From Dan Ariely's Predictably Irrational:The New York Times ran a story recently about Gregg Rapp, a restaurant consultant, who gets paid to work out the pricing for menus. He knows, for instance, how lamb sold this year as opposed to last year; whether lamb did better paired with risotto or with squash; and whether orders decrease when the price of the main dish was hiked from $39 to $41.One thing Rapp has learned is that high-priced entrees on the menu boost revenue for the restaurant -- even if no one buys them. Why? Because though people generally won't buy the most expensive dish on the menu, they will order the second most expensive dish. Thus, by creating an expensive dish, a restaurateur can lure customers into ordering the second most expensive dish (which can be cleverly engineered to deliver a higher profit margin).On some level, I always knew that I did this -- that I anchored my understanding of what a too-pricey dish was by finding the most expensive thing on the menu, and ordering below that. But it never really occurred to me that restaurants knew I did this, and have been playing me for a sucker. This, in general, is one of Ariely's really worthwhile insights. Humans don't have an internal compass that detects value. We don't know how much an item is "worth." So we rely on other methods of making the decision. Context, for instance. We "know" hardcover books are worth around $24.95, so less than that is probably a good value. Or we compare to nearby products, and look for the one in the middle, or the upper range of the middle. All well and good, except that retailers are well aware that we do this, and figure out their pricing accordingly. Oops.
