Thursday, March 25, 2010

“Priceless” Now on Kindle

In response to many e-mails: Priceless is now available in a Kindle edition. (The backstory on that here and here.)
Amazon's Kindle edition page uses a number of pricing strategems. They include—
• Charm prices. These are prices ending in 9, which often have an uncanny motivating effect on consumers debating whether to buy. Amazon's eBook price is a super-charming $9.99.
• Advertised reference prices. Amazon quotes a "digital list price" of $12.99. The "What's this?" button informs the curious shopper that "Digital List Price is the suggested retail price set by the publisher." But you don't pay that; instead, the "digital list price" presents an appealing contrast to Amazon's lower price. Lest anyone miss the point, Amazon crosses out the digital list price and gives the discount in dollars and in percent (computed from the not-so-comparable list price of the hardcover book, $26.99).
• "Free." You're just a mouse click away from sampling the book for free.
• "Don't wrap all the Christmas presents in one box." Coined by economist Richard Thaler, this dictum holds that a product's benefits should be enumerated rather than lumped together. Consumers are more likely to buy a Swiss Army knife than a penknife, all things being equal. Thaler's rule is practically the gospel of infomericals. So, if you buy Priceless now, we'll not only send you a fantastic book… we'll throw in "wireless delivery via Amazon Whispernet"… plus, it's "text to speech enabled"!

Tuesday, March 23, 2010

Cash and Calories

A little-noted feature of the new health care bill was inserted with no partisan rancor and the full support of industry. In the name of bending the cost curve, every restaurant chain with 20 or more outlets must hereafter post calories on its menus (and menu signs, for drive-thrus). "Nanny state" do-goodism? Not according to the National Restaurant Association, a lobbying group. The Association's Sue Hensley explained, "That growing patchwork of regulations and legislation in different parts of the country has been a real challenge, and this will allow operators to better be able to provide their information." New York City and California already require calorie information.
The point of the new regulation is to encourage healthier eating, of course. One recent study found scant evidence that New York's law had done any good. But there may be another reason why the restaurant industry likes the new law. It's more about the bottom line than waistlines.
Experiments in human decision making show that we're subject to information overload, especially where numbers are concerned. When calories are printed on the menu, the consumer has fewer cognitive resources to devote to judging prices. It's much like the "misdirection" employed by magicians. The sudden appearance of a scantily clad assistant in a puff of smoke gives the magician cover to slip a rabbit into his hat.
Above is a "Weight Watchers" menu from a popular restaurant chain. Notice that this includes not only calories but grams of fat and fiber — along with price. That's four sets of numbers for each item. (The prices are in smaller print than the nutritional data!) And of course, you have to factor in how much you like each item, too. Anyone who conscientiously tried to use all this information would need a spreadsheet. In most cases, we give up and just pick something we like. That's fine with restaurants. In that moment of capitulation, we tend to ignore price, often ordering something more expensive than we might have.

Friday, March 19, 2010

Sticker Shock Hits Disneyland

In 1955 Walt Disney opened the first modern theme park in Anaheim, Calif. The meticulous showman made sure that every detail was carefully engineered, down to the ticket pricing. The 1955 Disneyland admission was a modest $1. That's about $8 in today's dollars — and yes, it's vastly cheaper than today's adult admission price of $72. The park also sold tickets, costing 10 to 35 cents, for rides. The tickets were offered in books so that a family could purchase a book once and tear out tickets as needed. Psychologically, the tickets were a guilt-free currency. You weren't spending money, you were simply tearing tickets out of a book. America's families thought it was a fantastic deal — so much so that one huckster charged $5 to let overflow crowds in via a ladder.
In 1982, Disneyland dispensed with the ride tickets. Of course, you still had to pay $12 admission (about $27 in 2010 dollars). Over the past 28 years, the admission has more than doubled in real terms.
That's starting to have an effect. A recent Los Angeles Times article reports that Disney's theme parks saw a 7 percent drop in revenue for 2008-2009. Meanwhile, recession-weary families are returning to the Ferris wheel and boardwalk parks that some, including Walt himself, thought obsolete.

