Rafi Mohammed

Empirical Evidence: A Beautiful Woman Can Affect Men's Pricing Decisions

Posted on April 29th, 2008 (0 Comments)

Linda, my grad school chum, was in town last week for a weeklong economic growth course at Harvard’s John F. Kennedy School. Meeting up for dinner one night, she arrived with an academic article (from her course) in hand and declared “you must write a blog on this.” As usual, Linda was right.

Marianne Bertrand et al have written an interesting article titled “What’s psychology worth? A Field Experiment in the Consumer Credit Market.” This article focuses on an experiment conducted by one of the largest micro-lenders in South Africa, which typically offers short term 4 month loans. This lender sent out direct mail solicitations to 53,194 of its former clients offering a new loan at randomly different interest rates. These loan rates ranged from 3.25% to 11.75% a month (yup…per month). Additionally, these mailings also had randomized psychological attributes. Examples of these psychological attributes include: (1) Some offers included pleasant smiling photos of people of different ethnicities and gender, and (2) Other offers suggested what the loan recipient could do with their loan (e.g., use for home related expenses, make school related expenditures).

As you’d expect, the interest rate offered in the mail solicitation affected the response rate. Lower interest rates garnered more responses than higher ones. But what’s puzzling (and makes the article intriguing) is the authors’ discovery that psychological features significantly affect response rates. For example, a higher percentage of consumers who received a letter suggesting they use their loan for home related expenses actually used the loan for that purpose compared to those receiving a letter without a usage suggestion. Ditto for consumers receiving a mailing suggesting they use the loan to “pay off debt.”

Perhaps what was most illuminating (and humorous) is the effect of sending a letter to males that had a picture of a smiling woman. This psychological attribute significantly increased the probability of men responding to the loan offer. The authors estimated this enhanced response rate to be the equivalent of reducing the interest rate by 4.5 percentage points per month. Thus, men viewed a “no woman picture” offer of 6% interest per month to be equivalent to an offer “with a woman picture” of 10.5%! So how did woman react in a similar situation? There was no statistically significant difference in women’s response rates for offers with or without a picture of a smiling man. Hmmm…what do these results imply about men and women?

This article, along with an increasing volume of academic literature, demonstrates that psychology is an important component in consumer pricing decisions. No disagreement from me. That said, I view psychological tactics as the final step – akin to placing a red bow on a value-based price. It’s a marketing finishing touch. So while these findings are interesting, it’s important not to lose sight of the true job of setting prices…capturing the value customers place on your product or service.

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