Rory Sutherland: Feel-good factor

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There are a few fine exceptions – Volkswagen’s ‘Surprisingly ordinary prices’ campaign, for example. Or Aldi’s ‘Like brands, only cheaper’. But there are markedly few great campaigns promoting low prices. This dearth of such work may reveal a wider misconception: that it takes a lot of work to build premium brands, whereas low prices speak for themselves.

I don’t think they do.

Until a few years ago, I had always wanted to test something which would have been completely unethical, not to mention illegal. I wanted to put ‘50% extra free’ on an item on sale in the shops… and then increase the price by 50% to see what the effect would be on sales. I wanted to see how much of the uplift was created by an actual reduction in price, and how much by the implication that there was a deal on offer – even in the absence of any material reduction. To perfect the experiment, you would also test an identical product that was 50% bigger at the original price, in the absence of any promotional flash.

Obviously, it was impossible to perform this experiment. But thankfully, someone I met at a dinner did the job for me. I had explained that I wanted to know what part of the uplift from promotions was emotional not economic, only for him to reply: “I do know the answer to that question.” He had worked for a very large, packaged goods company, which will remain nameless. As he explained: “A few times a year, of all the thousands of promotions we run, once or twice we mistakenly put the price up by 50% on an item which says ‘50% extra free’.”

“Wow,” I said, hoping naively for some data. “I’m not going to share the data with you, obviously,” he went on. “But you wouldn’t believe how much money we make.” So, even though I could never perform my experiment, I was at least partly vindicated. It seems that trumpeting a discount is bizarrely effective, even if there is no discount to be had.

Now, here’s the thing, if you believe conventional economic theory – where people are trading off price and utility – you wouldn’t expect to see such a market effect, because every time someone buys something, supposedly they’re comparing the price they pay with the utility they gain. What this informal and technically illegal experiment shows is that isn’t the case at all. They like the feel of a deal. Those ‘three for £8’ deals at M&S – do you add up the cost of the three items first? Me neither.

This brings me to Black Friday. A Which? report found that very few items are actually on sale on that date for a lower price than at some other point in the year. Prices are often ramped up beforehand and reduced with great fanfare. In purely economic terms, Black Friday ain’t all that great. As I am writing this, an email arrived from a pen company offering two free refills if I spend £100 on pens. Seriously?

But that, I think, bears out my point. Black Friday succeeds effectively by creating emotional excitement around the idea of bargain hunting, rather than through real economic discounting. It is a time-limited ‘festival of fomo’ combined with other potent emotional cues: there’s a lot of social proof with many people shopping simultaneously, creating the fear that if I don’t buy that £100 pen, someone else will. It’s the razzmatazz that’s driving behaviour more than the savings themselves. Similarly, if Harrods reduced its prices by 50%, but didn’t tell anybody, I think the uplift in sales would be remarkably small. What makes the sale work are the queues outside, the bags with ‘sale’ on and the narrow window of opportunity.

The psychology of low prices is just as interesting as the psychology of high price. Fifteen or so years ago, KFC in Australia was selling chips for $1, in a limited time promotion. The most effective way it found of promoting this was by imposing a limit: ‘maximum four per customer’. Exploiting the idea of scarcity made the promotion seem much more valuable.

In many cases, businesses are guilty of reducing prices, expecting consumers to care or notice. Yet, in most cases, unless you make a noise, they really don’t. Consequently, much of the effort businesses put into achieving operational efficiencies is wasted in the marketplace. Finance folk think that no marketing is needed because low prices speak for themselves. Nothing could be further from the truth.

As Black Friday shows, the way to get people to buy things is to make them excited by a low price, not just to offer low prices. As I put it recently, ‘to economists, price is a number; to consumers, price is a feeling’.

Rory Sutherland is vice-chair at Ogilvy UK

This column was first published in Impact.