Kyle McNamara

A recent article in the New York Times discusses the impact of price on the perceived effectiveness of drugs. The article describes an experiment where two groups of patients receive a placebo drug that they are told is a pain reliever, but the groups are told different price points. After taking the placebo and receiving electric shocks, more people (85%) who were told it cost $2.50 reported pain relief than those who were told it cost only $0.10 (61%). While the placebo effect is well-documented, this experiment highlights an important application to business – that a product’s price can be an effective marketing lever that can directly impact its effectiveness and value.

This is not the first time that cues such as pricing and packaging have been applied to marketing. We recently collaborated with Professor Ariely (also quoted in the article) to explore the impact of applying behavioral economics principles to online marketing strategies. One of the concepts we discussed in the resulting paper, is “Framing,” and we explored how consumers evaluate their options on relative terms, and make purchase decisions based on the cues given to them. In the paper, we highlight the example of a magazine publisher who was able to steer consumers toward a higher-cost option simply by presenting a lower-cost one. Even though no one chose the lower-cost option, it was an effective cue in that it showed the relative value of the higher-cost one. In the drug experiment, price was the cue, and the higher price led consumers to find it a more effective (and valuable) product.

In Diamond’s market segmentation work, we have found that different consumer segments require different value propositions, and that marketing messages need to emphasize factors such as features or pricing to appeal to their target markets. Many generic, store-brand products are actually the same as the name-brand products, but are packaged differently and sold at a lower price to appeal to a different consumer segment. The drug experiment highlights the same concept – and 61% of the patients who thought it was a cheap drug still reported that the product was effective in relieving their pain.

In developing marketing strategies, it is important to carefully consider the market segments you are targeting, along with the value drivers for each. Understanding these drivers allows you to apply behavioral economics principles to maximize ROI through optimal pricing and product framing for each segment.

Note: This post has been adapted from my earlier post on Analytical Engine.