One of the economic dreams about pricing things on the internet is to partition
things to small amounts, and charge people only for the things they take.
And this is called micro-pricing. You're getting software, maybe you don't
pay for the whole software, you only pay for the feature that you're using and so
on and so forth. You're not getting a whole album, you're
just getting the songs that you want. And the question is, is micro-payment a
good idea or a bad idea? Now, what we talked about, which is the
pain of paying, suggests that this might not be ideal.
That in fact, thinking a hundred times about whether to pay one penny could be
much, much worse than paying in one time one dollar, right?
So these things did not accumulate. So together with Joseph Silver, we tried a
couple of experiments, and here is what we did.
We got people in the lab, and we say, look, for the next hour, you have to, you
can do only one of three things. You can read cartoons and this will cost
you some money. You could read news or sports and this
would cost you less. Or you could look at post-modern
literature. And this would be for free.
This by the way, the post-modern literature was not really a post-modern
literature. The was a, a website that was generating,
generating random sequences that looked like post-modern literature.
And the subjective feeling I had reading them, is that.
When you read these things, everything looked like it was making sense.
But, in fact, when you finished a, a sentence or a paragraph.
You said to yourself, what, what was this that I just, I just read?
And I was into it. It sounded like it was making sense.
But I have no idea what it is, and the people who designed this website, this was
their idea of what post-modern literature really is.
Anyway, so, this was by the way, not really fun to do.
So, cartoons, extra fun, you pay more, news and sports, you pay less.
Post-modern literature, you could do for free.
And this was the same for everybody, but we had groups of people that were faced
with different payment mechanisms. We gave everybody $10, and some people we
put them in the micro-payment condition. Which meant that for every piece of thing
they were going to pay, not the post literature, but the post-modern
literature, but for the[COUGH] cartoons and for the news.
It would prompt them and say, hey, would you like to pay for this?
And the cost was very, very cheap. The cost was one penny for the cartoons
and half a penny for news and sports. Not a lot of money, but they would, they
would pay for it. Say, hey, would you like, are you sure you
want to pay for it? So they had to do that.
Another group of people did the same thing, and we charged them the same way,
the piecemeal, but we charged them at the end.
This is kind of like electricity bill. You consume and you consume and you
consume and you consume. At the end, you pay for it.
Another group, we got them to prepay. We got them to put some money in an
electronic wallet. Then we say, hey.
This is just going to deduct money as you go along.
And finally, we had another group that had, a subscription.
They could pay for the whole thing. Right?
And they would pay like a package deal that gave them access to everything that
they wanted. What did we find?
We find that the people who got the subscription paid much, much more than the
people who got the micro-payment. In fact the people in the micro-payment
condition spend most of their time. Reading post-modern literature.
And, by the way, having a really miserable time in it.
On average, I think they paid basically four pennies that's it in this hour.
So they hardly paid anything. Every transaction, half a penny, penny,
was just too much for them. They decided they much rather read the
post-modern literature, the fake post-modern literature.
And they were quite miserable with the whole thing.
The people who got the subscription were much happier why?
They paid much more. Right?
They paid much, much more, ten times more. But they were happy.
To do it, because they were not encountering this decision every time,
should I pay half a cent, should I pay a penny, and so on.
And then what about the people who paid the end versus the people paid in the
beginning? Which one was better?
Well, it turns out the people who paid in the beginning spend more money.
Why? Because of they put it in an account
already. They sign it to an account, this account
was a sign. To get money for this particular purchase,
it was tougher. So, if you look at the order of these
effects, people in the micro condition, micropayment paid the least.
People in the post condition paid more. The pre-condition, they paid more.
And the most was paid by the people in the subscription.
Now, the other interesting thing from this experiment.
Is that people basically realize this effect.
At the end of the study we asked people, hey, by the way, in which condition would
you have liked to be? And even in the people in the
micro-payment condition said, you know what, we would have been much better in
the subscription condition. Why?
We don't like making decisions about one penny and one penny.
We don't, we don't like those decisions. We would much prefer to pay for everything
and enjoy it to a higher degree. They would have preferred to eliminate the
pain of paying from their ways. And I want us to think about two things in
this regard. One is if you look at something like the
iTune stores, everything is kind of the same price.
Or maybe they have two, two prices for, for songs.
Why not have lots of prices? Why $0.99?
