is supplanting Madison Avenue as the toll collector of advertising dollars, bar codes are everywhere, and in today's wired world, everything is quantitative. The practical value of background music may be limited, but there is one ubiquitous, all-powerful persuader: price. Everything comes with a price tag, and those prices affect decisions in ways we don't realize. Few consumers will buy a $400 pair of shoes, unless they're displayed next to $800 shoes (which make them look like a bargain). A rebate or mythic "list price" bewitches buyers into paying more than the logical market value. The new profession of price consultants is advising companies on how to "engineer choices" to extract the most dollars from consumer wallets. This is the brave new world I address in my book Priceless: The Myth of Fair Value (And How to Take Advantage of It).
"Subliminal advertising" was a hoax, but James Vicary posed an ethical thought-experiment for our own time. What if it is possible to persuade consumers to buy without their awareness? The issue, as Vicary's critics noted, is "free will." Yet free will is not quite what we imagined. What we want — and how much we're willing to pay for it — are invented on the fly. These constructed desires are readily manipulated by those who know a modicum of the new psychology. This is as ethically fraught a vision as the one Vicary cooked up, and which Mad Men brilliantly satirizes. But this one’s for real, and we’re only beginning to come to terms with it.

North, A.C., D.J. Hargreaves, and J. McKendrick (1999). “The influence of in-store music on wine selections.” Journal of Applied Psychology 84, 271-276.
Rogers, Stuart (1992). "How a Publicity Blitz Created the Myth of Subliminal Advertising." Public Relations Quarterly, Winter 1992-1993, 12-17.
Warrick, Jeff (2010). Programming the Nation? A new documentary film on the enduring mythos of subliminal advertising.

Tuesday, January 19, 2010

Maddest of the “Mad Men” (Part 2)

Would a successful ad man lie? That was the somewhat incredible question buzzing around Madison Avenue in the fall of 1957. Marketing consultant James Vicary claimed to have the holy grail, a way of compelling the American consumer to buy without any awareness of having been manipulated. He called his invention "subliminal advertising." Invisible yet effective commercials could be inserted in TV programs without viewers knowing it. Advertisers and broadcasters were starting to jump on board, the public was largely aghast, and a very few, in advertising and in psychology, were deeply skeptical.
The serious, peer-reviewed experiments on subliminal perception had involved word games and tasks requiring subjects to judge the expression of an ambiguous face. It was a big leap from that to choosing one cola over another, or choosing to spend money rather than keeping it in one's pocket. Vicary’s claims made a sensation because they met America’s default criterion of significance: money.
Some on-air tests of subliminal ads were not encouraging. In January 1958 the Canadian Broadcasting Company ran an experimental subliminal message during a popular TV show. “Many reported they got up from their chairs during the program to ‘get something,’ but there was no trend in what they got,” Advertising Age wrote. “One CBC executive reported his family’s reactions thus: ‘I felt like a beer, my wife had an urge for some cheese and the dog wanted to go outside in the middle of the program.’”
The FCC was alarmed enough to ask Vicary to demonstrate subliminal advertising in Washington. Vicary complied, but there was nothing to see and no indication that it worked. (After the demonstration, Michigan Senator Charles Potter deadpanned: “I think I want a hot dog.”) Vicary was challenged repeatedly to supply more data. He refused, deferring to the talking point that, “on advice of counsel,” he could not supply details while his patent was pending. A reporter for the Motion Picture Daily was interested enough to contact the manager of the Fort Lee movie theater where Vicary had supposedly conducted his experiment. The manager was curiously evasive and denied that subliminal ads had had any effect on sales. Hofstra psychology student Stuart Rogers contacted the same manager, and this time the manager admitted that no experiment had been done in his theater.
Vicary had separated from his wife in Westchester and taken an apartment in Astoria. In June 1958, he dropped out of sight. He had reportedly emptied his bank accounts and his closets and left no forwarding address. It was rumored he had a made a fortune off consulting fees.
I've always wondered what became of Vicary. In the course of researching my book Priceless, I took a look at Vicary's papers, now at the University of Connecticut. Subliminal ads didn't make Vicary rich. He moved to the San Francisco bay area, apparently hoping to dodge the scandal and reinvent his life. According to letters and resumes, he spent the next few years in a string of jobs, never staying long in any. His Subliminal Projection Company went bust. In 1962 Vicary took a $15,500 position with Dun and Bradstreet, the equivalent of about $110,000 today.
That same year Vicary resurfaced in an interview with Advertising Age. He conceded that “this was a gimmick,” and his data on subliminal ads was “too small to be meaningful.” He spoke wistfully of opportunities lost:

"And for a man who makes a career out of picking the right names for products and companies, I should have had my head examined for using a word like subliminal.… As for those who thought it was all so terrible — well, I had the same reaction when I first thought of it.… But then, as a researcher, I've always pushed on as far as I could. Why, compared to some schemes that have popped into my head, subliminal is one of the most innocent of schemes. The others? Hell, I buried them."


