I thought this piece about determining how to set prices on GigaOM this morning was fascinating. Wall Street is all about prices. What is something worth now, what will it be worth in 10 seconds, 6 months or 3 years from now?
There are no shortage of formulas and equations that can be used to help arrive at an answer to these questions, but, at least short-term, the price will be set by supply and demand, which is driven by human beings and what they are willing to pay.
Setting prices for restaurant menus is a great example of this science…
Have you ever gone to a restaurant and found some ridiculously priced item on the menu? Of course you didn’t buy it — you’re no sucker. Or are you? This Today Show piece on Gregg Rapp may surprise you.
Rapp is a menu engineer. He helps restaurants maximize revenue by hacking common flaws in human decision-making. For example, by simply removing “$” signs from prices, people are less intimidated by them. And he advises against listing items from least to most expensive, because that focuses the consumer on price. Instead he mixes up items, making it hard to find their price — thereby encouraging the customer to emotionally commit to something before finding out what it costs. But my favorite strategy of his is that of putting some absurdly expensive item on the menu. Rapp doesn’t expect many consumers to buy it, but having it there makes expensive items appear cheap by comparison. Think about it: How many times have you ordered a bottle of wine in the middle of the price range?
Why and how human beings arrive at particular pricing for goods and services is an interesting topic. Read the rest.