Making Your Stuff Cheaper Without Making Your Stuff Cheaper
Economic Theory operates on a basic set of premises.
We’ve discussed those premises in:
The problem is that those premises are flawed. Meaning that all logic that flows from those assumptions collapse like a house of cards built on a wobbly table.
Pricing is no exception.
How do you make your stuff cheaper so more people will buy?
Ask an economist and he’ll answer ‘‘You lower prices, idiot’’ before hurling Keynes’ The General Theory of Employment, Interest and Money, towards your head.*
But humans aren’t objective machines operating in environments of perfect trust and information.
They use heuristics.
Heuristics that we must exploit because it’s our ethical duty to make experiences that add the most value to their lives possible.
We work with the human body, we don’t make steering wheels for people’s noses, so we should work with the human mind too.
(I wrote about this in I Need Your Help…)
If you make the customer choose between buying your product for $10.000, then he’s got a binary choice to make. Yes, no.
If you offer that same customer 3 choices: Your product for $10.000, your product plus implementation for $15.000, your product plus implementation plus your consulting on standby for $25.000,
you’ll take their mind off of price and force it to consider which choice is better for them.
This is also referred to as framing.
It’s the difference between asking your wife: ‘‘Honey, do you want to go out for dinner?’’ vs ‘‘Honey, would you rather eat sushi at restaurant X or Indian food at Y tonight?’’.
People need autonomy. Giving them a choice (even if it’s a ‘‘false choice’’) will always feel better (and therefore be better cuz you’ll have their buy-in) than forcing them into a binary choice.
(I don’t have children but I’ve been told by parents that it’s much more effective to ask your kids which book they wanna be read for bedtime (choice) vs. telling them to go to bed (binary).
Change the choice architecture:
I’ve written an entire series of essays on this very topic so in order to avoid redundancy you can read it here:
Allow cashless payments:
Paying with a card feels about 15% cheaper. So that’s an extra 15% of pure profit that you can use to invest in R&D, customer support, better staff, and training.
In fact, willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. The effect can be as large as 100% (Prelec & Simester, 2001).
$500 =/ $325 + $50+ $100 + $25
Multi-stage pricing feels cheaper.
Which is why so many industries use loss leaders. From your local grocery store who loses money on their chocolate bars but makes a profit on all the other things you buy while there, to the retail industry that sells clothing at a loss in order to sell you bags, shoes, and perfume at much higher margins.
(This is incidentally why Calvin Klein and won’t ax their clothing line.)
Hotels tend to do this too. You prepay a $325 room for a night. Once there, you buy some drinks and food and use the mini bar or room service. You also get breakfast in the morning cuz well… you’re already there. And of course parking and fuel.
But when customers compare this to some all-in place that has everything included for $450 it feels cheaper even though it’s not.
There are a lot of hidden costs (such as fuel, parking, cost of time spent, etc.) and other expenses that we as humans forget to factor in when comparing.
We’ve all had that moment where we set out to spend $500 and when we got back we spent $1225 and we wondered what happened. This escalation is what sets multi-stage pricing apart.
Express users can board a park-bound shuttle, and check into the hotel. They don't have to mind their luggage, because each piece gets tagged at your home airport, so that it can follow you to your hotel, then your room. Once you arrive at the park, there are no tickets to hand over. Just tap your MagicBand at the gate and swipe onto the rides you’ve already reserved. If you've opted in on the web, the MagicBand is the only thing you need.
We see this much more with our current app culture.
Take Uber for example and how much better it feels to get in an Uber and get out, vs the experience with the taxi which felt much more transactional.
By implementing some of these, you’ll construct value out of thin air and create a much better user experience at almost zero cost.
Economic alchemy, my friends.
*Longtime readers of The YF Daily will probably have picked up where I stand in the debate of the Keynesian model of economics which favors government interference and bailouts to stabilize the market vs. the Hayekian school of economics which sees government intervention as pernicious and advocates that the market should sort itself out with minimal government regulation.
Prelec, D., & Simester, D. (2001). Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay. Marketing Letters, 12(1), 5-12.
Cristobal, M., Malayang, J., Sampan, M., & Solina, M. (2018). A Research Study on the Effects of Cashless Transactions on People’s Spending Behavior. Retrieved from https://www.academia.edu/36409929/A_Research_Study_on_the_Effects_of_Cashless_Transactions_on_Peoples_Spending_Behavior.docx