Relative Pricing: Market dictates worth

By Wayne Jordan

You’re a rational person. As a rational person, if I tell you that you’re about to be tricked then you will be on guard, and less likely to be fooled.

Or so you think. Prepare yourself to be tricked while taking the following pop quiz:

1. Is the average temperature in San Francisco higher or lower than 558 degrees Fahrenheit?

2. Without looking it up, what is the average temperature in San Francisco? (Your best guess will do.)

3. How many Top 10 records did The Beatles release: More than 100,025 or less than 100,025?

4. Give your estimate of the number of Top 10 Beatles records.

Of course, the temperature of San Francisco is nowhere near 558 degrees; you know that, and I know that. But the point of the exercise was to plant a high anchor number in your head regarding the temperature of San Fran in order to influence your “best guess” as to the actual average temperature. Psychologist George Quattrone used the above questions to demonstrate the concept of “anchoring.” In his studies, participants who were given a high anchor number consistently came up with a higher temperature than those who were given a low anchor number. It made no difference how ludicrous the anchor number was.

If you’re not pricing your inventory according to what the market will bear, then you’re pricing incorrectly.

In psychology circles, the concept of anchoring is rudimentary; I’ve touched on the subject briefly in previous columns. The ground-breaking study by Amos Tversky and Daniel Kahneman on behavioral decision theory spawned dozens of other studies and in 2002 resulted in a Nobel Prize in Economics for Kahneman [Download the study here: http://bit.ly/10sEHWr]. All subsequent anchoring studies reached a similar conclusion: Whenever humans guess at an unknown quantity that cannot be calculated, their guesses are heavily influenced by recently mentioned numbers. Plant a high number in their heads, and their guesses will be higher than if you plant a low number in their heads.

When his study ended in 1984, Tversky joked that his results proved what had long been known to advertisers and used-car salesmen: Consumers don’t know what an item should cost in actual terms, but they are good at comparisons. A recurring theme in pricing psychology is that judgments of monetary value have a lot in common with sensory judgments like weight, loudness, brightness, warmth or odors. People are sensitive to relative differences but not absolute values.

This knowledge is essential to antiques dealers, because most consumers don’t really know what antiques, art and collectibles should cost; there are too many variables. How does a customer determine the value of something they know little or nothing about? Dealers have to give their customers points of comparison if they want them to discover which item is the best value.

BusinessofAntiques-300x250The most compelling reason for antiques dealers to use price anchoring is that doing so raises the value of their average sale. Not because customers buy more higher-priced products, rather it’s because whenever there is a high price on the anchor item, customers will pay more for the lower-priced items.

I spent most of 2009 as an art auctioneer aboard cruise ships in the Baltic, the Caribbean and the Inside Passage of Alaska. The art gallery produced two to three auctions a week, each with about a hundred or so passengers in attendance. Few of the attendees knew anything at all about art, but that didn’t keep them from bidding and winning. Most had a great time and were excited about their purchases.

The gallery I worked for was an expert at using anchors to establish the value of their art. Each auction would offer 60 or more works of art, with emphasis on one or two particular artists. After a few quick sales to foster engagement, a fairly expensive oil painting by a featured artist would be offered. Rarely would anyone bid on it. As the auction progressed, works by the featured artist would be offered in various sizes and media and at different starting bids (value was established by the starting bid). When it was well established that works by the artist were both desirable and valuable, a “special deal” would be offered on the artist’s works, and hands would shoot into the air. I was always surprised by how many bidders wanted in on the deal.


This article originally appeared in Antique Trader magazine
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More than once, I was told by a buyer that even though they “didn’t know anything about art,” they “knew what they liked” and they “knew a good deal when they saw one.” Two hours earlier, they didn’t know anything at all about the value of art. Give them an anchor price and some points of comparison, and suddenly they recognize a good value and are willing to buy.

Were the buyers deceived? Not at all. They liked what they saw, or they wouldn’t have bid. No one is forced to bid at an auction; it’s purely voluntary. No one was deceived in any way. The stated market value of the art (opening bid) was well established through hundreds of weekly auctions worldwide.

My point is that in the mind of a buyer, value is established through comparison, whether in your shop or mine.

In every corporate retail shop, everywhere, prices are determined in this manner. Wholesale cost, operating margins and demand curves (though important) are not the primary drivers of an item’s selling price; the primary driver is the price that the market will bear.

Price is a factor of the value that consumers perceive in a product and how much they are willing to pay for it. According to pricing psychology, if you’re not pricing your inventory according to what the market will bear, then you’re pricing incorrectly. If “what the market will bear” doesn’t give you enough operating margin to run your business, then you overpaid for your inventory.

Price anchoring isn’t hocus-pocus or hearsay. It’s not a theory built on anecdotal evidence. The concept has been verified repeatedly in university studies. Dealers, providing your customers with anchor prices as points of comparison turns them from bargain hunters to value seekers. That, in turn, will increase your average sale and you’ll make more money.

In upcoming columns we’ll explore a few more pricing techniques and uncover the psychology behind effective pricing.

So what’s the average temperature in San Francisco? I’ll never tell, but I will quote Mark Twain: “The coldest winter I ever spent was a summer in San Francisco.”

About our columnist: Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears in every issue of Antique Trader. Learn more at www.waynejordanauctions.com, 276-730-5197 or auctioneer.wayne@yahoo.com.

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