Kristen Berman co-founded Irrational Labs, a behavioral product design company, with Dan Ariely in 2013. Irrational Labs helps companies and nonprofits understand and leverage behavioral economics to increase the health, wealth and happiness of their users.
In this episode, Kristen explores the intricacies of pricing strategies, emphasizing the importance of understanding behavioral economics to influence consumer decisions effectively. She discusses how techniques like the decoy effect, anchoring, and the power of price endings (like 99 cents) can drive customer behavior. Additionally, she highlights the challenges of pricing revolutionary products due to the lack of reference points and the creative approaches needed to establish them in the market.
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Why you have to check out today’s podcast:
- Deep dive into pricing strategies like the Good-Better-Best model, the Decoy Effect, and the psychology behind price ending to help you understand how to make pricing decisions that drive customer behaviors and increase sales.
- Find out valuable perspectives on how human psychology influences purchasing decisions which is essential for anyone looking to optimize their pricing or marketing strategies.
- Discover practical advice and real-world examples to see how you can apply these concepts to your own business.
“It’s all relative. So, what are customers using as a reference point? If it’s off your product site, then you need to help them create a new reference point within your product site.”
– Kristen Berman
Topics Covered:
01:14 – Sharing how she transitioned into behavioral economics from her role as a product manager at Intuit
03:42 – How behavioral science tie to pricing and product
06:10 – An example of how behavioral economics influence product decisions
08:50 – Explaining the concept of the “paradox of choice”
11:35 – Turning the path of least resistance into the preferred choice
14:30 – Simplifying decision-making for customers with the concept of “good, better, best” product offerings
16:42 – Explaining the decoy effect and how it influences consumer decision-making
19:09 – The reason behind the presentation of pricing options in the context of behavioral economics
22:43 – The concept of framing in sales in the context of product features and the importance of trials in subscription-based models
25:25 – How people often rely on heuristics, or mental shortcuts, when making decisions about prices
28:56 – Kristen’s best pricing advice
29:28 – Various sources of reference points
31:19 – The challenge of pricing revolutionary products due to the lack of existing reference points
Key Takeaways:
“People don’t come in with an understanding of the exact thing that they want to purchase at the exact moment. And so, our job is to help them understand value, and choice helps people understand value.” – Kristen Berman
“We’re using the heuristics on how big the number is to make a lot of fairness decisions.” – Kristen Berman
“We are relative creatures. We have reference points and we use our reference points to understand value. And so, it’s not just the price, it’s the reference point that we’re using.” – Kristen Berman
People/Resources Mentioned:
- Intuit: https://quickbooks.intuit.com/
- TikTok: https://www.tiktok.com
- Airbnb: https://www.airbnb.com
- Dan Ariely: https://danariely.com/all-about-dan/
- One Medical: https://www.onemedical.com
- Steve Jobs: https://en.wikipedia.org/wiki/Steve_Jobs
- Apple: https://www.apple.com/
- YouTube: https://www.youtube.com
- Netflix: https://www.netflix.com/
- Study: https://play.google.com/store/apps/details?id=com.thesoundagency.study&hl=en_ZA&pli=1Shopify: https://www.shopify.com/ph
Connect with Kristen Berman:
Connect with Mark Stiving:
- LinkedIn: https://www.linkedin.com/in/stiving/
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Kristen Berman
It’s all relative. So, what are customers using as a reference point? If it’s off your product site, then you need to help them create a new reference point within your product site.
[Intro / Ad]
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the behavioral relationship between them. I’m Mark Stiving, and our guest today is Kristen Berman. Here are three things you’ll want to know about Kristen before we start. She’s the CEO and founder of Irrational Labs. She did that in 2011 and is still running it. She came from the world of product management, which I find fascinating. We’ll talk to her about it. And she co-wrote a book with the one and only Dan Ariely called Hacking Human Nature For Good: A Practical Guide for Changing Human Behavior. Welcome, Kristen.
Kristen Berman
Great to be here. Thanks for having me.
Mark Stiving
Okay. I always ask, how did you get into pricing, but for you, I want to ask, how did you get into behavioral economics?