Small, privately owned seaside parks, such as Pacific Park at the pier in Santa Monica, Belmont Park in San Diego and the Santa Cruz Beach Boardwalk, don't have multimillion-dollar advertising campaigns or 3-D attractions as do Disneyland and Universal Studios Hollywood. But they boast something even more appealing to penny-pinching tourists: Free admission.…
Pacific Park on the Santa Monica Pier, for example, offers 12 rides on 2 acres of sun-baked boardwalk. But in 2009, it drew nearly $18 million in revenue, a 5% increase over the previous year, on top of a 5% increase in 2008.
"In this economy, we've actually done OK," said park spokesman Jeff Klocke.…
"We came here because it didn't cost anything," said Leila Nightingale, a tourist from England, who visited the park with her friend Jessica Townsend. "We are traveling around the world and we are trying to save money."

"Free" is the eye of the beholder. Small parks are free as long as you don't get on any rides. The Disney parks are free once you get past the turnstile. Behavioral economists have long been aware of a so-called flat-rate bias. Since surrendering hard-earned cash is unpleasant, we prefer to do it as little as possible — as if gulping down a distasteful medicine. Disneyland's post-1982 pricing is a perfect example of flat-rate pricing. Pay once and get the bad part over with — then everything is free! This appealing thought is also the basis of unlimited calling plans, health club memberships, Netflix, and luxury cruises' "free" food.
At his park's opening Walt Disney dedicated a plaque reading: "Disneyland is dedicated to the ideals, the dreams and the hard facts which have created America." As I remark in my book Priceless, the flat-rate bias figures prominently in the American dream of home ownership. Americans love owning a nice home in the suburbs and driving everywhere in private cars. It isn’t that owning is cheaper than renting, necessarily. It’s just that with renting the cost is more apparent. (“All you’ll end up with is a pile of rent receipts!”) Many urbanites would find it cheaper to sell their SUV and take taxis everywhere. But the thought of paying $15 cab fare to go to the supermarket is unconscionable. No one likes to hear the taxi meter running.
So where did the Disney parks go wrong? Obviously, admission prices have gone up a lot faster than inflation. The reason isn't hard to fathom. Today's Disneyland is a very different place from the 1955 version. The original park was low-key affair with no thrill rides. Expectations were different. To the teacup ride's first patrons, Disney's 1951 animated Alice in Wonderland was cutting-edge entertainment. Today's park has to stand up to Tim Burton's $250 million 3D extravaganza. Disneyland costs a lot more to run these days, and that has to be passed on. A family of four can pay $268 or more. Even the cleverest psychological pricing can't soft-pedal that.

Monday, March 1, 2010

Unpopular Pricing

We've heard a lot about one health insurer raising its rates by up to 39 percent. Yet in the past year, the price of another widely used commodity has gone up 50 percent industrywide. Not only that, it's for something that was free prior to 2008: the privilege of checking a bag on a U.S. airline. The average price for the first bag is now around $25.
Everyone hates paying to check bags — so much so that we're breeding a wrinkled generation of travelers living out of a carry-on and washing clothes in expensive hotel sinks. People who could well afford the fees refuse to check bags — "it's the principle of the thing!"
Charging for bags is an example of what price consultants call unbundling (and everyone else calls "nickel- and diming.") Instead of offering checked bags (meals, headphones, blankets, etc.) for "free" with the ticket, they price them separately. The reason is simple: Most travelers pick an airline based on the lowest fare. Think what the hotel business would be like if everyone refused to pay a penny more than the Motel 6 rate.
Some quick math suggests that a $25 baggage fee isn't excessive. That's something like a dollar a pound. If airlines charged passengers by the pound, $1 a pound would be a good deal for cross-country travel (even for Kevin Smith). But that's logic, and emotion is something else again. We all remember the days when baggage was free. That makes any charge seem like a gouge.
Unbundling is a powerful technique for drawing customers. They just might not be happy customers. The people who pay the fees resent them, and the people who refuse to pay resent the airline for making them live like hobos. The culprit may not be the airlines so much as human nature. Because prices are quantitative and easily compared, they carry undue weight in our decision making. We don't pay quite enough attention to the intangibles of comfort and convenience, simply because they are intangible. In another context, this is known as "megapixel bias." Camera buyers favor cameras with more megapixels, even though such cameras don't necessarily produce the best pictures. But megapixels are numbers, and everyone knows an 8 megapixel camera has more of something important than a 7 megapixel model does. (They know this, even if they couldn't begin to define the word "megapixel"). In reality, picture quality is determined by many subtle factors that aren't easily compared on a spec sheet.
In a recent New York Times piece, airline industry analyst Robert W. Mann asked, "How do you run an industry where people hate you?" It's a good question, and so far, no one's found the answer.