CPM Price Psychology & Behavioral Economics Flashcards

Which pricing psychology principle explains why a $500 price reduction feels larger on a $600 item than on a $6,000 item?

Answer: Weber's Law — perception of difference is proportional to the base quantity

Weber's Law states that the just-noticeable difference is a constant ratio of the stimulus; a $500 discount is 83% on $600 but only 8% on $6,000.

The endowment effect is relevant to pricing when:

Answer: Customers overvalue a product once they possess or try it, justifying trial-to-paid conversions

Ownership or trial increases perceived value, which is why free trials are effective at converting to paid subscriptions.

Bundling products together can increase consumer surplus capture because:

Answer: Different customers value bundle components differently, reducing WTP variance and increasing average revenue

Pure bundling aggregates heterogeneous valuations so the firm extracts more total surplus than selling items separately to different segments.

Social proof pricing (e.g., 'Most popular plan' badge) exploits which behavioral principle?

Answer: Herding — people infer value from what others choose

When uncertain, buyers look to others' choices as information about quality and value, making 'most popular' labels highly influential.

In a pricing experiment, offering a 'free' option alongside a paid one often:

Answer: Dramatically increases uptake of the free option beyond rational expectations due to zero-price effect

Ariely's zero-price effect shows that 'free' triggers a disproportionate positive response that overwhelms rational cost-benefit analysis.

Which of the following is a key implication of mental accounting for pricing strategy?

Answer: Buyers categorize spending into budgets (entertainment, food, etc.) and will pay more within the right category frame

Because consumers use mental accounts, framing a product as fitting a category with a generous budget (e.g., health vs. luxury) can increase WTP.