Pricing Experiments You Can Learn From (2011)
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Yes, asking a person about what he or she is willing to pay _hypothetically_ doesn't work. But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay. In fact, it's one of the reasons why William Vickrey won the Nobel Prize in Economic Sciences. The primary reason why you would reveal your maximum willingness-to-pay in a Vickrey auction is because you know beforehand that if you win the auction, you won't have to pay your own bid——you always pay less than your own bid as a winner. How much less is up to the auctioneer but in all cases it's less than your own bid. The pay-what-you-want mechanism cannot reveal how much a person values a product or service because there's such a strong financial incentive to simply state a low amount.
Disclaimer: I'm the co-founder of Veylinx, a platform to measure maximum willingness-to-pay of users using Vickrey auctions.
Yes, but participating in an auction is a concrete action to "commit to pay" -- and therefore not what the author is talking about.
The context of the author's quote you extracted ("asking people what they'd pay"†) is about abstract notions of what consumers think they would pay; e.g. gathering hypotheticals of prices from marketing efforts like customer surveys or focus groups.
Surveys and focus groups have no real money payment commitments. Auctions do.
† author also wrote a few sentences later: "When it comes to money, people are unable to predict accurately whether they’d pay or not. It’s much easier to spend hypothetical dollars than real ones."
So, how should you bid if you are a rational person? You should bid the maximum you are willing to pay. As there is zero chance that you will pay more than you needed: you will always pay just enough to beat the second place bidder.
So, the incentive is such that you reveal your maximum price to eBay.
I don't understand how it removes the incentive? Would you mind going into more detail?
(I ask because I believe I am rational when I place eBay bids, and I always choose the actual maximum I'm willing to pay.)
The reason is that for most goods (luxury goods, stuff with resale value, stuff where you might now all the details, etc.) you are actually dealing with a common value auction, so you DON'T want to reveal your cards before hand.
For instance, suppose I see an auction with 5 existing bids.. I stop and say wait that's probably something interesting, and start doing a bit more research on the value of the coin.
Similarly, I might do some quick research and decide that a coin is valued at $10, but if I see bids at $100 that means that either my prior was wrong or the bidders are wrong, and thus I do a bit more research and try to see if there is anything special about the coin (e.g. the quality is actually higher than what the auction description says).
Then besides all these rational motives, you have the irrational ones. A lot of people bid on things almost like gambling (bid the maximum+1, if that doesn't make them the highest bidders, then keep bidding). If you don't place your bid out there, you prevent this problem altogether. [1] https://en.wikipedia.org/wiki/Common_value_auction
For this to work, wouldn't the participants need to believe that the auction really is the only way they can get a subscription?
another (classic) alternative is conjoint analysis: https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing)
it's difficult to do well, but will reveal willingness-to-pay without requiring the commitment of real dollars.
Sounds like a catch-22 situation, how did these studies determine they actually measured a person's maximum willinges-to-pay? Even when a person has decided what their maximum is, there are many known sales tactics that can increase it beyond what the buyer initially decided. Some, like bait-and-switch are so effective that they're outlawed. So, it'd be really interesting to hear how these studies actually determined they actually measured what they said they did.
Big "SALE!" signs and prices ending in 9 aren't benign: they're malevolent attempts at psychological manipulation, and they degrade consumer trust the minute customers recognize them as such. While it's likely impossible to fully counter the bias, I've started clutching my purse strings more tightly since those big glowing signs became less of a declaration of value, and more of a warning that "We don't have your best interests at heart"
These techniques work, but only because people view this manipulation as acceptable and commonplace. It would do wonders for consumer confidence (and therefore sales) if stores could give a credible and transparent promise that they make every attempt to inform consumers about the value of their products. Shoppers like myself (busy, uninformed about most categories of things they buy, and unconfident that they can navigate the "DEALS" landscape and come out ahead) would not only shop there: they'd pay a premium to do so.
You won't see this - someone has already tried before it and it nearly financially ruined the company.
