Many years ago, when we were learning our trade, some distinguished authority explained to us that buyers like to think in chunks of money.
They will, for example, tell their agent, "We’re willing to go to $225,000", or some similar number that comes in $25,000 increments, so that there would be, in effect, a stepped pricing ladder. And we were also informed that above a certain level, depending on the specific market, those increments might be $50,000 steps, and at even higher levels, perhaps $100,000 steps. So there’s these pools of buyers out there are they’re neatly arranged in discrete groups. And the higher in price you go, the less buyers there would be in each group.
That made perfect sense to us. Most of the buyers we came in contact with over the years appeared to act that way, although a few would start at whatever figure their lender told them they were qualified for.
A logical conclusion, if you accept this received wisdom, is to initially price a listing with that buyer psychology in mind. For example, a listing price of $249,900 would be preferable to one of $251,900, since the latter would exclude buyers who placed their limit at $250,000 (assuming the agent didn’t cheat up a bit). A bigger pool of potential buyers might well be worth taking a couple of thousand off the top to start.
Further, if you accept this reasoning, the price decreases that would be really effective would be ones that bridged the gap between groups, because they are the ones that would increase the size of the potential buyer pool. Moving from $254,900 to $249,900 should be more effective in generating more showings than a decrease from $239,900 to $234,000.
For many years, we acted in accordance with this thinking, and it mostly worked well. But with the problems and challenges of recent years, we’re starting to question at least the price reduction part of the concept. Of necessity, we have quite a bit of recent experience with small "within category" reductions. And interestingly, the market has responded very positively with increased showings. And increased showings have led to more and faster sales.
We’re still not seeing potential buyers tell us they want to look at homes up to $217,400, but they do seem to be acting differently in regard to price reductions. Has buyer psychology changed? Is this just an obsolete concept, was it only a fantasy to begin with, or is there any residual value in attempting to use it?
Mary & Dick Greenberg
Data Source: IRES MLS