Why not some of them be 87 and 91 and 101 and so on?
And the idea is that if all the songs have the same price or two price points we
basically say yes or no. But if there's lot of variability in the
prices all of a sudden, it makes the decision much more difficult.
Is this worth another penny, should I pay another $0.03?
And we start thinking about small amounts of money.
And thinking about these small amounts of money might make the experience less
appealing. So having prices that are the same, maybe
like the dollar store, actually make things much more.
Easy for us to process. We don't look at small prices.
We don't start weighing them against other things.
We just decide, do we want it or not? The other point I want to make is about
the App Store. And there's a couple of points that are,
are actually worthwhile making about this. The first one is that the App Store has
basically very few very few prices. And you can ask yourself what would of
happened if there were more different prices out there.
It would have been incredible difficult to make these decisions.
But the moment they've settled on a few prices, this decision is becoming much
easier. Now, when you buy things on the App Store,
I don't know if you've realized, but Apple waits a little bit.
They wait a little bit, and they try to send you a receipt with multiple things
that you bought. Why?
Because it actually reduces some of your pain of paying.
It puts things together. So, rather than send you an email, hey,
you bought something for $0.99 and hey, you bought something for $0.99 cents.
It's sends you and email and says you've done all of those things together.
By the way, this strategy also saves them some money on the fee with the credit
card. But in addition, it reduces the che-, the
feeling of the pain of paying, making it less of a micro-payment.
How does the eye still make things look even less like micro-payments?
Gift certificates, or prepayment right? If you buy a $25 or $50 certificate for
the iTunes store, all of a sudden you have an account that you associate with buying
these things. You, you, you draw down on it, but you
don't feel in the same way that you're doing micropayments.
The final thing I wanted to say about the App Store, which relates to the psychology
of free, is that I think it has been a tremendous mistake to include price of
free as one of the options. I see people all the time buying the free
apps when a, a better version of the app exists at $0.99.
And it's not as if those are people that don't have 99 cents.
Those are the same people who then go for a latte, and spend $4 on a cup of coffee.
They could have spent one cup of coffee less a day.
And upgrade four of their apps. But the moment the price of free exists.
As a version of the app, spending $0.99 more is not just a direct increase.
Oh, this is what I'm not saying this is what I'm willing to pay, and what are the
other benefits. Now, the moment something has a free
version, the free version is so much more appealing that it's taking a
disproportional size of the market. And all of a sudden, people are much more
appealing to it. And the reason why I think this is a shame
because I think its killing the paid market for the apps.
What would happen, you can ask if free was not an option if the lowest price was
$0.05 or $0.10 cents or $0.25. Under those conditions the appeal of a
small price would not have been that strong.
An app store that has. A free version, and a version at $0.99,
create a huge barrier to switch to the $0.99.
An app store that has something at $0.05 and $0.99, now the barrier is not as high.
It's only 90 eh, $0.94 more sense. It's not the same as moving from free to a
paid. And if you think about the ecosystem of
app developers. There's a question of how do we support
these activities? People are developing all kinds of stuff,
initially, for free out of an interest in this.
But if this ecosystem is not going to support them, people are going to stop.
Or the kind of app that will appear would be very specific, and eh, many people
would not make them. If think, if you, we really wanted to
support this ecosystem. Both on the Android side and on the Apple
side, it's important not to create the zero price because the gravitation to zero
is too much, and it would actually undermine the whole market.
So to summarize, the psychology of money is a really interestingueh topic.
Eh, we think we're experts with money. We use money all the time, but if you take
a step back, you realize how interesting It is.
And not only is it interesting its going to become more interesting.
We're inventing electronic wallets, we're inventing new way of payment.
We're inventing ways for people to pay each other, to split checks differently,
to pay merchants differently, for merchants to pay other people differently.
We have circle lending we have all kinds of things that are emerging.
And of course those would make it more interesting to study, but we should also
ask ourselves, how do you want these payment methods to look like?
If we're designing a new electronic wallet, how do we want it to look like?
Do we want it to make people make better decisions or worse decisions?
Do we want it to be better for the merchants or for the individuals?
For long term savings or short term fun? Do we want to eliminate the pain of
paying, or do we want to make it central. I think it's incredibly important.
We are the designers of our money. And we have to understand how money works,
and think about how do we want to design the payment method.
So they will actually make us the best of we can.
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