The sad thing is it works and people are easily manipulated. Ron Johnson (former CEO of JC Penney) nearly bankrupted JC Penney with his "fair and square" pricing. Consumers are so used to being manipulated by fake sales and xx.99 pricing that having merchandise advertised without any gimmicks actually results in worse sales. [0]
I'm hoping one day people will turn around and be against being psychologically manipulated, but I don't see it happening anytime soon. After all, many people still defend advertisements. A socially accepted form of psychological manipulation that is intended to make you feel worse about yourself and your life unless you buy <product> because <product> will make you happier.
The fact people are okay with ads in any context completely baffles me. There are people who are totally fine with being emotionally and psychologically manipulated in return for something being "free". To the point where people in western cultures associate the colors red and yellow with food and don't question why.
[0] https://www.cbc.ca/radio/undertheinfluence/the-real-reason-m...
I personally like the information provided by ads. It provokes me to do research. I view the first search results I get as similar to ads. It educates me on how to refine my search.
[1] https://www.sciencedirect.com/science/article/abs/pii/S01482...
This is how I started viewing that decades ago. I have learned to become very suspicious of "sales", and the louder the deal is shouted, the more suspicious I become.
I think of it as similar to the "chandelier rule" in business (when you're being pitched a deal, the larger the chandelier in the room, the worse the deal is for you.)
The idea that choosing products and making correct economic decisions is a skill - this idea is formally taught almost nowhere.
Is there any surprise that manipulative techniques work so well?
If you think this is driven purely by self-interest of companies, you're probably wrong. Employees in most big corps waste immeasurable amounts of resources on "internal marketing" (from resumes during hire, to presentations, to emails sent to their bosses). Most big companies still believe it's better train 100 workers to sell their shit, than to train 1 VP to use basic math and critical thinking. Similar situation with resumes. HR bemoans people lying on their resumes, and then do absolutely everything possible to incentivize applicant to lie as much as possible.
Heck, even here. Where are the articles titled "here is how I rationalized my shopping"?
Another strategy is to ignore prices altogether and just skip items that are too expensive before the final checkout.
1. one really cheap but bad
2. one better but much more expensive
3. one even better, and more expensive
Since for most people, the middle option (2) made more sense than the cheap one (1), they would all buy the last option (3) because for a bit more money you had something better than 2.
Apple seems to be using a similar strategy with very limited capacities for their first option, which makes most people buy the more expensive option to have more capacity. From there it's easy to jump to more expensive stuff, or to add options and accessories.
The idea is that if you had two items, one for $10 and one for $40, adding a $200 item is going to increase sales of the $40 because it makes it seem more reasonable in comparison. It's not going to push a lot of people to the higher-priced item.
The Apple example I like is the iPad. It's priced against both the 512gb version (+$350) and the Wifi+Cellular (+$130) so you think that the $649 version is a bargain against $1129 and you don't compare it against the Amazon Fire at $49.99.
I don't know anyone who uses Facetime and I know a bunch of people with iPads.
Not that the information in this article is bad if you haven't seen it before or haven't fiddled with pricing in a while
https://science.howstuffworks.com/life/inside-the-mind/human...
People who travel anti-clockwise see more stuff, because if they travel clockwise, then they'll turn right and toward the front/exit before they finish a complete loop around the store.
Confusing to those who navigate by compass, though.
OT amusement: After school and teaching and spending half a career so-encumbered, I took up boating and took a marine navigation course. At first it drove me crazy because all of their + and - direction changes were backwards and I was screwing them up.
For this one for instance, what was being bought? How expensive? How did the prices vary? What about shelf positions? Who were the customers? How many customers? How were they made to pick a direction? How long were they shopping for? What factors were and weren't controlled for?
Usually when the controls aren't great, you find that further studies that improve on the controls lead to the measured effect size getting smaller and smaller.
Maybe not the case here, I don't know, but I'm very skeptical about general claims that sound hard to measure.
"Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo (almost 17 times more than before), but customers paid only $.92 on average.
The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. This is a substantial result, especially since it came from a real setting."
Why does pay what you wish with half going to charity slash sales in half compared to standard pay as you wish?
There's a difference between "how much would you pay for X?" versus "would you pay N for X? How about M for X?"
You can also conduct a Discrete Choice experiment, asking respondents to choose between priced bundles (repetitively) to estimate the value of each component