Predictably Irrational

If you deal with pricing, or for that matter, marketing or sales in general, and you’re going to read one related book this year, read Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely. (I mentioned an article by him in a previous post on the impact of transparent pricing for CDNs, and I’ve finally had time to read his book.)

The book deals with behavioral economics, which can be summed up as the science of the way we perceive value and make economic decisions. It’s an entertaining read, describing a variety of experiments, their outcomes, and the broader conclusions that can be drawn. The book does an excellent job of demonstrating that we do not make such decisions in a fully rational manner, even when we think we are — but because there’s a predictable pattern to this irrationality, you can market and sell accordingly.

Two thoughts, among many others that I’m mulling over as a result:

Ariely asserts that people don’t know what new things ought to cost — they have no basis for comparison. Thus, establishing a basis for comparison creates the sense of value, and can be used to manipulate people’s mental pricing baselines and influence their decisions. For instance, given a thing, an inferior version but cheaper version of that thing, and some other less-similar thing, people will generally choose the thing. That’s relevant when you think about the way people compare CDN services, especially first-time enterprise buyers.

Ariely also shows that given a useful but brand-new thing, people might not know whether it’s a good value and thus may choose not to buy it — but establish a comparison in the form of a bigger but much more expensive form of that thing, and people will see the original as a good value and buy it. This is hugely relevant in the emerging cloud computing market, where people aren’t yet certain what the billing units should be and what they should cost.

Relating this to my usual topics of interest: Amazon has essentially established a transparent baseline in both the cloud computing and CDN markets, with clearly-articulated, readily-available pricing, and as a result, they have implicit control of the conversation around pricing. Broadly, any vendor who puts a public stake in the ground on prices is going to exert influence over a customer’s perception of not only their value, but every other comparable vendor.

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Posted on January 8, 2009, in Marketing and tagged , . Bookmark the permalink. Leave a comment.

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