What do Mars bars, floor mats and Financial Review have in common?

It sounds like the start of a bad joke, doesn't it? But these unexpected bedfellows each share the ability to exploit loop-holes in our thinking to charge higher prices.

This is particularly relevant at a time when most Australian's are becoming more price sensitive. Many retailers are resorting to extreme discounting with little success, as worried consumers save at rates not seen since the 1980s. This environment creates an imperative for investors to search for those rare companies that can still increase prices and maintain or increase profit margins.

So what products are we prepared (or forced) to pay more for?

A few categories include monopoly assets (MAp Group), addictive products (British American Tobacco) and government licenses (Aristocrat). Brands including Mars, Wriggles and Hermès are further examples, for several reasons.

Spending other people's money

First, when we're spending other people's money we care less about how much things cost. Companies know this, including those that run conferences, publish finance newspapers and sell business class airline tickets. Why else would Fairfax get away with charging $3 for a copy of the Financial Review?

Pricing

Second, the size and way prices are presented effects how much we're willing to spend.

Products with a small absolute price are more easily increased in price. Coca-cola or Mars are able to raise prices above inflation without losing customers as the increase is only ever a few cents, even though it might be large in percentage terms. These regular price increases are partly why Coca-cola is such a wonderful business.

The price of one thing compared to another, or 'relativity', can also be important.  For example, it's easier for a car dealer to sell a $250 pair of car mats to someone that has just bought a $30k car. The cost of the floor mats seems inconsequential compared to the car. Shops that sell expensive suits use the same principle to sell expensive ties and socks. Computershare also benefits in this way as its fees on big acquisition deals pale next to those of accountants and lawyers.

Perception

Third is perception. We're willing to pay more if the potential returns exceed the cost. Lawyers use this method to justify the high cost of their services by comparing fees to the returns you're likely to make.

Another example is 'Veblen Goods', where an increase in price creates an increase in demand, which shirk the normal laws of supply and demand. High end luxury fashion items such as the famous Hermès 'Birkin Bag' (which cost an eye-popping $10,000 ), high end watches (Rolex) or premium sports cars (Aston Martin, Bentley) are all examples of products that become more attractive as prices increase. That's because the primary motivation for purchasing these products is to demonstrate wealth.

These are just a few examples. But by better understanding how we make spending decisions we can more easily indentify businesses that benefit from these mental loop-holes, and avoid buyer's regret.

What products do you pay up for? What companies take advantage of these loopholes?