Kristen Berman
Great question. Yeah. I was at Intuit as a product manager, and I think doing the thing that many product managers do, which is talking to customers, trying to build features from those insights, and got quite disillusioned after a few of my features just failed. Trying to build first use features that get people to stay on and retain. and it was about that time that behavioral economics was really kind of coming into the zeitgeist and people were talking about it. I ended up meeting Dan Ariely and creating a few side projects with him where we would do research together, we’d work with startups together. and the insight was, wow, as a product manager, I’m beating my head against the wall trying to figure out what customers want and what to build for them. And there is actually a science to that.
There are tons of papers likely written about the exact thing you’re working on right now. That’s what we tell the product managers today that we worked with and the designers, and we should start there. That’s a reasonable starting place and it creates a hypothesis about how and why we do something. And so when I met Dan and started working with him it was quite clear that this was maybe kind of the unlock or the shortcut that could really help the products world. And from that kind of experience I ended up starting the behavioral economics group at Google with him. We ran that for three years and really got a fair amount of at bats at driving behavior change across 25 teams at Google. and now Irrational Labs is basically across domains. We think about health problems, finance problems, misinformation at TikTok, connection at Airbnb. so lots of problems can, can take this behavioral economics lens.
Mark Stiving
Okay. I cannot wait to ask you about some of those and here’s some examples. But before I do that, I want to talk about pricing, right? Most of my listeners probably care a lot about pricing, and when I think of behavioral economics, it feels to me like it’s almost always around the pricing domain, not around some other domain. And in fact, to make it even worse, I think of, don’t hate me for this. I think of behavioral economics as the thing you do when you’re communicating the value and the price to your customer. Because if I communicate it well, they’re more likely to say, yes, we’ve got reference prices and all these other issues that are going on. But I don’t think of behavioral economics much in the product side. So why do I think about it in pricing and why is it really relevant in product?
Kristen Berman
Yeah. Behavioral economics is about getting people to do anything. And most of the time we have these intentions. We want to have more time, save more, spend less, eat better, sign up for a new credit card. These are all things that we may say, I want to optimize my rate, I want to pay down my loan. and so whenever there’s a behavior that somebody wants to do, in a perfect world, you would just tell them information about how to do it, and we would do it, and we would be these kind of spock level econs that would execute on our intentions. And it turns out, sadly, I’m behind on email right now and I’m not going to work out today. And this is life. And so, behavioral scientists study these decisions and we study the environments that people are in to change the decision to match their intentions.
And so, as you can imagine in a digital world, this is around changing the onboarding flows. This is about changing how the product features look, work in our launch to get people to actually use them. And then, what we’ve found in our work and kind of the payroll economics field has found as well is that these small changes to the environment of decision making can actually change behavior. And in our case, it’s user behavior. So that’s kind of one, that’s why behavioral economics tends to be relevant for products. and we would say that product managers should really pay attention to the underlying psychologies that their customers have, which is particularly relevant for pricing.Because if you ask somebody’s willingness to pay, do you believe them? And that’s, yeah, you’re shaking your head no.
And so, that’s really kind of the art and the science of behavioral economics is trying to get to these underlying psychologies. And so when we’re designing our pricing studies, when we’re doing quantitative work or qualitative work or just a behavioral audit of the system, we’re thinking about how you ask questions to elicit someone’s actual preferences. Obviously this is difficult, but we can get close. and then how do you actually design the features that would increase the likelihood that they would pay something or more for them?
Mark Stiving
Okay. So first off, just to agree with you, I think if I were to show you any product and ask you what you’re willing to pay for it, you don’t even know the answer yourself. So how you could answer it for me, I have no idea. So, we’re all in agreement that asking willingness to pay questions is pretty hard, not very accurate. But we try, we do our best in those types of surveys. Can you give us an example of product decisions that are made and how behavioral economics influences a product decision?
Kristen Berman
For sure. So we worked with One Medical which is, basically, I would say a nice UX/UI layer on healthcare. So instead of having to navigate your insurance and your doctor’s office, you basically log into One Medical and you can book an immediate appointment. It’s magic. And it’s funny how much we take. We just forget how bad the healthcare system is. We worked with them and they were trying to increase conversion for booking appointments. Like, look, they give, they’re trying to help you get healthy when you’re sick. They’re trying to do preventative things, flu shots, you name it. They can do it just like a normal doctor’s office. they’re given away for free in many of these companies. So you can imagine large corporations give One Medical away for free. And turns out people weren’t booking doctor’s appointments. and so in their product, they had a really lovely option where people could just scroll through all of the doctors and figure out which doctor worked for them and which location worked for them, and is it in person or is it virtual?