Sunday, January 17, 2010

Maddest of the “Mad Men”

TV’s Mad Men presents the advertising world of the early 1960s as an exercise in moral ambiguity. That perception owes much to Vance Packard’s 1957 exposé, The Hidden Persuaders. Packard describes Madison Avenue's embrace of psychology and psychoanalysis, an era in which cars were phallic symbols and "motivational research" sought to uncover the American consumer's most secret desires. The maddest of Packard’s mad men was perhaps James Vicary (1915-1977). Like Don Draper, Vicary came from a humble background, lost his father (an opera singer) in childhood, and was raised by godparents. He became a Gatsby-like figure, rewriting his life story and rising to power on Madison Avenue as his marriage crumbled. Vicary had a peculiar genius for discerning what the American consumer wanted. Much of his business consisted of devising names for new products. The Dodge “Dart” was his handiwork, chosen after polling such alternatives as the Belvedere, the Proton, and the Zing. Asked to critique the trademark of Bethlehem Steel (also a client of the fictional Sterling-Cooper), Vicary mordantly counseled, “The word ‘Bethlehem’ has warm, religious connotations as well as those of ‘Bedlam’…”
Vicary is best remembered for a diabolical hoax. His long shadow fell over Madison Avenue throughout the Mad Men era and still affects attitudes toward psychological marketing in the age of Google. In Priceless, I explore how the new psychology of decision making has transformed marketing, raising some novel issues of free will. What if the smart retailer is able to persuade the consumer to buy, or to pay more, without any awareness of having been "manipulated"? That question isn't so new, after all. It was raised—loudly—in Vicary's time.
It all began on the afternoon of September 12, 1957, in a small mid-Manhattan office. At Vicary's invitation, about fifty press people watched an underwater documentary, “Secrets of the Reef.” Hidden in the film were ads for Coca-Cola, flashed on the screen for 1/3000 of a second. For that Vicary used a tachistoscope, a high-speed slide projector widely used in post-war psychological experiments. Though the ads were inperceptible, Vicary claimed that they worked. He said he had done an experiment flashing similar split-second ads for Coca-Cola and popcorn at a regular movie theater in Fort Lee, New Jersey, showing the film Picnic. The ads boosted concession stand sales of Coke 18 percent, and popcorn 58 percent. Vicary had founded a Subliminal Projection Company to capitalize on the technique. He boasted, “This innocent little technique is going to sell a hell of a lot of goods.”
This brought Vicary into conflict with another of Packard's mad men, Ernest Dichter. The Vienna-born "Doctor Dichter" allegedly used his psychoanalytic training to fine-tune such pitches as "Put a tiger in your tank." More to the point, Dichter was the high guru of motivational research. In his not-so-humble opinion, subliminal ads were not innocent. Dichter feared they would give psychological marketing a bad name (or a worse name, as the cynics would have it).
The tiff only fanned interest. Soon, subliminals were in the news and on the air. Stations from coast to coast began running subliminal messages with various degrees of seriousness. Chicago radio station WAAF began selling subliminal ads (faint pitches played behind the music) for $1000 per week for 500 ads. “Phantom selling has quietly become a growing and ghostly industry,” enthused the Wall Street Journal. A United Artist theater in Los Angeles began flashing “Buy Popcorn” ads during its movies. This was not an experiment but an earnest attempt to boost sales, and United Artists talked of expanding the ads to 350-some theaters.
“We’ve already had a Los Angeles automobile retailer and a furniture store tell us they‘re interested in buying subliminal advertising time,” said a KTLA-TV manager, who offered such weird possibilities as “the subliminal projection of pleasing geometric shapes” to increase the acceptability of overt ads, and enhancing ham commericals by subliminally overlaying “a beautiful invisible ham cooking in the background.”
The public reaction to subliminal ads was outrage. “Himmler and Goebbels had, at least, the decency to commit suicide,” ran one letter to an editor. “In the absence of any such display of ethical sense on the part of James M. Vicary, I submit that said gentlemen be shot out of hand.” Hopeful rumor had it that subliminals could be unmasked by waving the hand, fingers outstretched, in front of the eyes. Life magazine ran a photo of this practice, vying in weirdness with the near-contemporary one of a 3D-movie-spec’d audience.
“It takes neither a psychologist nor a moralist to explain the feeling of revulsion felt by so many people toward the whole idea,” wrote George Brooks in Consumer Reports. “The concept of free will underlies that of free society.”
Vicary had hit a nerve. Atomic-age America had grown ambivalent about advertising and science. Intellectuals such as Aldous Huxley and Norman Cousins editorialized that Vicary had combined the worst of both. “There is only one kind of regulation or ruling that could possibly make any sense in this case,” Cousins wrote, “and that would be to take this invention and everything connected to it and attach it to the center of the next nuclear explosive scheduled for testing."


