3 ms·
> it is definitely the most optimal way to price your product. Yes, but it ignores some second-order effects. When you leave some money on the table by chargin
by Ozzie_osman 4y ago
> it is definitely the most optimal way to price your product.
Yes, but it ignores some second-order effects. When you leave some money on the table by charging some users less than the max they are willing to pay (often referred to as consumer surplus), you get some benefits like more word of mouth, higher likelihood to get repeat purchases from a customer, and so on.
Think of the feeling you had the last time you bought something and thought "oh, this is so expensive i can barely justify paying for it" vs "oh my God, this is so worth the money I'm going to feel good for the next week and tell all my friends it's a no-brainer".
Most people underestimate these effects when they price discriminate.
- edmundsauto 4y agoI can see how people would forget to include them (2nd order thinking is hard!). But how would they underestimate the effects when there is t really a clear way to accurately quantify them? It makes a big difference if word of mouth was 1% increased versus 20%. (And then there are 3rd order psychological effects - people tend to increase their perception of how valuable something is when they pay more. that’s kind of the BMW strategy!) What we’re left with is a world where we make decisions on easy measurements. That does not necessarily mean including 2nd order effects would change the calculus. And if you’re doing 2nd order, how can you make smart business decisions that aren’t just your gut? Human psychology is really complex, situationally dependent, and cannot be generalized from our own experience. That’s why companies rely on data, even if it’s incomplete.