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How to Use Consumer Psychology to Nail Product Pricing

During a recent talk, Yammer's director of analytics gave tips on determining prices according to not-so-predictable human behavior.

Imagine that Jonah Hill and Brad Pitt walk into a singles bar. Your job is to predict who will have better luck collecting phone numbers by the end of the night.

This isn't a trick question. The answer of course is Brad Pitt. But consider this: is there anything that could change the outcome?  

Not really. Unfortunately for Jonah, Brad Pitt will always have the upper hand, data scientist Peter Fishman said during a recent presentation on, believe it or not, business models and pricing in the digital age. 

However, picture a second scenario in which Brad Pitt, Jonah Hill, and a man who looks just like Jonah Hill--but with a lightening bolt scar across his forehead--walk into a bar. This time Brad Pitt still gets the most attention. But now Jonah Hill receives a big boost from standing next to a slightly less attractive version of himself all night long. 

The point, Fishman said, is that an additional choice can alter normally predictable behavior. Fishman, director of analytics at Yammer, used this example Wednesday night in his talk. The event was hosted by a local meetup group called Ideo to IPO, and it drew a crowd of about 50 people.

This thought experiment is based on a quote from one of Fishman's favorite behavioral economists Dan Ariely. "If you ever go bar hopping, who do you want to take with you? You want a slightly uglier version of yourself. Similar … but slightly uglier," Ariely has said.  

This piece of advice has applications in the business world, too, Fishman said. For example, in 2003, The Economist had two offerings. Readers could either buy online-only access to the weekly magazine for $59, or they could receive both the online and print version for $125. 

As a result, about two-thirds of subscribers opted for the cheaper, online-only access. 

"Then The Economist actually accidentally offered a third option, which was just the print only option. And it was $125--which seems kind of stupid," Fishman said. And in fact, as you might have guessed, no one signed up for it. 

However, the offering wasn't a failure at all. In the end--because customers consequently perceived the online and print deal to be such a good value--two thirds of The Economist's subscribers switched to the print and online package. 

There are a number of variables that go into determining the prices for online products, services, and games. And while it's necessary to consider what Economics 101 teaches about pricing strategy, you need to marry those concepts with considerations about how people behave in the real world, Fishman said.  

"In thinking about the lifetime value, you really have to nail it. But nail every component. Think really deeply about the consumer psychology," he said. 

Last updated: Jul 24, 2014

LAURA MONTINI | Staff Writer

Laura Montini is a reporter at Inc. She previously covered health care technology for Health 2.0 News and has served as an associate editor at The Health Care Blog. She lives in San Francisco.

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