Pricing and the Investment Effect

Description

When we spend time in doing something, and in particular if this includes a tangible, emotional component, then we become less price-sensitive.

Pricing can hence be based on the mode of selling, with the price being increased if it is possible to reliably ensure the customer gains some investment in the product before they are told the price. Investment also increases when the engagement is public and others can see that we like the product.

Example

A toy and games shop puts products out so customers can play with them, which many do. By the time they come to enquire about purchasing a product, they have already invested time and emotion and become more attached and so become less price-sensitive.

A firm uses a 'try before you buy' offer, allowing customers to make operational use of product before they make the purchase decision. This both reduces customer fear of buying a 'turkey' and increases their invested connection with the product.

Discussion

Pricing and the Investment Effect can be seen in the general investment principle. When we spend time with something, we start to form a bond with it, such that it becomes a part of our extended identity and we feel that, in some way, we already own it. This can trigger something of the endowment effect, where ownership leads us to value an item more highly.

If this bond can be built before the price is known, then the emotional connection (and fear of loss) may well overwhelm price concerns, leading people to buy in spite of the high price.

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