Professional Documents
Culture Documents
Consumer Behavior
Dan Bartels
Reluctance to Close
Accounts at a Loss: Your Data
As the president of an airline company, you have invested $120
million of the companys money into a research project. The
purpose was to build a plane that would not be detected by
conventional radar. When the project is 97% completed, another
firm begins marketing a plane that cannot be detected by
radar. Also, it is apparent that their plane is much faster and more
economical than the plane your company is building. The
question is: Should you invest the last 3 percent of research funds
to finish your plane?
1
Your data: The House Money Effect
Choose between:
A. A sure gain of $30
B. A 50% chance to win $21 and a 50%
chance to win $39
2
Choosing a price structure
Decisions:
Should prices be bundled or separate?
Timing: Frequency, before or after usage
Relationship to Usage: flat fee or metered
Issues to consider
Cost structure (Fixed vs. Variable)
Payment risk (Collectibles)
Demand balancing
Consumer psychology
Hedonic Editing:
What do People Want?
Value Function:
If x > 0 then V(x) = x
If x < 0 then V(x) = x
3
Hedonic Editing:
Four Combination Rules
Integrate Losses
Loss function is convex
Segregate Gains
Gains are concave
Insurance:
Deductibles vs. Rebates
You have just bought a $32,000 car and need insurance...
4
Why might this work?
The concreteness principle
People tend to represent the transaction in the
way it is presented
Flat rates
Imagine a health club where one had to pay per
step on a Stairmaster!
5
Tactic 4: Pennies a Day Framing
Why do so many charities and marketers
frame payments this way?
What are some reasons why people dont do
lasik?
Small transactions are not booked
We dont pay as much attention to our purchases of
contact lens fluid
iTunes Napster
$.99 a song All you can eat, while
Lifetime ownership on net.
(transfer to 3 devices) $12.95 month.
Cost Structure (WSJ: 3/23/04) .55 for licensing, .15 for infrastructure,
and something for credit card charges.
Note:
This goes against straight hedonic editing
Works best when seen as a cost of doing business:
energy surcharge vs. excess demand charge
6
Tactic 6: Shrouded Payments
Not just mental
accounting, but making
some costs hidden
Other Examples
Hotels:
Taxes, long distance phone fees, parking, minibar,
aspirin from gift shop, room service
Rental car companies:
Insurance and gas refill charges
Mutual funds:
Management fees (most do not know them)
Printers:
Operating costs (only 3% of consumers know
them)
7
Wrap-up
Principles of hedonic editing
Concreteness: People take the transaction as
given
Several applications:
Silver Lining, Integrate Losses, Decoupling,
Pennies a day, Price Partitioning, Price Shrouding
Things to remember
History of investment of effort, money matters
People want to break even, honor sunk costs, and
blow funny money