CPP Psychology of Pricing 3 — Questions and Answers
Question 1: A gym offers a 'free first month' promotion. After cancellation rates spike in month two, what psychological concept explains why members may feel they already got their value?
- Endowment effect
- Mental accounting and sunk cost (Correct answer)
- Loss aversion
- Hyperbolic discounting
Correct answer: Mental accounting and sunk cost
Mental accounting leads consumers to categorize the free month as 'prepaid value already received,' reducing perceived cost of canceling.
Question 2: Consumers perceive a $10 discount on a $25 item as more attractive than a $10 discount on a $250 item, even though the dollar savings are identical. This is explained by:
- Price-quality heuristic
- Weber's Law / proportional discounting (Correct answer)
- Decoy effect
- Loss aversion
Correct answer: Weber's Law / proportional discounting
Weber's Law predicts that perceived value is relative to the base price; 40% off $25 is far more salient than 4% off $250.
Question 3: Which of the following best describes the 'decoy effect' in pricing?
- Offering a free trial to reduce purchase anxiety
- Adding an inferior third option to make a target option seem superior (Correct answer)
- Using a high anchor price to make the sale price seem low
- Bundling products to obscure individual item costs
Correct answer: Adding an inferior third option to make a target option seem superior
The decoy (asymmetrically dominated) option is deliberately inferior to one choice but not the other, steering consumers toward the preferred target.
Question 4: A car dealership advertises monthly payments of $299 instead of the total price of $17,940. This tactic exploits:
- Prestige pricing
- Payment segregation / temporal discounting (Correct answer)
- Penetration pricing
- Bundling psychology
Correct answer: Payment segregation / temporal discounting
Breaking the total into smaller periodic payments reduces the perceived magnitude of the expenditure through temporal discounting and unit bias.
Question 5: A consumer who paid $500 for a non-refundable concert ticket attends despite feeling ill because 'I already paid.' This behavior exemplifies:
- Loss aversion
- Sunk cost fallacy (Correct answer)
- Endowment effect
- Anchoring bias
Correct answer: Sunk cost fallacy
The sunk cost fallacy causes people to factor in irrecoverable past costs when making current decisions, even though those costs are economically irrelevant.
Question 6: From a behavioral economics standpoint, why do $0 shipping offers dramatically increase conversion rates beyond the value of shipping savings?
- Zero is a special price that eliminates transaction cost anxiety entirely (Correct answer)
- Consumers incorrectly calculate the total price with shipping
- Free shipping is a prestige signal
- Weber's Law makes small savings seem large
Correct answer: Zero is a special price that eliminates transaction cost anxiety entirely
Ariely's 'zero price effect' shows that free offerings trigger an emotional response disproportionate to their economic value, removing perceived risk entirely.
Question 7: A pricing manager is introducing a 15% price increase. To minimize consumer resistance using psychological principles, they should:
- Announce the increase far in advance with detailed justification
- Introduce a line extension at the new price point while maintaining the old SKU briefly
- Bundle the increase with a visible product improvement or added feature (Correct answer)
- Switch to odd-number pricing exclusively
Correct answer: Bundle the increase with a visible product improvement or added feature
Linking a price increase to a tangible product improvement shifts consumer attention from the price change to the added value, reducing resistance.
CPP Psychology of Pricing 3
A gym offers a 'free first month' promotion.
After cancellation rates spike in month two, what psychological concept explains why members may feel they already got their value?