I recently read a great book by Barry Schwartz called The Paradox of Choice, Why More Is Less, which discusses why Americans have every-increasing choice and material plenty along with increasing rates of depression and dissatisfaction. His basic thesis is that while more choice should make us objectively better off, it seems to make subjectively less well off.
For any given purchasing decision, we have a tremendous range of choices, whether we’re buying cereal or televisions or computer systems or business services. In theory, the more choices we have, the better utility we should get out of each of our purchases. What actually happens however, is that we get overwhelmed by choice and we wonder whether we’ve made the right (optimal) choice. The possibilities of post-decision regret creep into pre-decision anticipation of potential regret. Schwartz cites numerous studies illustrating the emotional aspects of decision making that run counter to our image of ourselves (especially those of us in the buisness world who consider ourselves particularly “objective” decision makers).
The book has a lot to say about the way we live our lives and how to live them better. It also has some things to say about the way we run our businesses and the way people evaluate pricing trade-offs. For example:
In one study, participants were told that Car A costs $25,000 and ranks high in safety (8 on a 10 point scale). Car B ranks 6 on the safety scale. Participants were then asked how much Car B would have to cost to be as attractive as car A. Answering this question required making a trade-off. … Participants performed this task with little difficulty. A little while later, though, they were confronted with a second task. They were presented with a choice between Car A, safety rating 8, and a price of $25,000, and Car B, safety rating 6, and the price that they had previously said made the two cars equally attractive…
Most participants chose the safer, more expensive car. … They acted as if the importance of safety to their decision was so great that price was essentially irrelevant. This choice was clearly different from the way people reacted to the task of in which they had to establish a price that would make the two cars equivalent. If they had thought that safety was overriding importance, they would have set the price of Car B very low. But they didn’t. So it wasn’t that people refused to “put a price” on safety. Rather, when the time came to make the choice, they were simply unwilling to live by the price on safety that they had already established.
Even though their decision was purely hypothetical, participants experienced substantial negative emotion when choosing between Cars A and B. And if the experimental procedure gave them the opportunity, they refused to make the decision at all. So the researchers concluded that being forced to confront trade-offs in making decisions make people unhappy and indecisive.
What does this mean for pricing people?
First, it’s really helpful to identify and capture those areas where people are practically price insensitive. Then, invest in driving those areas forward because the return on that investment is much greater than areas that are more commoditized or less valued by customers. What the study points out, however, is that people don’t even know how much they value certain things.
Second, don’t make pricing options more complex than necessary. Yes, I’m talking about you, Microsoft (this site launches into their various licensing plans). Is it a coincidence that in the hey-dey of fast food chains, they had simpler menus? Too much choice makes people uncomfortable. In the business world this causes people to set up lengthy purchasing processes, which instead of leading to good decisions, leads us to agonize over all the things that can go wrong. So many business decisions these days are not about buying commodities, but about buying competitive advantage. This is open-ended.
There are no boundaries on what we could buy or do to obtain this advantage (or mitigate a disadvantage). The only way to remove the risk and buyer’s remorse for the buyer is to take all the risk as the seller. This is not a good position to be in, unless we can capture a portion of the results. After all, results are what they’re buying, so it’s what we should be selling. The challenge is providing buyers the flexibility they demand in today’s world, without paralyzing them with an overabundance of choices. Easier said than done…