The Psychology of Pricing - New York Times 2/18/07

by Teri Karush Rogers

"In a market where buyers and sellers circle one another warily - each certain that he or she is being taken advantage of, no matter what the conclusion of the deal - the asking price of a property is rarely a straightforward reflection of comparable values. While comparables may be a starting point, the price at which a seller offers the property is also based on wishful thinking, propaganda, and ploy.

Buyers in turn, parry by deconstructing the price. They aim not merely to asses a dwelling's fair value but also to plumb a seller's bottom line and vulnerabilities.  How a price tracks with similar properties, how large and hasty any reduction is, and even how parsed or rounded a number is - all these are grist for concluding, rightly or not, whether a price is firm, desperate, or a sign of painful dealings to come.

Or even a sign of delusion.

Despite whispering advice like courtiers into the ear of a monarch, brokers say some sellers have delusions of grandeur, stemming from a failure to grasp that what they want for their home has nothing to do with what it's worth.

Even when the seller and broker reach and agreement on a home's value, it is often wise to adjust the asking price downward, and not just because buyers like bargains.

An equally compelling reason to fly low is to adhere to psychological 'break points'.  These are dollar thresholds that buyers are most likely to select as the top amounts they are initially willing to spend or use in Internet searches. (Intially is the key. Once buyers set foot in a house and make an emotional connection to it, they're more vulnerable to budget creep, by which a $25,000 increase can be rationalized as a little bump of $30 or $40 a month in the mortgage.)

Major break points occur at $500,000, $1million, $1.5 million and so forth. Smaller ones occur every $100,000 and then at every $20,000 or $25,000. So for example, if the market value of an apartment is around $610,000, brokers generally advise sellers to round down to $600,000 so that the property lands within a buyer's budgetary myopic field of vision.

Many brokers tweak break points even further, counseling their clients to name a price just under break point - choosing $599,000 rather than $600,000. While buyers intellectually recognize the lack of meaningful difference, the lower amount is said to appeal on a less conscious level. (It works in reverse too, buyers in a bidding war are often counceled to offer an amount just above the next break point).

Sellers are almost certainly at a disadvantage if their price towers over comparable properties. Prices of more than 5 % over the market will probably have a chilling effect on buyers.

Sellers who think that buyers will simply show up and make the best offer do not understand how the market works. Sellers who have priced too high can still salvage the situation. Brokers say they must act quickly - ideally within a few weeks - and make sure there are buyers around to take notice.

Second, to be effective, the lower price must tempt a whole new group of buyers, which means slimming down to at least the next break point. For sellers already hovering above a break point, the reduction can be small though psychologically significant, like going from $2.01 million to $1.95 million. Proper pruning can elicit a swift reaction.

Professor Ravi Dhar, a professor of marketing and management at Yale Center for Consumer Insights suggests that some anxiety"...over dropping the price.." may be warranted.

"If we start getting a good deal on something, we always think, "Is there something wrong here?" he explained. "It makes you look at the apartment through a more critical eye and notice the deficiencies, like buying products on sale at the marketplace."

On the other hand, he said "If you give people a reason why you are dropping a price, then psychologically they interpret it differently."  Sellers could neutralize a buyer's negative reaction, he suggested, by explaining that they were moving to another state.

As for brokers, many argue that seeming eager to sell - even if you aren't - is a canny strategy. Price reductions also work by making buyers feel more in control."

 - this article has been abbreviate due to spacial issues. for more information please go to www.nytimes.com