1 00:00:00,707 --> 00:00:07,769 One of the economic dreams about pricing things on the internet is to partition 2 00:00:07,769 --> 00:00:14,310 things to small amounts, and charge people only for the things they take. 3 00:00:14,310 --> 00:00:19,454 And this is called micro-pricing. You're getting software, maybe you don't 4 00:00:19,454 --> 00:00:23,282 pay for the whole software, you only pay for the feature that you're using and so 5 00:00:23,282 --> 00:00:25,706 on and so forth. You're not getting a whole album, you're 6 00:00:25,706 --> 00:00:29,939 just getting the songs that you want. And the question is, is micro-payment a 7 00:00:29,939 --> 00:00:33,640 good idea or a bad idea? Now, what we talked about, which is the 8 00:00:33,640 --> 00:00:36,774 pain of paying, suggests that this might not be ideal. 9 00:00:36,775 --> 00:00:42,332 That in fact, thinking a hundred times about whether to pay one penny could be 10 00:00:42,332 --> 00:00:46,404 much, much worse than paying in one time one dollar, right? 11 00:00:46,404 --> 00:00:51,600 So these things did not accumulate. So together with Joseph Silver, we tried a 12 00:00:51,600 --> 00:00:54,727 couple of experiments, and here is what we did. 13 00:00:54,727 --> 00:01:00,059 We got people in the lab, and we say, look, for the next hour, you have to, you 14 00:01:00,059 --> 00:01:05,938 can do only one of three things. You can read cartoons and this will cost 15 00:01:05,938 --> 00:01:10,056 you some money. You could read news or sports and this 16 00:01:10,056 --> 00:01:13,450 would cost you less. Or you could look at post-modern 17 00:01:13,450 --> 00:01:15,747 literature. And this would be for free. 18 00:01:15,748 --> 00:01:19,064 This by the way, the post-modern literature was not really a post-modern 19 00:01:19,064 --> 00:01:23,186 literature. The was a, a website that was generating, 20 00:01:23,186 --> 00:01:27,610 generating random sequences that looked like post-modern literature. 21 00:01:27,610 --> 00:01:30,277 And the subjective feeling I had reading them, is that. 22 00:01:30,278 --> 00:01:34,068 When you read these things, everything looked like it was making sense. 23 00:01:34,068 --> 00:01:37,160 But, in fact, when you finished a, a sentence or a paragraph. 24 00:01:37,160 --> 00:01:40,470 You said to yourself, what, what was this that I just, I just read? 25 00:01:40,470 --> 00:01:42,979 And I was into it. It sounded like it was making sense. 26 00:01:42,980 --> 00:01:47,115 But I have no idea what it is, and the people who designed this website, this was 27 00:01:47,115 --> 00:01:49,891 their idea of what post-modern literature really is. 28 00:01:49,892 --> 00:01:53,497 Anyway, so, this was by the way, not really fun to do. 29 00:01:53,498 --> 00:01:58,683 So, cartoons, extra fun, you pay more, news and sports, you pay less. 30 00:01:58,683 --> 00:02:01,009 Post-modern literature, you could do for free. 31 00:02:02,160 --> 00:02:07,485 And this was the same for everybody, but we had groups of people that were faced 32 00:02:07,485 --> 00:02:11,900 with different payment mechanisms. We gave everybody $10, and some people we 33 00:02:11,900 --> 00:02:16,084 put them in the micro-payment condition. Which meant that for every piece of thing 34 00:02:16,084 --> 00:02:19,561 they were going to pay, not the post literature, but the post-modern 35 00:02:19,561 --> 00:02:22,634 literature, but for the[COUGH] cartoons and for the news. 36 00:02:22,634 --> 00:02:26,103 It would prompt them and say, hey, would you like to pay for this? 37 00:02:26,103 --> 00:02:31,026 And the cost was very, very cheap. The cost was one penny for the cartoons 38 00:02:31,026 --> 00:02:35,968 and half a penny for news and sports. Not a lot of money, but they would, they 39 00:02:35,968 --> 00:02:38,114 would pay for it. Say, hey, would you like, are you sure you 40 00:02:38,114 --> 00:02:39,619 want to pay for it? So they had to do that. 41 00:02:41,110 --> 00:02:45,016 Another group of people did the same thing, and we charged them the same way, 42 00:02:45,016 --> 00:02:47,387 the piecemeal, but we charged them at the end. 43 00:02:47,388 --> 00:02:51,131 This is kind of like electricity bill. You consume and you consume and you 44 00:02:51,131 --> 00:02:54,643 consume and you consume. At the end, you pay for it. 45 00:02:54,644 --> 00:02:57,848 Another group, we got them to prepay. We got them to put some money in an 46 00:02:57,848 --> 00:03:00,095 electronic wallet. Then we say, hey. 47 00:03:00,095 --> 00:03:02,754 This is just going to deduct money as you go along. 