How Making People Pay More Gets You More Customers
We all know that more expensive items tend to be of slightly higher quality, but people are also paying for the status symbol and exclusivity associated with it - Polo, Burberry, Rolls Royce, BMW, etc. But are they really worth the 2x, 3x, ?x markup over products of only slightly lesser quality?
What if there’s no status attached to it? Shoemoney recently made a post containing info from a book called Pinpoint Pricing. This snippet of info showed that an increase in price for an e-book from $19 to $29 (what’s the status in an e-book?) actually increased sales. It could have been an issue of perceived value, or it could have been an issue with the number itself (aren’t you sick of those $19.95 TV Ads?),
Or it could have been a reference point issue: “$19 - that’s like $10, but double!” vs “$29 - that’s like $50, but a lot less!”
Sounds ridiculous? It is. The fact is, humans often act completely irrationally. Take some examples:
Your offered the chance to bet $100, with a 50/50 chance you’ll lose that $100 or win another $100. Studies show most people will choose to risk-averse and not bet. Additionally, theories that suggest that winning $100 isn’t as valuable as losing it because it will create a proportionally smaller change in your current wealth.
You’re offered either $100 or a 50/50 chance to get $0 or $200. Studies show most people will choose to risk-averse and pick the solid $100.
You’re offered the chance to either lose $100 or a 50/50 chance to lose $0 or $200. Most people will actually choose to gamble, despite the fact that this goes against the previous theory (since the second $100 is actually a larger change to your current wealth), and if you reorganize the question slightly:
You lose $100. You are then given the option of winning it back or losing another $100. The results of this question are identical to the previous one, but people, if they were rational, would choose to not gamble again, since this scenario is the same as the first.
Or look at any lottery - if you have a 1/1000 chance of winning $500, and the ticket costs $1, the average return you can expect is $.50. And yet people play lotteries all the time (some with better odds, some with worse), going against all “rational” judgment.
So what can we learn from this? People are never truly rational. Things that may make complete sense may actually be damaging you.