And which time do you want? And when we look at that as behavioral scientists, we say that’s a very amazing choice set and operationally congratulations. But from a decision making point of view, it is obviously problematic that we need to, number one, set the mental model for what is One Medical, why would you even set an appointment with them? And we need to make it easy psychologically and logistically for people to make that appointment. And so what we did is instead of bearing this kind of, you have three clicks to get to this long list, and then you’d have this decision fatigue when you get there, we pulled it out, we put in the onboarding field, we reduced choice just recommended one doctor for them. We asked them a few questions up front to get their interest, have them say, what was the issue?
We said, this person could probably help you. Do you want an appointment? And then offered them appointments tomorrow. Why tomorrow? It’s because we’re very present biased. In a perfect world, you could say, yeah, in a month or two you should do it, but what’s going to happen in a month or two? You’re going to forget the appointment or it’s not relevant anymore. so we made some strategic decisions about how to limit choice. And by doing this, we increase conversion by 20% to booking. And this way we’re not adding technical requirements for them. We’re not changing the doctors, we’re just changing how the decision is made to align with people’s underlying psychology. and so that’s kind of what we mean by this idea of product changes that reflect actually our real behavior.
Mark Stiving
Yep. That’s a great example. What I just heard you talk about was the paradox of choice.
Kristen Berman
Yes.
Mark Stiving
So can you tell us, tell everybody else what the paradox of choice means? And then I’d like to hear from you, because I don’t know the answer to this. What’s the optimal number in the world of the paradox of choice?
Kristen Berman
I wish I could answer this in a, it is three, and that’s not the answer I’ll give you. So, you’ll have to forgive me for that. But the paradox of choices, just in general, I’ll kind of say we use the term cognitive overload is where you are presented with a series of decisions or options and you need to figure out which one is going to work for you and make some decision and then follow through. And turns out humans like choice, we actually are attracted to choice. and yet when we are faced with this decision framework we may not make an actual decision. And we like the idea that there are 30 videos I could choose from at the end of my YouTube experience.
And yet, because there’s 30 videos I could choose from, I may not actually choose any. And so you could imagine, well, that’s a great autoplay. Like those engineers at Netflix and YouTube really understood the paradox of choice because they offer us choice, but then they’re going to make it easy for us to continue. And so that is kind of the essence of the conundrum that everyone is facing. and so for us, when we think about choice, it’s less about the number and more about the ease of decision making. So you could have lots of choice if you bury them under categories and each time you’re making a decision that is actually very easy, do you want, and by the way, so kind of the analogies, it’s actually hard to decide between an apple and an orange. It’s easy to decide between an apple and an apple that’s bruised.
Like of course I want the apple that’s not bruised. and so when we think about choice, some of these are how do you make it easy for people to identify which product or skew or option is good for them? We can use heuristics like recommended discounts or categories for a few shoe women’s shopping. You have some fancy shoes or hiking shoes. There’s no issue with that type of choice. so we think deeply about how to frame the choice so that at each point people have a very clear option of what to do. You can imagine timing things. So when you think about an empty text field versus a dropdown, it’s going to take people a lot longer. By the way, this is a choice. What do I write in the text field? it’s going to take people a lot longer to fill that out. And that would represent some level of cognitive overload if they have to think about what they want to say. They have to evaluate all the options they have to make a decision. Versus a dropdown, you’d see four constrained choices. And it may be easier for people to do versus kind of this open text field.
Mark Stiving
Uh, fascinating example. I rarely say the words cognitive overload when I’m thinking about this concept, and I usually say something slightly different, and I’d love to hear your opinion. I usually say people are terrified to make a mistake. And so they’d rather not make a decision.
Kristen Berman
Yeah. I think that there’s different levels of risk that go around decision making. And so one is that we don’t want to be wrong. And so we’re actually very imaginative creatures where you can foresee a world where you make the decision and then you foresee a world where you are wrong with that decision. And so then you choose inaction versus choosing to take an action to make the decision. And it is easier many times to choose inaction than action. We forget that inaction is also a decision. and so like one intervention or solution that we’ve come up with and have tested is what we call forced choice. So people can’t not make a decision. So we say we launched a feature within a FinTech app called Study, and we gave people the option to accept or decline the feature.