48 00:03:02,754 --> 00:03:06,737 And finally, we had another group that had, a subscription. 49 00:03:06,738 --> 00:03:09,538 They could pay for the whole thing. Right? 50 00:03:09,539 --> 00:03:13,961 And they would pay like a package deal that gave them access to everything that 51 00:03:13,961 --> 00:03:17,214 they wanted. What did we find? 52 00:03:17,214 --> 00:03:22,594 We find that the people who got the subscription paid much, much more than the 53 00:03:22,594 --> 00:03:27,162 people who got the micro-payment. In fact the people in the micro-payment 54 00:03:27,162 --> 00:03:30,802 condition spend most of their time. Reading post-modern literature. 55 00:03:30,802 --> 00:03:33,650 And, by the way, having a really miserable time in it. 56 00:03:33,650 --> 00:03:38,190 On average, I think they paid basically four pennies that's it in this hour. 57 00:03:38,190 --> 00:03:42,118 So they hardly paid anything. Every transaction, half a penny, penny, 58 00:03:42,118 --> 00:03:45,366 was just too much for them. They decided they much rather read the 59 00:03:45,366 --> 00:03:48,366 post-modern literature, the fake post-modern literature. 60 00:03:48,366 --> 00:03:50,518 And they were quite miserable with the whole thing. 61 00:03:50,518 --> 00:03:53,480 The people who got the subscription were much happier why? 62 00:03:53,480 --> 00:03:55,773 They paid much more. Right? 63 00:03:55,774 --> 00:03:59,163 They paid much, much more, ten times more. But they were happy. 64 00:03:59,163 --> 00:04:03,294 To do it, because they were not encountering this decision every time, 65 00:04:03,294 --> 00:04:06,759 should I pay half a cent, should I pay a penny, and so on. 66 00:04:06,760 --> 00:04:10,950 And then what about the people who paid the end versus the people paid in the 67 00:04:10,950 --> 00:04:13,620 beginning? Which one was better? 68 00:04:13,620 --> 00:04:17,588 Well, it turns out the people who paid in the beginning spend more money. 69 00:04:17,588 --> 00:04:20,665 Why? Because of they put it in an account 70 00:04:20,665 --> 00:04:23,693 already. They sign it to an account, this account 71 00:04:23,693 --> 00:04:27,126 was a sign. To get money for this particular purchase, 72 00:04:27,126 --> 00:04:29,928 it was tougher. So, if you look at the order of these 73 00:04:29,928 --> 00:04:33,847 effects, people in the micro condition, micropayment paid the least. 74 00:04:33,848 --> 00:04:38,240 People in the post condition paid more. The pre-condition, they paid more. 75 00:04:38,240 --> 00:04:41,699 And the most was paid by the people in the subscription. 76 00:04:41,700 --> 00:04:45,024 Now, the other interesting thing from this experiment. 77 00:04:45,025 --> 00:04:48,231 Is that people basically realize this effect. 78 00:04:48,231 --> 00:04:52,662 At the end of the study we asked people, hey, by the way, in which condition would 79 00:04:52,662 --> 00:04:55,174 you have liked to be? And even in the people in the 80 00:04:55,174 --> 00:04:59,002 micro-payment condition said, you know what, we would have been much better in 81 00:04:59,002 --> 00:05:01,110 the subscription condition. Why? 82 00:05:01,110 --> 00:05:04,480 We don't like making decisions about one penny and one penny. 83 00:05:04,480 --> 00:05:07,845 We don't, we don't like those decisions. We would much prefer to pay for everything 84 00:05:07,845 --> 00:05:11,598 and enjoy it to a higher degree. They would have preferred to eliminate the 85 00:05:11,598 --> 00:05:16,610 pain of paying from their ways. And I want us to think about two things in 86 00:05:16,610 --> 00:05:19,584 this regard. One is if you look at something like the 87 00:05:19,584 --> 00:05:21,990 iTune stores, everything is kind of the same price. 88 00:05:21,990 --> 00:05:27,207 Or maybe they have two, two prices for, for songs. 89 00:05:27,208 --> 00:05:29,509 Why not have lots of prices? Why $0.99? 