What Serendipity 3 teaches us about the Psychology of Pricing

An Interview with Behavioral Scientist, Podcaster, and Author Melina Palmer

Serendipity 3, a restaurant based in New York City sells a grilled cheese sandwich for $214. They also sell fries for $200 and vanilla sundae for $100. And here’s the thing: people regularly buy them. But why? Do these foods have more expensive ingredients? Do they cure cancer or provide they key to happiness?

The example of Serendipity 3, from Melina Palmer’s excellent new book, The Truth about Pricing, reveals much more than just how crazy the New York restaurant scene has become. The story of the $214 Grilled Cheese sandwich provides deep insights about the psychology of pricing - not for consumers, but for brands and business owners.

In this interview, we dive into this case and what it shows us: our pricing strategy’s biggest enemy is ourselves.

One of my favorite examples in the book is Serendipity 3’s Quintessential Grilled Cheese Sandwich ($214). What does it teach us about the psychology of pricing?

This is one of my favorites as well, and it comes up in the chapter that's helping you to realize the limits you’re placing on the brand, in terms of what you can charge, and what people pay. All businesses have these self-imposed constraints, but when we unpack them, we see that they are, in general, totally made up. More often than not, it's you putting yourself in a box of what can be done. There's a whole chapter that is dedicated to this concept called “You” - about understanding how you are psychologically getting in the way of your pricing and your sales.

And this is where the grilled cheese sandwich comes in.

So think about a grilled cheese sandwich. Even if you’re not a good cook, you’re not likely to go out and buy one, since making one is pretty easy. And also pretty cheap too - it may cost a buck to buy the ingredients. When we ask how much would you pay for one and then how much do you think in the most extreme case like if you were really craving one or like what's the most anyone would pay to get a grilled cheese sandwich what do you think that is.

So typically when I ask this question, I'm speaking to a group on a stage or doing an interview. People say $15, $20, or $25 - I think I had someone say $35 which is on the high side, but typically we're in that $15 - $20 range. That is what people think, in the most extreme case, is what someone will pay for a grilled cheese sandwich.

And then I introduce Serendipity 3, which has a $214 grilled cheese sandwich! Their menu also includes $200 French fries and a $1,000 Vanilla Sunday. And guess what? People buy them.

How does Serendipity 3 leverage this pricing strategy in their overall marketing?

While you be tempted to say it's a PR stunt (in many ways it is - they're the Guinness world record holder for the most expensive Grilled Cheese), there’s a bigger lesson here. They still regularly sell these, and the thing about them is that they reset the mental anchor of what this should cost to the consumer. And so if you were going to go to Serendipity 3, if you're in New York, and you're saying “okay I'm going to go buy the sandwich” but you want to go there even if you're not getting one. You might want to go to be a part of the experience, or you're going to share on social media. Maybe you get a $35 sandwich to feel like you're a part of the buzz.

Whatever it is, it feels completely different than when you're thinking about the ingredient side of things. Their $200 fries - something that they introduced when they were coming back from the pandemic, and they had an 8 to 10-week wait list to get them! People will buy them. When you think more flexibly about your pricing, you give yourself the freedom to make it more about the experience, and all of these other aspects. At the end of the day, price is just a number.

I love this example from Serendipity Three. This sounds a bit like the “Virgin Mary” Grilled Cheese..

Exactly - it's the same concept. The Virgin Mary grilled cheese, which for those who don't remember, there was a woman many moons ago who reportedly went to eat a bite of her grilled cheese sandwich. looked down and saw the face of The Virgin Mary. She decided to put it into a clear container with cotton balls, and set it next to her bed where it survived for 10 years without getting a speck of mold. She then opted to sell it on eBay, and after 38 bids it sold for $28,000. $28,000! And you only need one!

What do these cases teach us about pricing, and about marketing?

The overarching point with these cases is that we have more flexibility with our pricing than we think we do. The constraints around how much something should cost, and how much we should sell it for, come much more from ourselves.

As was the case with The Virgin Mary, someone did pay for that, and they had bids to get to that point. Ultimately, knowing what your business is about means that those upper limits in pricing don't exist in the way that we think they do. When we realize this, we can open up our minds and think creatively about our business. This is true whether you're looking to increase prices, or to be more competitive on price. It also frees us up, as business owners, to dramatically reduce prices as I talk with Costco and their $1.50 hot dog meals, and their very inexpensive rotisserie chickens.

Ultimately, its not about whether you raise your prices or reduce them. The biggest take-home lesson for business owners is just knowing that it’s all too easy to be your own worst enemy when it comes to pricing, especially if you're not aware of it. But then once you do, and you know more about your psychology, it can help to open things up so that you can embrace prices that may seem scary or different.

It sounds like this is closely related to the general approach that many business owners are tempted to take when it comes to their pricing: cost-based pricing. What’s wrong with basing your price on the cost to make the product?

The main thing that's wrong in that case is that you've set the wrong anchor for yourself - it focuses you on your perspective: what you paid for it. And often we're not our own best clients because we don't typically need to buy the things that we're creating and selling. Recall Serendipity 3 - they have higher quality ingredients in their $214 sandwich, but I guarantee you they don't cost that much more - they're not $150 or $200 worth of ingredients.

And so of coure, its important to know and understand those numbers, so that you don't lose money on the wrong things. However, if you only start from how much it cost to make, and then try to do a markup, it's just going to set you up to not be a compelling sale. And ultimately, this kind of pricing strategy is not going to bring in the kinds of profit that the business is capable of.

More from Melina Palmer on the difference between Quality Brands & Value Brands, and why Pricing isn’t About the Numbers

Photo by Jp Valery via Unsplash