Now the product team was like, what are you doing? People are not going to, we don’t want people to decline the feature, but in reality, if you X out the box or you don’t do anything, you are implicitly declining the feature. And it’s very easy to do that because as you said, you’re avoiding a decision. You don’t want to make the wrong… Maybe it’s not worth your time. Maybe you’re not going to like the feature. And so what actually happened is that more people, when we had accepted decline, chose to accept the feature than when we had something like continue or we also did a progress bar and chose to continue because now, the hard thing is to decline. And so we just totally flipped the paradigm that now you have to make a decision to decline and people don’t want to make that decision. The easier decision is to accept. so I think kind of to your point is when you understand these kind of mechanisms that people may avoid making a decision at some level, and actually you want them to make a decision, how do we make the continuing, moving forward, learning more, trying it, to actually be the path of least resistance versus not doing anything, which we are very good and not doing anything. We are very good at the status quo.
Mark Stiving
Nice. Now, only we could force people to make a decision between our products, right? You have to buy one of my products. That would be great.
Kristen Berman
Yeah. I mean, at some level, this is a little bit of what B2B does. If you have a budget for something, you have to use this budget by the end of the quarter. And you and salespeople know this, they know that there’s some declining budget and they’re forced to make some decision. And so salespeople use things like discounts and deadlines to their advantage to get people to drive towards that decision. And consumer products, maybe that’s more of a tool we should be using as well.
Mark Stiving
Yeah. So, the one place that before we had this conversation, and I know you were in products and you were in behavioral economics, the one place I think of as behavioral economics driving product choice is when we decide that we want to build a good, better, best product offering, right? So it’s the three. Without me telling you why I think all that, just give me your talk about good, better, best for a few minutes.
Kristen Berman
Yeah. Good, better, best is an idea that basically, how do you make choices simple? So in theory, this product team has actually like hundreds of ways that they could present the product. They have lots of features they could pair and good, better, best allows me some decision heuristics. In one world, and this is kind of a classic decision frame, I’m going to take the Compromise effect. I’m going to just pick the one in the middle, not because I like it, but because I’m avoiding the risk of making the wrong decision. And then you could also say that actually people don’t want to make a mistake. And so they’re going to pick the most, the best one, right? Not because they want all the features, but because they are fearful of making a mistake. And so the number of choices, how they’re delivered to people and obviously the pages before, so we don’t really understand value, it’s just the pricing page.
I’m sure as most people listening to this know this, it’s a buildup. Value is created. People don’t come in there with an understanding of the exact thing that they want to purchase at the exact moment. And so our job is to help them understand value and choice helps people understand value because you say this is worse than this, and all of a sudden I know that this is better which means I may want it. And so, one, you imagine four SKUs and the last one sold out. Well now all of a sudden the third one, which was the highest one, looks better. It looks like a steal. and then before it may look expensive if you don’t have something sold out at the end or a higher enterprise SKU.
Mark Stiving
I love that. That was so good. I usually think that the people who are afraid to make a mistake buy the one in the middle, though, by the way. Because they don’t want to waste money and they don’t want to get one that’s not good enough. So they use the Compromise Effect and say, I’m going to take the one in the middle.
Kristen Berman
I think that’s a fair bet. And especially if a company could do something that’s like confound over, they’re like, recommended, because they know that also if they’re recommending the highest tier that people are going to be like, it doesn’t feel like you’re doing that on my behalf. And so companies tend to put recommended or most popular into the middle SKU, which also drives our kind of anchoring or social norm to that SKU.
Mark Stiving
Okay. So since we’re on good, better, best two more questions on this one. Tell us about the decoy effect and why it’s different than good, better, best.
