Business

Spend less on gifts—really

Why it pays to shop for presents with the recipient's point of view in mind

By Dave Nussbaum     
September 14, 2013

From: Magazine

Research suggests you will be happier if you pause before working and think about what experiences your earnings will buy. The same basic logic applies, in reverse, when buying things for others—you’ll be happier if you pause and think about what your money will buy. 

Booth’s Christopher K. Hsee looks at this in a study that involves birthday presents. Imagine you’re buying a birthday present for a friend and you’re choosing between two gifts: a scarf that costs $45 and a jacket that costs $10 more. Objectively, the jacket is the more generous gift, but your friend will probably consider you more generous if you get her the scarf instead. 

Why? Your friend won’t be comparing the scarf to the jacket, she’ll be comparing it to other scarves. Compared to other scarves, a $45 scarf is really nice. Relative to other jackets, a $55 jacket isn’t nearly as nice. The lesson, then: don’t focus on the comparison you’re making, instead pay attention to the comparison the gift’s recipient will make.

The very same logic can be used by businesses that are setting prices, ironically to justify charging more. Research by Hsee, Booth PhD student Luxi Shen, and their collaborators suggests that, under certain circumstances, sellers systematically set their prices too low and fail to maximize profits.

The researchers look at transatlantic flights and ask participants in a study if they, assuming they ran an airline, would charge $50 or $75 for access to an electrical outlet on a flight from Chicago to London. It might seem that $50 is a reasonable price to pay for the convenience of an electrical outlet on such a long flight, while $75 for the same outlet may seem a little steep by comparison. Given this analysis, most participants decided that $50 was a better price to charge because they anticipated that buyers would reject the $75 charge as too high. What they overlooked is that the customer would only see one of these prices—either $50 or $75—so they wouldn’t make the comparison. Hsee and Shen’s research suggests that customers will actually be almost as willing to pay $75 for the upgrade as $50. 

One useful corrective that Hsee and Shen find is to encourage sellers to see things from their customers’ points of view. For example, when sellers are asked to consider just one price at a time, their estimates of what customers will be willing to pay become a much closer approximation of reality. If you’re selling something that is relatively unique, don’t forget that your customers will only see one price, the one you set, and not all the other possible prices you might have considered.

This article originally appeared alongside Why you're working too hard

Christopher K. Hsee, “Less is better: When low-value options are valued more highly than high-value options,” Journal of Behavioral Decision Making, 1998.

Luxi Shen, Christopher K. Hsee, Qingsheng Wu, and Claire I. Tsai, “Overpredicting and underprofiting in pricing decisions,” Journal of Behavioral Decision Making, August 2012.