Nov

29

On Pricing, from Kim Zussman

November 29, 2008 |

 Here is a paper showing different buy/sell activity for stocks as a function of digit of price:

It contains a chart quite similar to the one above, which I made using data a real-estate agent shared on the local housing market over the past year, including listing price, sale price, days on market, and selling agent commission.

I tried to address a question related to choosing a listing price. Often when someone wants to sell something for $100, he might price it $99.95 or $98.50, etc., under the theory that people will think "ninety-something" instead of a hundred, and be more tempted to buy. The chart seems to show that people do this with house listing prices too.

To check this, I used the listing prices for homes ranging from $400,000-$999,999, and adjusted them such that the data was moot in the 100,000 column; they were all $9XX,XXX, and binned. For instance 495000 became 995000, 675000 = 975000, 825000=925000, etc. This way I could look at where people priced their homes in the ten-thousands column, regardless of the hundred thousands column (which was adjusted to 9).

Above is a dot-plot showing the frequency of prices in the various 10,000 bins. It is a "bimodal" distribution; people were more likely to price at or above 90,000 (in the ten thousands column), and near the 50,000 level. This confirms the effect alluded to earlier, because of the huge peak in the 90,000 area which dwarfs the 10,000 band. This and the peak around 50,000 bears a resemblance to what was found in stocks.

Adam Robinson writes:

Adam RDr. Zussman's reference on pricing reminds me of the notion of price points: discrete (rather than continuous) pricing "bands" that once "entered," a person is willing to go to the next higher band. (E.g., once a person is willing to pay more than $10 for an item, he's willing to pay $14 — so it would be foolish to ask for $12. Kind of like quantum levels for electrons.) If you examine random price offers, which are tested to death by direct marketers, they cluster around these price points.

Also, for some quirky reason, prices ending in a "7" draw much higher response than any other digit (not sure if this is true of other cultures).

For more on the psychology of pricing, and why we buy things (which might offer insights into why people buy stocks), here are some terrific sources:

Buyology, by Martin Lindstrom

Influence, by Robert Cialdini (Yes! is an offshoot with more applications in business world)

Why We Buy, by Paco Underhill (an almost anthropological take, more on retail environments)

The Strategy and Tactics of Pricing, by Thomas Nagle

Dr. Robinson is the author of The Rocket Review Revolution, NAL Trade, 2006


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