When I give relative lectures or speeches, I always look for three options… A, B and C… I recently started pondering on this issue and I couldn’t help but realise the same options of three come up in every articulated speech/article that I have read. Now what if I told you there weren’t three options at all, there were two options and the third was going to be the audiences option that I wanted them to pick. Confused? Okay allow me to demonstrate….
The Economist wanted to offer these subscription options:
1. Internet-only subscription for $59.
2. Print-only subscription for $125.
But they realised that very few people would pay that much for print so they added a twist.
1. Internet-only subscription for $59.
2. Print-only subscription for $125.
3. Print-and-Internet subscription for $125.
By adding this third option for the same price as the second, they changed the basis for comparison. In this new setup, you essentially get the online for free (which doesn’t cost the company much anyway) if you pay for the print, which makes the 3rd option much more attractive. Also, you’ve got two options for the same price, which makes it easy to compare those two and choose the better one, and disregard the first option even if it’s half the price.
The proportion of people who went for different options when presented with these choices:
1. Internet-only subscription for $59. – 68%
2. Print-only subscription for $125. – 32%
1. Internet-only subscription for $59. – 16%
2. Print-only subscription for $125. – 0%
3. Print-and-Internet subscription for $125. – 84%
The logic behind this is that we have no idea about the real value of each option (and of most products in general for that matter). The best we can do is compare the cost and benefit related to each one.
The same thing happens if we are in the market for a house and are presented with three options.
1. Contemporary
2. Colonial
3. Colonial with damaged roof for lower price
You are much more likely to buy number two, because you can compare it to another one, which is similar, but worse over all. Number one is difficult to compare, so you won’t even consider it. Chances are your agent wants you to buy number two and put the other two in there to make sure you do.
Another example: you are shopping for a trip. Your agent shows you a trip to Rome and a similar one to Paris for the same price. You have no idea which one to choose. Then your agent changes the package. Rome comes with breakfast, Paris doesn’t. Now it’s easy to decide.
The most frightening place to catch this phenomena in the act is dating. There are three options again:
1. A good looking person
2. Another good looking person
3. A slightly less good looking person, similar to number 2
75% of people will choose number 2. Again, because it’s easy to compare 2 to 3 and 2 is clearly better. 1 never stood a chance.
A visual demonstration
How about a visual demonstration to this strange truth about relativity, have a look at the following picture for a moment…
Notice the middle circle (in black) changing in size from the left to the right. On the right, (when placed among the larger circles), it gets smaller, but on the left (when placed among the smaller circles), it seems larger. The middle circle is in fact the same size in both left and right pictures, but it appears to change depending on what we place next to it. This is how we are all wired… we don’t see things as they are, we see things relative to something else.
By our very nature we are wired to compare
If you were planning to go on a holiday abroad would you choose to go to a holiday beneath your social economic position? For example, you are a senior manager in a large firm, would you choose to go to a holiday which the staff at the non-managerial level go to or would you choose a higher rated holiday which you know other senior managers go to? You may blame all types of influences, i.e. you want to meet good company, you just want to relax without any headache of managing things yourself, you would like a butler service because you work hard so you want to enjoy your time off etc.. These excuses are no doubt valid, but the fact is, your conscious mind may be making excuses for your subconscious.
Be warned: This will not go lower, it will only go higher in expectations unless you break the cycle altogether, a task far more difficult to do when one is already following the social norm.
How can you use this for your business?
Most of the time we have no idea of the inherent value of a certain product and what we’re willing to pay for it depends on lots of things, but the first price associated with that product has a decisive role. You are setting a benchmark, i.e. if you are launching a product don’t necessarily base your pricing on your costs or the competition’s prices, but take into account your potential buyers perception of your product. Going one step further, create a perception that supports your pricing policy. This is how some people can get away with charging ten times the price for the same thing as others.
Or, as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”
We compare our decisions to the first one we made, i.e. comparing decision 2 by our original decision 1. That is why the first price would be the original decision.
Was $4,000 Now $1,000 (colour also makes a big difference).
Furthermore I’m sure you’ve all heard about the herd behaviour (seen a queue outside a coffee shop and thought the coffee there must be great, so you join the queue causing others to notice the same). This is however is a-whole-new-kettle of fish… you create a herd behaviour, without the herd! Imagine someone who hates Starbucks, but has no choice due to opening times, or logistics and has a coffee in there one day. Next time he sees Starbucks, he remembers that it wasn’t as bad as he had expected so he gives it another go. By the third time he’s familiar with the different names and the ambience so he goes in again. Soon our subject is happy to pay $5 for a coffee, although he resented that idea a while ago. He has just created his own type of ‘herd-behaviour’.
We look back at our past decisions and experiences and see them much the same way we see a long queue of people in front of a restaurant. If so many people want to get that lunch, it must be good. If I’ve been to this place so many times, it must be good. This works as long as the initial experience has been a good (or better than awful) one for this to work.
The enemy of forming new habits is past behaviours, and research suggests that old habits die hard. Even when we change our routines, neural pathways remain etched in our brains, ready to be reactivated when we lose focus. Adapting to the differences in the Bing interface is what actually slows down regular Google users and makes Bing feel inferior, not the technology itself, just is the same to Apple and non-Apple users.
Can a company ever become so confident as to advertise its direct competition by setting a genuine preconceived decision 1 and then reflecting it’s own price decision 2? Apparently Amazon shows you related products sold not by Amazon but individual sellers. The reason why Amazon can afford to do that is because it’s become the “go to” shopping place, furthermore by addressing shoppers’ price concerns, Amazon earns loyalty even if it doesn’t make the sale and comes across as trustworthy in the process.
The tactic is backed by a 2003 study, which demonstrated that consumers’ preference for an online retailer increases when they are offered competitive pricing information.
Would this work for your business? According to the above, if you do it right, then it will…
More to follow…
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