I don’t know anyone who doesn’t love a bargain but often they aren’t all they’re cracked up to be.
The price of free
People will happily queue up for ages for a free coffee from Starbucks but would they queue quite so readily if what they got at the head of the queue was the £3 in cash that the coffee was worth?
When thinking about products how does the price difference compare to the difference in quality?
When offered either a 25p truffle or a 1p chocolate, most people go for the truffle but if offered a 24p truffle or the same cheap chocolate for free, most people choose the chocolate.
We are over-excited by ‘free’. Why? Because we only see the benefits, not the costs if things are free.
For example you compare the same book from three vendors:
- book – £10 + shipping – £10 this is seems the worst deal
- book – £20 + shipping – free this seems the best deal
- book – free + shipping – £20 this just seems crazy
The perfect example of how to manage the price of free would be a group of friends who meet regularly for a meal in a restaurant together – how should they split the bill?
- split it exactly when the bill arrives – this ruins the end of the meal when everyone has to get their phones out to work out how much to pay
- split the bill evenly – this can cause resentment when some didn’t have a starter or someone had a large glass of wine when the rest just had Coke
- each person pays the whole bill on a rota – this eliminates the pain of paying, you get a free meal more often than you pay, the payer feels good, although the pain of paying has diminishing returns as the price increases
Micro-pricing breaks up the cost of a purchase into smaller compartments. iTunes is a great example of this where you can pay for just the tracks you want rather than a whole album. Personally I think this is ruining the stories that used to run through albums but then I’m a vinyl junkie – what can I say?
However, sometimes micro-payments are a bad idea – 100p does not always equal £1. Dan ran an experiment to see how people would read articles depending on how they had to pay for them. There were four methods of payment:
- pay on demand to read them
- pay at the end once you’ve read them
- deduct payment from a pre-paid account
- pay a subscription to read as mush as you want
In fact people read the least when they had to pay on demand and not much more when they had to pay at the end. Things got slightly better with deducting from a pre-paid account but people felt happier and read more when they paid a subscription.
Keeping prices equal simplifies the decision-making process, making us more likely to pay – a good example of this would be pound shops.
Consolidating multiple purchases into one invoice reduces the pain of paying.
Gift certificates and pre-payment options reduce micro-payments and therefore the pain of paying. An example of this not working would be offering free apps as this reduces the number that can be sold for profit.
The psychology of money is a topic where our intuitions aren’t always correct.
We had a guest lecture by Mike Norton from Harvard Business School telling us about his studies of time, money and happiness.
Time versus money
What are the best ways to use these for ultimate happiness?
Money – we all think more money will make us happier than it actually does. We try to make more and more of it but experiments have shown that getting more money makes us more selfish and happiness tails off. Giving money away makes people happier than spending it on themselves, no matter how poor they are.
Time – this is the same as money. Most of us spend time on ourselves but giving time away makes you feel like you have more time. How? When we give to other people, it signals to us that we have more than enough for ourselves and can afford to give some away.
If you want to hear more from Mike there’s a lot out there but he did a TEDx talk on this very thing.
If you want to know more about the behavioural economics MOOC I’m talking about over the next few posts you should sign up for Dan Ariely’s Beginners Guide to Irrationality course on Coursera.
Tune of the week
Northern Soul Girl Levanna
As you all know I love a bit of Northern Soul – I just wish I could do the dance. Levanna dances in her front room and all around town sharing the Northern Love. In this she dances in the street to Pharrell’s Happy and Velvet Hammer’s Happy. This makes me happy 🙂