Kristen Berman
Great question. So basically, again, these are things where they’re heuristics that help people make decisions. And the decoy basically kind of the classic example is a Dan Ariely’s study with the Economist where you basically say, look, do you want to do a print version of The Economist or an online version of The Economist? And they’re very different prices. The online version is less than the print. and it’s a difficult decision because like, I don’t know, I kind of want both, but which one do I want? and it turns out then that when we make these difficult decisions, people may choose the lower price one because why not? It’s very reasonable to do this. and in his experiment, he basically had an added another option that basically made the print option look worse. There’s three options. And the bottom two are the same price. and what happened is that one of them looked like a really good deal compared to the print-only version. or it was a web-only version. Sorry guys, it’s been a long time since the seminal study happened. but the idea here is that nobody bought the SKU that didn’t look good. So there’s one option that just like, and if you look at that, if your data scientist seems, looks at that, and you’re like in the marketing landing page and you’re like, guys, this product is not selling, we should kill it. It’s just not selling. And the response is, behavioral scientist says, but it serves a purpose. It serves a purpose to get people to understand the value of all of the other offerings. And I think that’s what a decoy does.
They’re very close in price. There’s something that’s more appealing to one of the options, clearly more appealing and at a price value that makes it feel like a steal, such that you say that’s clearly the better option, and now you are more confident in your decision moving forward. and that’s what we want to give people as they’re making decisions, confidence and reduced uncertainty, increased confidence in decision making. And when you put things close together, so it’s just like this bruised apple, or not bruised apple it’s easy to make the decision. I don’t have to think about it. And we don’t want people to overwhelm themselves with analyzing each of the options. Just the matrix stuff always confuses me. It’s like, do we want people to spend all the time analyzing your pricing matrix? Likely not. how do we help give people more heuristics when they’re analyzing the product and want more detail versus just, here’s a long list of things that you, I’m putting the burden on you to read.
Mark Stiving
Yeah. And so if I were going to repeat what you said on the decoy effect without using the economist example, good, better, best, we set better and best essentially at the same price or really, really close prices. But the value difference, the value delivered is obviously better and the best. It just makes the decision really easy for people.
Kristen Berman
Decisions are really easy. Yeah. So I would, in a kind of a classic model, you could imagine like a 1.5 or two X jump between SKUs. And this could, this is not a hard and fast rule, but in general, these are kind of like evenly priced SKUs that are products that are in good, better, best. And in a decoy model, they’re more closely priced. And by the way, you can also have kind of the better value and the discount on either one. So you could say it’s, you’re getting a lot for free and the best SKU, and it just makes so much sense to get that. Or you could say that the kind of middle SKU is actually clearly the best option when you’re comparing them. and the goal here is to really make it feel like you’re getting it, it’s an easy decision.
Mark Stiving
Yeah. Okay. Now, I’m going to ask a hard question. Because I see companies do this wrong, at least in my mind all the time. So in the world, if I’m going to present to you good, better, best as a product offering, and I’m a salesperson, I’m presenting it to you, the optimal way to present it is best, better, good, right? Because if I present you best, you’ve set your heuristics now to, oh, this is what I’m getting. And when I offer you better, the losses loom larger than gains in behavioral economics, of course, right? So the losses in the product and the gain is in the price discount, but yet every single website says good, better, best, which essentially says the losses in the price I have to pay and the gain is in the product. So explain this whole story to me. Would you please?
Kristen Berman
Yeah, I think there’s something to ease of cognition. So I think you’re right that basically like in anchoring works, and if I were to present to you, let’s say I have something I’m selling I say it’s 50 bucks and you say, oh, interesting. I was like, and then there’s a few options for 30 and 10. And otherwise I would say I have something that’s $10 and then I also have a $50 option. Now all of a sudden, 50 sounds very expensive. You have to move me from the anchor of 10. In the opposite world, you’re moving me from the anchor of 50 10 feels cheap and 30 feels reasonable. And so that’s what you’re talking about is basically anchoring. And yet there’s some cognitive ease that says, honestly, sometimes if you look at an app that’s in a modern design or a new fancy design, you’re like, I can’t find the button.
And there’s something to be said for UI/UX being consistent. People know how to read it. They know how to understand it. and when we’re making these moves to change where the navigation is to have it be on the top or the side this actually decreases the cognitive ease, the fluency by which people can make decisions. And so when we’re suggesting UX changes to product teams, we’re not actually reinventing UX, right? We’re reinventing a decision framework within the constraints of the current norms that UX have. The same thing with pricing. I think it could be over time we move to a better, good, worse sort of thing. But my hunch is that this cognitive fluency will actually decrease some conversion. we haven’t seen enough people do it to really do that experiment.
