How it works
List price, Recommended Retail Price, Suggested Retail Price, Manufacturer’s Suggested Retail Price… they all mean the same thing – the price that the company making a product thinks it should be sold for.
Or do they?
After all, it’s only a recommendation so there’s no pressure on the retailer to stick to it… so why bother?
Because it can help retailers charge more.
Why it works
Information
These prices act as an anchor. We humans love a mental shortcut. Calculating the value of a product is work. Being told the price? That’s easier. And if the product is being sold for less than that price… well, then that’s a bargain.
Friction
We’re naturally risk averse. If we don’t feel we have enough information, we’re likely to default to saying no. Better safe than sorry, eh?
Incentives
We’re also naturally disposed to fear of missing out (we call this loss aversion), so if we see what looks like a good deal we’re more likely to snap it up before it goes back to full price and we’re left wondering what might have been.
Wider impacts to consider:
- Could misuse of deals erode customer trust?
- Could discounted prices cause an increase in haggling as people already perceive flexibility in the pricing?
- Could setting an anchor actually harm sales or damage reputations if retailers were able to charge more due to unexpected demand?
Why we love it:
This is an odd one. We don’t necessarily love the concept of recommended retail prices on their own, but we love what it shows us about people.
It’s not just that people like a discount, but that our brains actively crave a reference point to help us make sense of the world.
In their book Blindsight, Matt Johnson PhD and Prince Ghuman tell the story of how the US chain JCPenney decided to do away with discounting and sales and just focus on always low ‘fair and square’ pricing. The result?
‘JCP’s revenue plunged $985 million in the fiscal year following their move to “fair and square” pricing. It turns out customers liked the marked-down prices; their brains wanted the reference of the inflated, untrue prices to help justify their purchases.”
We crave information. We crave clarity. And if we don’t get it, we’ll look somewhere else for it.
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