90 00:05:29,509 --> 00:05:34,070 Why not some of them be 87 and 91 and 101 and so on? 91 00:05:34,070 --> 00:05:37,850 And the idea is that if all the songs have the same price or two price points we 92 00:05:37,850 --> 00:05:42,733 basically say yes or no. But if there's lot of variability in the 93 00:05:42,733 --> 00:05:49,120 prices all of a sudden, it makes the decision much more difficult. 94 00:05:49,120 --> 00:05:52,300 Is this worth another penny, should I pay another $0.03? 95 00:05:52,300 --> 00:05:54,700 And we start thinking about small amounts of money. 96 00:05:54,700 --> 00:05:58,462 And thinking about these small amounts of money might make the experience less 97 00:05:58,462 --> 00:06:02,518 appealing. So having prices that are the same, maybe 98 00:06:02,518 --> 00:06:07,479 like the dollar store, actually make things much more. 99 00:06:07,480 --> 00:06:11,321 Easy for us to process. We don't look at small prices. 100 00:06:11,321 --> 00:06:13,370 We don't start weighing them against other things. 101 00:06:13,370 --> 00:06:19,682 We just decide, do we want it or not? The other point I want to make is about 102 00:06:19,682 --> 00:06:22,297 the App Store. And there's a couple of points that are, 103 00:06:22,297 --> 00:06:28,506 are actually worthwhile making about this. The first one is that the App Store has 104 00:06:28,506 --> 00:06:34,660 basically very few very few prices. And you can ask yourself what would of 105 00:06:34,660 --> 00:06:37,480 happened if there were more different prices out there. 106 00:06:37,480 --> 00:06:40,880 It would have been incredible difficult to make these decisions. 107 00:06:40,880 --> 00:06:46,015 But the moment they've settled on a few prices, this decision is becoming much 108 00:06:46,015 --> 00:06:49,172 easier. Now, when you buy things on the App Store, 109 00:06:49,172 --> 00:06:53,047 I don't know if you've realized, but Apple waits a little bit. 110 00:06:53,048 --> 00:06:57,348 They wait a little bit, and they try to send you a receipt with multiple things 111 00:06:57,348 --> 00:06:58,856 that you bought. Why? 112 00:06:58,856 --> 00:07:02,150 Because it actually reduces some of your pain of paying. 113 00:07:02,150 --> 00:07:05,228 It puts things together. So, rather than send you an email, hey, 114 00:07:05,228 --> 00:07:08,248 you bought something for $0.99 and hey, you bought something for $0.99 cents. 115 00:07:08,249 --> 00:07:12,717 It's sends you and email and says you've done all of those things together. 116 00:07:12,717 --> 00:07:17,389 By the way, this strategy also saves them some money on the fee with the credit 117 00:07:17,389 --> 00:07:20,373 card. But in addition, it reduces the che-, the 118 00:07:20,373 --> 00:07:24,424 feeling of the pain of paying, making it less of a micro-payment. 119 00:07:24,424 --> 00:07:28,035 How does the eye still make things look even less like micro-payments? 120 00:07:28,036 --> 00:07:32,900 Gift certificates, or prepayment right? If you buy a $25 or $50 certificate for 121 00:07:32,900 --> 00:07:37,730 the iTunes store, all of a sudden you have an account that you associate with buying 122 00:07:37,730 --> 00:07:40,948 these things. You, you, you draw down on it, but you 123 00:07:40,948 --> 00:07:44,814 don't feel in the same way that you're doing micropayments. 124 00:07:45,920 --> 00:07:50,888 The final thing I wanted to say about the App Store, which relates to the psychology 125 00:07:50,888 --> 00:07:55,352 of free, is that I think it has been a tremendous mistake to include price of 126 00:07:55,352 --> 00:08:00,310 free as one of the options. I see people all the time buying the free 127 00:08:00,310 --> 00:08:04,802 apps when a, a better version of the app exists at $0.99. 128 00:08:04,802 --> 00:08:08,153 And it's not as if those are people that don't have 99 cents. 129 00:08:08,154 --> 00:08:12,807 Those are the same people who then go for a latte, and spend $4 on a cup of coffee. 130 00:08:12,808 --> 00:08:15,712 They could have spent one cup of coffee less a day. 131 00:08:15,713 --> 00:08:21,419 And upgrade four of their apps. But the moment the price of free exists. 132 00:08:21,420 --> 00:08:27,130 As a version of the app, spending $0.99 more is not just a direct increase. 