All businesses need to make a decision about how to communicate their prices. Is it better to start low and go high, or start high and go low? Let’s see what behavioural science suggests.
Start low and go high
“Start low go high” is commonly used in car ads where a price is quoted like “$19,990 drive away” on the lowest model in the range to get people to the dealership.
From there the real sales process begins, with upgrades to a better model and options like good ol’ car mats.
Real estate agents tend to use this strategy to get interested parties to the house, hoping that the prospective buyers will then become emotionally invested and stretch their budget (noting of course in Australia it is illegal for agents to under quote), and research has shown that lower starting prices can lead to higher final prices in auctions.
Start high and go low
Most commonly used by service firms, the full ‘bells and whistle’ proposal is often quoted first, which then allows the client and agency to negotiate around scope. The price can come down if the client can do without particular services.
Restaurants and retailers can use this strategy to great effect to sell products that seem good value relative to the most expensive item: compared with the $99 lobster the $36 steak seems reasonable.
At its worst, this strategy is used as an ambit claim by parties in negotiation, padding out their terms so it is easy to make subsequent concessions.
So which strategy is best?
Either can work, and both can fail. It all depends.
Starting low has the advantage of deferring ‘sticker shock’ until you have had a chance to engage the customer with your product. Notice the examples I’ve cited, car dealers and real estate agents have trained salespeople to manage the conversion process to transition the buyer from this initial emotional connection to becoming a paying customer.
Behaviourally the business is relying on both the customer’s ‘sunk cost’, where they have invested time, effort and/or money in the product and are therefore less willing to walk away, and the customer’s ‘mental accounting’, where they have already mentally ‘spent’ the lower amount on the product, and so feel that they only now have to pay for the incremental amount.
In research on auctions, starting low resulted in higher prices due not only to the sunk cost and lower barriers to entry, but the ‘herding effect’ of an item’s popularity. In other words, when we see everyone else wants something, then we do too and are willing to bid more.
Starting high risks initial turn-off but has the advantage of landing on a mutually beneficial price where everyone feels like they’ve won. Central to this strategy is the behavioural principle of ‘anchoring’ where we are most influenced by the first number we see.
Just recall the last time you bought something on sale – you felt good because you knew how much the product used to cost – you were anchored to the RRP.
Where starting low just means the pricing news gets worse for the customer as they consider options, when you anchor them high they can only feel better because the cost is decreasing.
How to know which strategy to use?
As frustrating as this is, it depends on your circumstance, so I can’t give you a directive here and now. What I will say is that you need to tune into your buyers and marketplace.
For online retailers who need to list their products, I would give serious consideration to sequencing your items from highest to lowest. However, if you are an eBay seller who uses auctions, then starting low will fuel the feeding frenzy that should drive up the price.
For professional service firms who typically need to talk about scope with clients, I would look at how you can use price anchoring, whereas firms who are dealing in a price sensitive, largely undifferentiated market where lead generation is key should consider having some loss leader, low price products with which to entice customers.
If your head is swimming with pricing options don’t worry – drop me a line and we can talk about what’s best for you.
Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.