On Pricing Real Estate Like Groceries
Another question: Do you really believe that $499,900 is a better and smarter price than $500,000? Someone who can afford to purchase your property is not going to be swayed by such nonsense. Why insult them?
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Evidently some time ago, some researcher, somewhere, maybe an academic, maybe he worked for Del Monte or Kellogg’s, came up with the bright idea that consumers are more likely to pickup a $0.99 can of green beans over a $1.00 can of green beans.
Right?
And ever since then, American consumers have come to expect this nonsense, even if it is just a bit insulting. And of course we see this style of pricing for all consumer goods, clothing, white goods, furniture, automobiles, lot’s of things…the pricing of dry cleaning. Certainly we all see this with gasoline.
But here’s my question: How long ago were these studies done? Fifty years ago? Longer? Would I be wrong to make the proposition that American consumers are much wiser today than they were when this practice became the standard? Yet it continues. I think, not really out of a question of what works, but rather, out of habit.
Personally, I think it is a bad habit. But I might be convinced to accept it if I could be convinced that it works. Don’t take my opinion on this. Answer the question for yourself: Are you more likely to pick up a $0.99 can of green beans that you don’t really like or a $1.00 can that you prefer? See, at least today, it is not about the perception of price; we all know the price is the same. So, what do we do? We pickup the beans that we prefer.
Maybe canned goods are not the best example: You are considering two sofas at two different stores. One is $999 and the other is $1,000. Do you really believe that anyone would buy the $999 sofa over the $1,000 sofa if they happen to prefer (for whatever reason) the $1,000 sofa? Again, it is not about price perception. Today it is about preference.14
So I would like to make the following proposition: With real estate, it is today, and it has always been, about preference. This odd pricing nonsense never sold any real estate. The price point is too high, and the decision is too important, for a buyer to be swayed by this claptrap. For real estate, this pricing method is specious; it is silly and adolescent. And if it had ever been effective, I would call it out-of-date.
And yet, we see this all the time in real estate pricing. It is, I think, testament to the inability or unwillingness of real estate brokers to think for themselves. The term intellectually vacant comes to mind, but I am not sure they would get the pun.
In fact, there are some studies that suggest odd pricing in the other direction (e.g. $501,534) leads, on average, to a higher negotiated final Purchase Price for the seller.15 But if one wants a higher negotiated final Purchase Price, instead of playing games like this, it might be more productive to focus on one’s negotiating skills. I don’t think it is a stretch to suggest that most Americans, including most real estate brokers, could benefit from improvement in this skill set.
But there is something else.
Could we return to our typical $500,000 house. Specifically, could we consider the buyers for such a house. We have already discussed that buyers are finding their own houses, and we’ve also discussed the fact that they are doing so online.
But specifically, how do $500,000-buyers go about searching for a $500,000 house? It’s not a trick question. They pull up a real estate website and enter search terms. Right? Here’s something they don’t do: They don’t simply enter $500,000. As in show me all the $500,000 properties. No of course not; they enter a range. Say for example, $475,000 to $525,000. Right?
And really, there will be buyers who enter: $450,000 to $500,000. Right? And others, who will enter $500,000 to $535,000. Right? So that makes three possibilities: The figure may be at the top, or at the bottom, or somewhere in the middle.
I might add, in passing, notice all the zeros. No one searches for $474,999 to $524,900.
But there is something else I want you to notice. If you price your home at $499,900, it does not show up in the search range of $500,000 to $525,000. Nope, it is not there. Even if it is the perfect match for the buyer.
Alternatively, if you price your home at $500,000 it shows up in all three search possibilities.
So even if you do not agree with my opinion on odd pricing foolishness, here is a practical reason for even pricing: Let’s get the property in front of the greatest number of buyers.
I would even go so far as to say: The more zeros, the better.
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14. In fact, odd pricing dates back over one hundred years. Conventional wisdom and numerous studies say it works because people read left to right. Therefore, the left-most figure is the most important in terms of perception. So the real question is: Today, does perception outweigh preference? You judge for yourself. My personal opinion is that odd pricing worked when there was less selection and therefore less comparison shopping. Clearly different from today. I also believe that this perception business diminishes with each additional digit and by the time you get to, say, six-figures, it is practically nonexistent. Six figures, as in the price of a house.
15. As an example, see Eric Cardella and Michael Seiler, The effect of listing price strategy on real estate negotiations, Journal of Economic Psychology. 23 November 2015.