133 00:08:27,130 --> 00:08:30,011 Oh, this is what I'm not saying this is what I'm willing to pay, and what are the 134 00:08:30,011 --> 00:08:32,532 other benefits. Now, the moment something has a free 135 00:08:32,532 --> 00:08:36,128 version, the free version is so much more appealing that it's taking a 136 00:08:36,128 --> 00:08:40,163 disproportional size of the market. And all of a sudden, people are much more 137 00:08:40,163 --> 00:08:43,499 appealing to it. And the reason why I think this is a shame 138 00:08:43,499 --> 00:08:46,974 because I think its killing the paid market for the apps. 139 00:08:46,974 --> 00:08:51,838 What would happen, you can ask if free was not an option if the lowest price was 140 00:08:51,838 --> 00:08:56,111 $0.05 or $0.10 cents or $0.25. Under those conditions the appeal of a 141 00:08:56,111 --> 00:08:58,860 small price would not have been that strong. 142 00:08:58,860 --> 00:09:03,392 An app store that has. A free version, and a version at $0.99, 143 00:09:03,392 --> 00:09:06,600 create a huge barrier to switch to the $0.99. 144 00:09:06,600 --> 00:09:12,227 An app store that has something at $0.05 and $0.99, now the barrier is not as high. 145 00:09:12,228 --> 00:09:17,505 It's only 90 eh, $0.94 more sense. It's not the same as moving from free to a 146 00:09:17,505 --> 00:09:20,536 paid. And if you think about the ecosystem of 147 00:09:20,536 --> 00:09:23,460 app developers. There's a question of how do we support 148 00:09:23,460 --> 00:09:26,705 these activities? People are developing all kinds of stuff, 149 00:09:26,705 --> 00:09:29,530 initially, for free out of an interest in this. 150 00:09:29,530 --> 00:09:33,717 But if this ecosystem is not going to support them, people are going to stop. 151 00:09:33,718 --> 00:09:37,314 Or the kind of app that will appear would be very specific, and eh, many people 152 00:09:37,314 --> 00:09:40,130 would not make them. If think, if you, we really wanted to 153 00:09:40,130 --> 00:09:44,500 support this ecosystem. Both on the Android side and on the Apple 154 00:09:44,500 --> 00:09:49,940 side, it's important not to create the zero price because the gravitation to zero 155 00:09:49,940 --> 00:09:54,137 is too much, and it would actually undermine the whole market. 156 00:09:54,138 --> 00:09:59,499 So to summarize, the psychology of money is a really interestingueh topic. 157 00:09:59,500 --> 00:10:04,025 Eh, we think we're experts with money. We use money all the time, but if you take 158 00:10:04,025 --> 00:10:06,635 a step back, you realize how interesting It is. 159 00:10:06,635 --> 00:10:09,907 And not only is it interesting its going to become more interesting. 160 00:10:09,908 --> 00:10:14,450 We're inventing electronic wallets, we're inventing new way of payment. 161 00:10:14,450 --> 00:10:18,336 We're inventing ways for people to pay each other, to split checks differently, 162 00:10:18,336 --> 00:10:22,297 to pay merchants differently, for merchants to pay other people differently. 163 00:10:22,297 --> 00:10:25,012 We have circle lending we have all kinds of things that are emerging. 164 00:10:25,012 --> 00:10:29,640 And of course those would make it more interesting to study, but we should also 165 00:10:29,640 --> 00:10:33,637 ask ourselves, how do you want these payment methods to look like? 166 00:10:33,638 --> 00:10:37,987 If we're designing a new electronic wallet, how do we want it to look like? 167 00:10:37,988 --> 00:10:41,700 Do we want it to make people make better decisions or worse decisions? 168 00:10:41,700 --> 00:10:44,684 Do we want it to be better for the merchants or for the individuals? 169 00:10:44,684 --> 00:10:49,378 For long term savings or short term fun? Do we want to eliminate the pain of 170 00:10:49,378 --> 00:10:53,290 paying, or do we want to make it central. I think it's incredibly important. 171 00:10:53,290 --> 00:10:57,706 We are the designers of our money. And we have to understand how money works, 172 00:10:57,706 --> 00:11:01,211 and think about how do we want to design the payment method. 173 00:11:01,211 --> 00:11:04,172 So they will actually make us the best of we can. 174 00:11:04,172 --> 00:11:42,724 [music].