My Thursday morning started off fantastically: I found a sock that I had misplaced while doing laundry the previous weekend (and he’s single?!?). It was a running sock that I especially liked, probably because it had the right amount of softness and support. I may also have been especially happy to find this sock because I bought it from City Sports, the now defunct sporting goods store that closed its doors around the country at the end of 2015. At the time of purchase the sock only cost me a couple of bucks, but there would have been no straightforward way to determine a price to replace the sock now that City Sports had closed. I may have been willing to pay $5 or $10 to buy a replacement pair through a third party reseller. I may also have been willing to try out a new brand. After all, I can be brave sometimes. The real point here is that a person’s willingness to pay (or willingness to sell) can be significantly affected by context, scarcity, emotion and straight out temporary insanity.
The truth is, this is the longest I have ever thought about a running sock (dress socks are a different story; I love what the guys at Nice Laundry are doing, as a side note). But it made me think about the concept of pricing and how distorted our views can be based on a particular situation.
A classic example of price distortion is the add-on pricing for accessories when buying a car. Would anyone spend $150 on car mats if they instead purchased the mats in a separate, standalone transaction? The answer is most likely no, but when the item is added on to a $30,000 purchase, our view on what is considered a reasonable price completely changes. If you end up financing your car, that extra add-on will now be paid off over several months, further distorting our view on pricing.
Emotions also play a significant role in our willingness to pay. My sock example showed that I would have paid several times more than my original transaction price. Part of that mindset was due to the sock’s scarcity and my higher demand, sure, which would increase the price of the good (thanks Econ 101), but my so-called demand shock is so illogical because of the thousands of other substitutes for this running sock. My emotions (and my feet) were clouding my judgment temporarily until my life changed that fine Thursday morning when I found the lost sock. Emotions are healthy, just don’t let them break the bank.
None of this logic is groundbreaking. We know that emotions and other factors cloud our judgment (both for the good and the bad). We also know that money is fungible, for the most part, so a dollar spent on a car accessory could just as easily be spent on rent or a dinner, but we do not also think rationally at the time of these purchases. As a consumer, you should try to keep your purchases in context. As a business, you should take these factors into consideration when developing your pricing strategy. I often hear that a startup or business had a great product, but they failed on execution. Among other things, execution includes effective marketing and understanding the potential customer base, both of which should rely heavily on effective product pricing to maximize sales.
It is certainly not an easy task to quantify emotions and find customers’ maximum willingness to pay, or even to determine the optimal price for just one customer. But that doesn’t mean your company shouldn’t make an effort to price efficiently; whether that means lowering your prices to increase sales or increase prices to increase profits depends on your particular situation, of course.
My mind sometimes goes in unexpected directions (as shown by my instant reaction to discuss pricing strategies after temporarily losing a sock), but I have great interest in how people react to certain situations and how this logic can be applied to a business setting. And to ensure that people don’t think I’m simply thinking about exploiting profits in a greedy manner, what I refer to as a “business” could also include a non-profit that seeks to maximize dues or fundraising contributions to make the world a better place. Similar logic would apply.
Bottom line: I encourage you all to go out and lose a sock for a few days. It might make you think about things a little differently.