Why Spend Less When You Can Spend More? Part 2
Yesterday, we looked at how prices can affect the way we feel in Why Spend Less When You Can Spend More Part 1.
We discussed why, if you want to increase your happiness, you should either spend as almost nothing or a shit ton when you’re not dealing with commodities that you don’t care about.
Bargains will make you happy. Spending a ton will make you value the stuff you bought. The middle however is this weird no-mans land.
Today, we’ll look at how we can use that knowledge to influence the perception of your stuff in your company.
Pricing is a pretty complex subject to navigate because it's not 100% objective.
It depends on the context in which it's presented as well.
In today’s thought experiment, you run a business that specializes in selling milkshakes and you want to increase sales:
The original scenario is: You sell them for $3.50.
It's likely that increasing the price point to $5.50 will make them taste better because people will perceive them to be better tasting simply because the price is higher.
(Conversely, lowering the price to $2.00 will make them taste worse!)
Alternatively, we could also start messing with the choice architecture.
In order to do that effectively, we'll need to introduce 2 extra milkshakes.
A smaller one and a bigger one for $2.00 and $6.00, respectively.
Just adding a smaller one would make most people opt for the smallest one resulting in a decrease in the $3.50 original milkshakes.
When consumers have a choice between too much or too little, they tend to be conservative.
However, having both a smaller and a bigger one will push people towards the middle which is exactly what we wanted.
(This is called the compromise effect and it relies on extremeness aversion which most humans have.)
If people want to buy the small or large, fine. But their main function is to increase the sales of the original $3.50 one by changing the choice architecture and providing some context.
Another cool way to do it is like this:
Say you have a $7 milkshake and you want it to sell better.
You could introduce 2 milkshakes:
A small one for $3.50. Now, as we know, most people will buy this one.
But here's the magic,
We will also sell a medium one for $6.75
If people have 3 choices they tend to go for the middle (compromise effect) but doing that now almost feels like you're robbing yourself since you can get the largest one for only $0.25 more.
Loss aversion (fear of loss or missing out) will outweigh the compromise effect for most individuals.
The result of this is that sales will increase because originally, the $7 milkshake was just $7.
That's either affordable or expensive depending on what you're used to. (In Manhattan or SF, it'll be perceived differently than in Detroit.)
In the $3.50 vs $7.00, the $7.00 is perceived as something for people who want a bigger milkshake at that moment.
But in the final scenario, that exact same $7.00 milkshake will be perceived as a bargain.
This is known as decoy pricing.
The raison d’etre of the $6.75 milkshake is not to be bought, but rather to make people feel like they’re missing out if they don’t buy the $7 one.
This changes the choice from do I want a small, medium or big milkshake to am I okay with missing out on this great deal to get the large one which is only a little bit more than the medium one I’d otherwise go for?
For most people, the answer will be no.
I hope this has given you some insight as to how to influence your customers and synthesize happiness in psychological ways vs. always trying to make the product better.
I’ll release an essay soon about game theory in which we’ll discuss the best course of action when choosing between two strategies to win a game.
Which is essentially what we’re doing here. Winning by improving the experience technologically (making the product better) or psychologically (improving the way it’s perceived).