Richard Gottlieb

Our love-hate relationship with the irrational consumer
March 24, 2008

Your pretty good new product, to your amazement, just became a mega-hit. As a result you are struck dumb with awe and almost reverential love for the American consumer.

Your great new product, to your amazement, just laid an egg. As a result you are struck dumb with awe and unfathomable disdain for the American consumer.  

If you have been in this business long enough you have undoubtedly had both experiences (sometimes more than once.) If you wonder why the same consuming public can be at times so wonderful and at other times so awful you may want to read an interesting book by Dan Ariely entitled Predictably Irrational: The Hidden Forces That Shape Our Decisions. 

Ariely is a champion of “behavioral economics” which unlike “classical economics” and its underpinning that people make decisions made upon a careful cost benefit analysis, proposes that people actually make economic decisions that are far more irrational. 

Here are a couple of examples I have found sited in two different magazines on the subject. Read them and then consider whether the notion of perceived value is as quantifiable as buyers want us to think: 

Ariely offered people the choice of a high-quality Lindt chocolate truffle for 15 cents or a plain-Jane Hershey’s Kiss for one cent. At that price, 73 percent chose the truffle and 27 percent went for the Kiss. But when the price was dropped to 14 cents per truffle and the Kisses were marked as free, 69 percent of the subjects took the Kiss instead of the truffle -- even though the price gap between the two candies was still the same, 14 cents. As Ariely notes, the temptation of getting something for free can overwhelm logic.

                                                                                    American Way Magazine

                                                                                    March, 15, 2008

Ariely and a colleague asked students at M.I.T.’s Sloan School of Management to write the last two digits of their Social Security number at the top of a piece of paper. They then told the students to record, on the same paper, whether they would be willing to pay that many dollars for a fancy bottle of wine, a not-so-fancy bottle of wine, a book, or a box of chocolates. Finally, the students were told to write down the maximum figure they would be willing to spend for each item. Once they had finished, Ariely asked them whether they thought that their Social Security numbers had had any influence on their bids. The students dismissed this idea, but when Ariely tabulated the results he found that they were kidding themselves. The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

                                                                                                New Yorker Magazine
                                                                                                February 25, 2008

                   Elizabeth Kolbert

So, the next time you are thinking about how to price your products, don’t take for granted that consumers necessarily make the same cost benefit analyses that buyers want us to think they do. 

Bottom line is: Consumers are irrational. Maybe buyers are too.

Posted by Richard Gottlieb on March 24, 2008 | Comments (0)