Consumer behaviour and the psychology of value are fascinating. One could try to explain it by logic, but that would not be the full picture.
It’s all about the perception of value and some companies have it all nailed down.
Let’s assume a theatre company decides to offer 50% discounts on certain dates to boost ticket sales and consumers buy the tickets. What prompts the conversion? Is it the 50% increase in value or the 50% drop in cost? This is a trick question because that 50% is never there. If that value is there, then there would not be a need for discount. Nonetheless, consumers tend to see an increase of 50% in value. When in fact, there is no gain at all, because the asset has already depreciated and they are simply paying market value.
In another example, suppose an item drops its price by 70%, and someone buys it at 30% of the original price. Although that person may think he is gaining 70% by paying 30%, the reality is that he has only gained 30% after a 70% drop. So, that person is in fact 40% down; not 30% up.
This happens when a consumer is selling themselves that they are getting more than what they are paying for. The lesson here is simply get what you need and do not be greedy, because in the end, you are really getting what you pay for. The cost of buying something you don’t need is mathematically infinite.
With that in mind, a company could price a product to give the illusion of value. Pricing a product and offering is always challenging. There must be incentive for consumers to trade “up” for a higher end product or buy additional “peripheral” products. For instance, consider the following iPod price points.
When consumer see this, they will use the 512MB iPod shuffle as a benchmark ($156/GB) upon which other comparisons will be made. For instance, consumers see that for another $40, they will get another 512MB for the 1GB model ($120/GB).
The benchmark changes again when they compare the 1GB iPod shuffle with the 1GB iPod nano ($170/GB), “I will get a cooler, slimmer iPod with a colour screen for $50 more.”
There is extra incentive to upgrade to the 2GB iPod nano ($115/GB) because “it’s only $60 for an extra 1GB of space”. Then there is even MORE incentive to upgrade to the 4GB model because it is only $50 more for an extra 2GB of space ($70/GB).
The pricing continues with the iPod video line, $12/GB for the 30GB model, and $8/GB for the 60GB model.
The value here is tangible for the consumer on a per-GB basis. The incremental increase in value is well-structured and simple-to-understand: from $156/GB to $120/GB, to $170/GB (a premium for switching to a newer product line), then $115/GB, $70/GB, $12/GB, and finally, $8/GB for the 60GB model.