How to get consumers to pay more for your innovation

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Dan Ariely is one of the most influential thinkers in the world today and a leader in the field of behavioural economics (he’s also founder of the wonderfully named ‘Center for Advanced Hindsight‘). At Brand Genetics we are constantly looking out for new sources of insight and inspiration and – in seeking these out – we went to see Dan talk about the psychology of money.

Given money is a relatively recent invention in human evolutionary terms, it turns out that decisions about money are often non-intuitive and, in fact, quite difficult. We should really weigh up ‘opportunity cost’ (ie. what the money could buy us in the future) but this is a complex and time consuming calculation. So instead of thinking hard to evaluate the benefit, we rely on simple heuristics or mental short cuts (the System 1 thinking Daniel Kahneman refers to in ‘Thinking, Fast & Slow‘) that are often inaccurate and misguided.

Understanding these heuristics provides a real insight into how consumers make decisions about money; they also provide the innovator with guidance as to how to justify the price premium innovation often demands.

One of the most striking heuristics is that we are more willing to pay a premium if we think someone has gone to more trouble or taken more time over something: in short we pay for the effort. Dan shared the scenario of asking someone for a £1 coin for a parking meter; if they told you they would give you one, but it would cost you £5 then you’d likely laugh and walk away. But if they told you they didn’t have £1 but would run 10 blocks to a bank, change a note into coins and come running back to give you the £1, then perhaps £5 might not seem so unreasonable. It’s an evaluation based on effort rather than benefit.

For a real life example take the online travel site Kayak: experiments showed that people actually preferred to wait 50 seconds for an online search to complete rather than get the results instantly – it was a demonstration of effort! To add to this effect, whilst the you’re waiting for the search to complete, Kayak tells you its searching 1000’s number of different flights / hotels etc on your behalf. Together these lead to a greater appreciation of what the site is ‘doing for you’ – and a justification of the price you pay.

The implications for innovation are clear: if you’re planning on charging a premium for your innovation, you should hero any extra effort you’ve gone to to produce the results (or – if you’re being cynical – create an impression of extra effort). Although consumers often find it hard to evaluate the extra benefit they are likely to derive from your innovation over and above the competition, they will be able to easily judge the extra trouble you’ve been to to deliver it.


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