Mark Stiving
So it seems fair to say people expect to see good, better, best on your website. And so that’s, if I were going to go publish a website, I would publish good, better, best. I guarantee you I would do that. But would you agree that a salesperson should be presenting best, better, good?
Kristen Berman
I think that’s reasonable to do. Everything is kind of with context. I think the idea of basically saying what do you want to take away from the product is a nice frame. And you have all the AI, you’re trying to sell it to enterprise clients, you have AI features, it comes with this. it comes with security features and privacy features and unique URLs for everyone. Which one do you think that your management would allow you to take away? And now the frame is like, oh, wow, I don’t know, like each of them seem important. and so that is definitely a selling technique. Another selling technique is you just get people to use the features. and so there’s some level of endowment and the features have to be pretty good for that to happen. And then you also kind of feel the loss of, I’ve used the… Call this kind of a reverse trial, I’ve used the feature, now I’m going to take it away is another kind of way to get that feeling.
Mark Stiving
Yeah. And the other thing is in subscription, we care more about people getting into trials than we do about closing the big deal in the beginning. So
Kristen Berman
Yeah, exactly. I mean, trials are also risky, right? Because you have to enforce it. My favorite trial I’ve seen is Shopify. So it is a three-day no credit card required free trial, wild, who does that anymore? but after three days you have to make a decision and it’s $1 then for three months. So what they’ve done is basically combine these two worlds of opening up the funnel. Because when you put a credit card in, you’re actually just limiting all the people who aren’t kind of committed to you. If you put a credit card in a user’s like, yeah, I kind of think that I may want to do this. And so by opening up the funnel, they’ve gotten everyone and then they’re giving people a short deadline, which is great. People don’t need a month to make a decision. Give them a short deadline, you put a dollar in, you’ve now secured their commitment. You’ve got them for three months to actually try out the product. At that point, hopefully they have enough sunk costs, they’ve set up their store and they’re going to have to pay you because they’ve set up the store. so it aligns with the Shopify business model, which is obviously what you want a pricing model to do and say you actually need time to set up the store to see if this is going to work for you. but we also need your commitment because our customer support’s going to have to help you.
Mark Stiving
Yeah. Okay. Last really hard question. My dissertation was on 99 cents. And without telling you what I think I just have to ask you. Tell me why you think companies or people behave weirdly around the price ending?
Kristen Berman
Yeah, we’re simple creatures. I think we use heuristics too, or this would be my hot take. I think we use heuristics very quickly to make a call on if this is in our price range. So if you were to give a choice if you want to give a discount to something, usually if it’s under a hundred dollars, you’d use some percentage. And if it’s over a hundred dollars, you’d use a dollar amount because 20% will feel different if it’s a larger price discount, than if it’s a smaller price discount. And so what is the takeaway there? It’s like, oh, we just like larger numbers. So if it’s like you’re getting 20% off, but in a different world, you get $200 off, 200 feels bigger than 20%. And so we’re using the heuristic on how big the number is to make a lot of fairness decisions. I think it’s just the first number that you’re solving for. I would say at this point, people, I think the latest research is still working. And I do imagine that over time if you want to be an Airbnb brand, you’re not going to use 9.99 because you understand that this could cheapen quote unquote the brand. But, I believe it still actually has power. You tell me.
Mark Stiving
I believe it still actually has power. I’ll give you the two reasons it works, at least according to me, which may not be right. But the first one you’ll love, and that is, it’s still a heuristic because when I’m making a choice between two products, I actually have to subtract the prices to figure out what the price difference is, and I’m going to make that subtraction as easily as I can. And so I’m going to make the decision based on the left hand digits and I’m not going to worry about the right hand digits.
Kristen Berman
Yeah. So, that’s kind of like the left hand bias that we’re talking about, or left number bias. But you’re actually adding a nice step to that which says that’s important not just because it’s a lower number, but because when we relative price compare, it’s important to have the lower number that people are anchored on. So we have left number bias, not just for is this cheap, but is this cheap relative to something else?
