The idea
Shafir, Diamond and Tversky named this effect in 1997. Because the last price paid is the reference point, a rise feels like a loss. Small, regular, announced steps move that reference point gradually, and a visible cost reason such as fuel or the exchange rate makes the rise feel fairer. At 24% inflation money loses half its value in about three years.
Use it thoughtfully
- Raise prices in small, regular, announced steps.
- Tie rises to costs customers can see.
- Never change pack sizes silently.
An example
ILLUSTRATIVE EXAMPLE: An operator announces a 10% rise one month ahead, explains higher fuel costs for tower generators, and keeps the entry pack unchanged.
A question to try
When did you last raise a price, and how much warning and explanation did customers get?
A useful framework is a starting point, not a guarantee. Effects vary with the audience, product and situation. Use truthful evidence, respect customer choice, and test the result.