Why Spend Less When You Can Spend More? Final Part
This is the final part of the series ‘’Why Spend Less When You Can Spend More?’’.
In Part 1 we discussed how pricing affects your own perception of the choices you make.
In Part 2 we talked about how you can use pricing to influence how your customers perceive your products, even if you don’t change your product at all.
Today, we’ll investigate how logical choice architectures can destroy value and how irrational choice architectures can create value, seemingly out of thin air like alchemy.
(I wrote about the necessity of employing both science (revenue engines) and alchemy (creative ways to increase user happiness) in order to create predictable magic (predictable and sustainable revenue engines) in this essay.)
Continuing with yesterday’s example, let’s use an extreme version of the compromise effect in order to change how the $7 milkshake is perceived.
This time we’re gonna introduce a ridiculously over the top milkshake for $52.50
Now, for that kind of money, you can make it incredibly fancy with 24 karat gold leaves, handpicked Tibetan flowers and dancing unicorns who’ll bring you a fresh batch of whipped cream.
Ignoring the free press and word of mouth we’d get by doing something as crazy as that, the very fact that that milkshake is so expensive will change the way the $7.00 one is perceived.
You can hardly call it expensive when you’re looking at the $52.50 one right next to it.
Even though almost no one will buy the expensive milkshake, sales of the regular one will increase, simply because we changed the frame it’s presented in.
Apple did this beautifully with their $10K apple watch. (Just look at this 2K+ comment long thread on Reddit.)
Many people were complaining but they missed the point.
They were giving apple free press because it was top of mind for everyone for a while, and it changed the context in which the other Apple watches were being perceived.
You see electronic stores (who’re aware of behavioral psychology) do this as well.
Position a $20k tv next to the $2k one they’re trying to sell.
This is precisely where standard economic theory, which they teach you in an MBA, fails us.
Standard economic theory is devoid of irrationality.
It constructs models of the world and then fails to realize the job of the model is to accommodate reality.
It’s not the job of reality to accommodate the model.
Standard economic theory uses utility pricing (meaning products have inherent value) but as you realize by now, that’s simply not true.
The value of your products is malleable. It depends on the context it’s presented in.
According to utility pricing, the simple act of having Sally grab the expensive 20k tv and placing it next to the 2k one should not have any impact on consumer behavior and yet we see it clearly does.
The minute we start messing with the choice architecture and the context in which we present things, we start influencing the very way it’s perceived.
The problem is that it doesn’t matter if you do it consciously or not.. which is why it’s so important to become aware of it so you can avoid mistakes and guide behavior in the direction you want it to be guided in.
By now you’ve learned a lot about behavior change.
You know how context influences your perception as a consumer buying things.
You’ve also learned about how you’re influencing your customer’s perception and how you can improve upon that.
Now armed with all that knowledge you’re going to solve a problem.
The Economist wants your help.
They’re selling two subscriptions: a $59 1-year web subscription and a $125 1-year web plus print subscription.
Your job is to increase the number of people buying the web plus print subscription.
Take a minute to think about how you’d go about solving this.
(Don’t just view this as an intellectual exercise. Practicing this muscle helps you directly in your own company.)
Now if we hired a McKinsey consultant, they’d suggest something completely rational like spending lots of money improving the web plus print product so more people buy it.
After all, people make decisions based on logic, right!
Well, by now, you know better.
What you could have done is to include an option to buy a print-only subscription at the same or slightly lower price as the web plus print option.
This wouldn’t have cost you any money at all and would’ve drastically increased the number of people buying web plus print.
Dan Ariely ( Professor of Psychology and Behavioral Economics at Duke University and author of Predictably Irrational) surveyed students about the subscriptions The Economist offered to see which option they preferred.
As you can see in the image above, a 1-year web subscription is $59.
A 1-year print subscription $125.
And a 1-year web plus print subscription is also $125.
0% chose print subscription alone.
16% choose the web subscription and 84% choose the web plus print subscription.
But then he decided to test it again but with the removal of the print subscription.
Standard economic theory suggests that this shouldn’t affect behavior at all, after all, if 0% of people are choosing that option then. mathematically speaking, it makes no difference if you remove it.
Except, when he removed that option the entire choice architecture collapsed.
The number of students choosing web went from 16% to 68%.
The number of students choosing the web plus print collapsed from 84% to 32%.
This demonstrates how a logically thinking McKinsey consultant could completely destroy your revenue, never understanding how they inadvertently caused it.
It also demonstrates that just because something makes logical sense it doesn’t necessarily mean it’s right.
As it turns out when people compare the $59 web subscription to the $125 web plus print subscription most people choose web.
Web plus print feels like an expensive luxury.
But when you add the print-only version at the same price $125, most people now choose the web plus print because it now feels like a bargain.
They’re now comparing print only to web plus print.
This concludes our 3 Part journey.
I hope you enjoyed it and have learned some practical lessons you can use to improve your company.
If you want us to help you improve your business then contact us at younglingfeynman.com
Dhar, R., & Simonson, I. (2003). The Effect of Forced Choice on Choice. Journal of Marketing Research, 40(2), 146–160. Retrieved from http://faculty.som.yale.edu/ravidhar/documents/TheEffectofForcedChoiceonChoice.pdf
Simonson, I. (1989). Choice Based on Reasons: The Case of Attraction and Compromise Effects. Journal of Consumer Research, 16(2), 158–174. Retrieved from http://www.jstor.org/stable/2489315
Simonson, I., & Tversky, A. (1992). Choice in Context: Tradeoff Contrast and Extremeness Aversion. Journal of Marketing Research, 29(3), 281–295. doi:10.2307/3172740