As artificial intelligence enables businesses to fine-tune prices to closely reflect products’ cost or value, it may seem natural to assume that more differentiated pricing leads to better profits. But new research from UW-Milwaukee suggests the opposite can be true: Fewer, better-designed price points may work better.
Walk into a store like Five Below or buy a movie ticket at AMC Theatres, and you’ll notice something curious: Very different products often share the exact same price. A basketball, a phone accessory and a water bottle all might cost $5. A blockbuster film and a lesser-known movie might carry the same ticket price.
According to new research, that’s not a coincidence. It’s a strategy.
A study by Zuhui Xiao, assistant professor of marketing in UWM’s Lubar College of Business, examines a common practice known as “class pricing.” This is a method where businesses group a wide range of products into just a few price points. While this may seem to go against basic economics – which suggests prices should reflect a product’s cost or value – the research shows that consumer psychology plays a powerful role.
Instead of judging prices in isolation, people compare them to what they expect to pay. When a price feels lower than expected, it creates a sense of gain. When it feels higher, it creates a sense of loss. Because losses tend to loom larger than gains, consumers often dislike overpaying more sharply than they enjoy getting a bargain.
Class pricing helps reduce those negative comparisons.
“When prices are simplified, consumers are less likely to feel like they’re overpaying,” Xiao said. “That makes them more comfortable making a purchase.”
In other words, fewer price points can lead to fewer second thoughts.
The findings suggest that businesses aren’t just setting prices based on cost or value – they’re carefully shaping how customers experience those prices. When firms adopt more differentiated pricing across a price line, shoppers tend to resent higher-priced options more than they reward lower-priced alternatives, making expensive items look worse than the actual price difference alone would imply. By limiting the number of price points, companies can reduce these unfavorable comparisons, helping higher-priced products preserve more of their prestige and improving overall profitability.
“Consumers don’t evaluate prices one by one. They compare what they see to what they expect, and that shapes whether a price feels like a good deal,” Xiao said.
The strategy is already widely used in retail, entertainment and beyond. As companies look for ways to attract price-sensitive consumers, especially during times of economic uncertainty, simple pricing models may become even more common. Even with advanced AI pricing algorithmic tools, more flexibility in setting more differentiated prices does not necessarily lead to higher profits. In many cases, simpler pricing tiers are more effective.
For shoppers, the takeaway is straightforward: That clean, simple price tag may feel like a good deal – but it’s also designed to feel that way.
| Research@Lubar Faculty scholarship in the Lubar College of Business spans the business fields and beyond through both theoretical and applied research that is published in leading journals. Here are some of our faculty’s most recent publications: |
| Consumer-driven Class Pricing Marketing Science Author: Zuhui Xiao |
| Does Gibrat’s Law Apply to Chain Organizations? The Case of Franchising Applied Economics Authors: Steve Michael and Antonio C. J. Porto |
| How Do Technology Paradigms Influence Configurations of Contract Characteristics for Success of Inter-Organizational Outsourcing Projects, 1991–2009? Journal of Operations Management Authors: Onkar S. Malgonde, Moez Farokhnia Hamedani, Sunil Mithas, Manish Agrawal, Kaushal Chari |
| Click here to see more faculty research |