Op-Ed in Los Angeles Times

I've written an op-ed for the Los Angeles Times. You can find it here.

Tuesday, January 12, 2010

How Much Is Enough?

Some of the most successful product packages are the least practical. By universal consent, the Heinz Ketchup bottle is too tall and narrow to gracefully dispense its contents. Heinz experimented with a squatter, more practical bottle — and the public rejected it. For all the complaints about slow ketchup, they preferred to buy the old bottle. The company has had more success with its squeezable plastic bottles (also strangely tall and narrow). You'll find sleek profiles on many other containers, from the original Coca-Cola bottle to that of your favorite beer. The reason may have less to do with logic than with the quirks of human perception. The mind and eye are terrible at estimating volumes.
In an amusing experiment, Brian Wansink and Koert van Ittersum, of Cornell and Georgia Tech, asked student volunteers and professional bartenders to pour out a shot (1.5 ounces) of a simulated liquor. They were instructed to pour carefully, to dispense as close to the exact 1.5 ounces as they could manage. Two types of glasses were used in the experiment: a tall, narrow highball glass and a short, squat tumbler (photo, below). Despite the different shapes, each glass had the same capacity. On average, the students poured 30 percent more "liquor" in the short tumblers than in the tall glasses. The professional mixologists were only a bit more accurate: They poured 21 percent more in the tumblers.
One conclusion: If you're having a party and want to encourage safe driving — or just save on liquor — use tall, narrow glasses. Your guests, or the bartender, will pour less and think it's more.
This result is relevant to the psychology of price, contends marketing consultant Rags Srinivasan in his blog, Iterative Path. As we walk the supermarket aisles, we make a lot of snap decisions. Is that enough ketchup for that price? Is it good deal? These judgments are rarely as exact as they could be. For the most part, we glance at the posted price but don't even bother to scrutinize the label for the number of ounces or milliliters. Nor do we look at unit pricing. (Who's got time?) Instead, the purchase decision is based on two datums, the price and an eyeball estimate of volume. Since volume estimates are subject to all sorts of perceptual illusions, they are an important part of psychological marketing.
You've probably seen Discovery Channel shows on creatures that make themselves look bigger, to deter predators. Well marketers do much the same thing with packages. They use perceptual tricks to make packages look bigger. If Heinz and Hunt's ketchup each costs the same, but Heinz's bottle looks bigger, you're likely to buy Heinz.
That's why products tend to come in tall, narrow containers. It truly does look like you're getting more for the money. As much as possible, manufacturers try to avoid "tuna can"-shaped containers. There are few exceptions, of course — tuna cans, for one thing. There's generally a good reason for the exceptions. A flaky tuna filet wouldn't fit in a tall can. Pineapple rings need a pineapple-wide can. Guacamole and other dips come in flat containers so that the package presents a chip-friendly surface for serving.
Srinivasan found an ingenious application of the principle at the Tutti Frutti frozen yogurt chain. The chain lets its customers build their own yogurt sundaes and charges 35 cents an ounce, for however much (or little) yogurt and toppings they care to dispense. That flat rate seems eminently sensible, and would appear to preclude any kind of marketing hocus-pocus.
Until you look at the containers, that is. Srinivasan notes that they're wide and short, much like those in Wansink and van Ittersum's experiment. It's likely that most customers will buy more yogurt than they would have with a taller container.