Mark Stiving
Yep. And then the next piece that I actually did a study when I was in university for this one as well, but that was prices that ended in zeros are considered to be higher quality products, higher quality offers. And it’s probably because we’ve been trained that nines are good prices, good deals and the quick example I’ll give you is imagine a jacket that normally sells for 400 bucks on sale for 299 feels like a pretty good deal, almost half off, right? But what if it’s sold for 399 on sale for 299? Right? Doesn’t feel anywhere good a deal. And so the 400 to 299, if you’re going to set a price for a good quality product, set it at a round number. So then when you offer your discount, you go to 299, the left hand digits look different. Discount looks much bigger.
Kristen Berman
That’s nice. Yeah. So I think the takeaway from these are, we are relative creatures. We have reference points and we use our reference points to understand value. And so it’s not just the price, it’s the reference point that we’re using.
Mark Stiving
Yeah. Kristen, I am fascinated talking with you. Thank you so much for all this. And sadly I’m going to have to run, but let me ask you the question I ask everybody at the end. What is one piece of pricing advice you would give our listeners that you think could have a big impact on their business?
Kristen Berman
It’s a great question and I’ll kind of wrap up where we ended there, which is it’s all relative. So what are customers using as a reference point? If it’s off your product site, then you need to help them create a new reference point within your product site. We don’t fully understand absolute value and we look around for cues and many times they’re coming to you with a reference point that you don’t know about and it’s your job to kind of figure it out and then re-anchor them.
Mark Stiving
Yeah. So just for kicks, list a few places where we get reference points.
Kristen Berman
Oh, great. Yeah. I think in general why you can’t change prices for commodities, like, now, I’ll say a commodity is a donut. I walk into it, it’d be very weird to have a $14 donut. It’s just why, actually that’s probably a good business to try to sell them, but like, still very weird. and so we’re getting reference points from all of our past experiences within the capitalist market that we live in. We’re also getting reference points from our friends and family, what is acceptable to spend on something. So if I am friends with folks who buy expensive earrings, I all of a sudden think it’s excusable to spend a lot on earrings. And so we have social norms that we look around and we say, what are other people doing?
And so that’s why social norms tend to work on pricing pages is because for people who are not confident in a reference point, you social norm them and they understand that other people are doing this. and then I think that the biggest problem is we don’t have reference points. So when AI is trying to make something easier for our job that we’ve done ourselves, we actually just don’t have a reference point like, oh, you’re going to write my email for me. Like, I never, that’s not a thing. I don’t understand reference points, and that’s why it’s really hard to increase my willingness to pay for an AI email writing tool because I’m not anchored anywhere yet. Yeah. it’s also the biggest opportunity a startup has because they can create the anchor in the market. And so if you’re coming into a pre-anchored market, you don’t have as much ability to play. But if you are a startup without an anchor, you can, you just have to drive the reference points up.
Mark Stiving
Yeah. So pricing a revolutionary product is the hardest single thing to do in the world of pricing. Right. And it’s because there is no reference point, there’s nothing to compare it to.
Kristen Berman
Yep. Exactly. And then kind of, the thing is right, this is Steve Jobs. The first Apple iPhone or the first iPhone that came out, he created his own reference point. He said, look, it’s whatever, it’s 399. He is like, oh, shoot, that’s too high, now it’s lower. He really created an internal reference point for people that the next price was actually lower than what he launched. Kind of creating the market in and of itself. And so, yeah, I think you have to be creative when launching new products here.
Mark Stiving
It’s challenging. Kristen, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Kristen Berman
The best? I mean, so my email, I like when people email me, if they want to chat. So it’s [email protected], K-R-I-S-T-E-N, @irrationallabs.com. If you go to Irrational Labs, you can also sign up for our newsletter. We send you interesting behavioral economics studies, applied case studies, tidbits and tricks. And then I have a substack that tears down products. So I will, I do a five minute video most weeks where I will go into a product and apply these psychology insights to help the product team think about what they could be changing.
Mark Stiivng
Fun. And I’m going to go sign up as soon as we hang up here.
Kristen Berman
Great.
Mark Stiving
To our listeners, thank you so much for your time. If you enjoyed this, would you please leave us a rating and a review? And if you have any questions about this podcast or pricing in general, feel free to email me, [email protected]. Now, go make an impact!
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