Thursday, January 7, 2010

Pricing the Snuggie

The Snuggie, the "blanket with sleeves," may be an Irony Belt punchline, but somewhere, in a less jaded America, 20 million have bought it. Like other infomercials, the Snuggie pitch uses some powerful tricks of psychological marketing. Next to that, logic — and fashion sense — don't count for much.

• The Snuggie is not quite like anything the viewer has seen before. Is it a blanket? Is it a shirt? Is it a centaur-like hybrid? The potential buyer does not know how to categorize it and can't compare its price to those of familiar products. This leaves the buyer open to suggestion about what a fair price might be.

• The buyer of a novelty product also doesn't know what quality to expect, and this too leaves him open to suggestion about value. "When washed, it sheds," writes this month's Consumer Reports. "Each time we laundered two Snuggies, we removed a sandwich bag's worth of lint from the dryer screen." This provoked a rebuttal by the Snuggie people in The New York Times: "Because the Snuggie is designed to be used like a blanket, you typically don’t have to wash it as often as you would clothing." (Hmmm. The website says that Snuggies are perfect for "Night Time Pub Crawls." My guess is, you'll want to wash it once per pub crawl.)

• How much does a Snuggie cost? Glancing at the website, you might think $19.95. That's the most popular price for infomercial products — a "charm" price that seems so much less than $20. But as Consumer Reports notes, a $19.95 item usually costs $5 or $6 wholesale.

• Postage and handling run $7.95. Yes, you heard me right. The shipping charges are more than the probable wholesale cost of the Snuggie itself. When making a decision to buy, consumers focus on the product price, ignoring the extras. Marketers therefore shift the cost from the "price" to the "P&H."

• California and New York residents must pay sales tax on top of that, nearly $2. In the history of the world, has anyone ever factored that into their decision to buy?

• They throw in a "free" book light. It's mentioned like it's a fascinating product in its own right, but they don't waste much precious airtime on it. Suffice it to say it's small — think "prize in a cereal box."

• The book light is a freebie, the backbone of all infomercial pitches. Instead of selling just one product, they throw in something else for free, sometimes a whole cornucopia of freebies. Economist Richard Thaler calls this principle "Don't wrap all the Christmas presents in one box." Marketers use this formula because it means more sales at higher prices.

Now wait a minute, I hear the skeptics saying. I wouldn't be caught dead in one of those things — not if THEY PAID ME! These marketing tricks won't work on someone dead set against buying a Snuggie. They work on the persuadable, those sitting on the fence between buying and not buying. Even if you're not a Snuggie persuadable, you are for something else. We all make decisions, and the underlying psychology is much the same.

• Every slasher movie ends with the "slain" villain springing back to life. And every infomercial ends on this "surprise" twist: Buy now, and they'll double your order for free! You get two Snuggies, and two book lights, for just $19.95 with an asterisk. It's the asterisk that just got more expensive. You have to pay another $7.95 for shipping the "free" Snuggie (which probably isn't worth $7.95 wholesale). Grand total: $35.85 (plus any tax).

• What if you want to buy one Snuggie? Sorry, it doesn't work that way. One Snuggie is like the sound of one hand clapping (in a cheap fleece sleeve.)

Consumer Reports editors (2010). "Should you 'BUY THIS NOW!'?" Consumer Reports, Feb. 2010, 16-20.
Newman, Andrew Adam (2010). "Infomercial Products Take One on the Chin." The New York Times, Jan. 7, 2010.
Thaler, Richard (1985). “Mental Accounting and Consumer Choice.” Marketing Science 4, 199-214.

Tuesday, January 5, 2010

Publication Date, and a Mystery

Today is the official publication date of Priceless: The Myth of Fair Value (And How to Take Advantage of It). That means Amazon has it in stock, and so should most bookstores. It also means, as with most books nowadays, that someone is already selling used copies on Amazon. No mystery there: Review copies are sent out early, and (underpaid) reviewers often sell their books. The mystery is that one of the used books is selling for $39.99. The brand-new book has a list price of $26.99 and Amazon is currently selling it for $17.81. What would motivate someone to click past the Amazon price to pay more than twice that for a used book? (It's not autographed because, uh, I haven't autographed any copies yet.) I half-wondered whether some robo-resale outfit was confused by the cover, which has a fake price tag with multiple prices — but none of them is $39.99.