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You Are Paying More Than Others | Product Pricing Psychology - FutureIQ

5,719 views Wait, is this logic right? • Nov 29, 2024
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Slog Reference: Everything you know about Product Pricing is wrong

Description

How often have you seen different pricing for the same products on different e-commerce platforms? Or how about different pricing for different people but for the same seat on the same flight? If you have also experienced this unfair differentiation and gotten frustrated about it, then you might find this episode interesting.

This practice is nothing but "customer segmentation" that businesses follow and this episode we have uncovered the truth behind what we believe product pricing is in the market. By gaining insights into how companies charge more and sell more, customers can understand the psychology of product pricing.

What is most interesting to note is that the pricing of the product does not depend on the cost of production, raw material, labor, etc.; rather, it is to be decided on the basis of how much a customer is willing to pay for that particular product. We have explained the three broadly three categorizations for pricing based on customer types while also giving real-life examples, so watch till the end if you are curious to find out which category you fall into.

Related videos:
Why Surge Pricing Feels Wrong: https://youtu.be/IsHPxh-C0Sw
The Dollar Value of Your Time: https://youtu.be/C-8gffw9_h4?si=CIWDDMw5vJT736v0
Demand & Supply in Our Lives: https://youtu.be/imweTGK0Myk?si=q-VlSpwU_OgQhCPV
Opportunity Cost Explained: https://youtu.be/fgtiC6RkRwg?si=G9tuCCkX214_uiOf
Efficiency of Free Markets: https://youtu.be/ULc5aCS_L88?si=g_Ad5mMqr3zHoXMS
Compounding Beyond Money: https://youtu.be/KheKQbax0ME?si=Yb0IqaQarWCepcyX


Chapters:
00:00 Introduction
00:30 Understanding pricing with example
01:26 How to maximise money
05:36 Where to get the data from, willingness to pay?
07:40 Pricing categorization - Discounts, Premium, Dynamic Pricing
17:00 Is it unfair - price differentiation?

#futureiq #productpricing

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Everything you know about Product Pricing is wrong

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Transcript

ever wonder why the same flight cost 2,000 Rupees sometimes and sometimes 7,000 rupees ever wonder why the same product has different prices on Amazon and Flipkart and you know different prices and different months different months well they do sales in different months could it be because of that well sales isn't the only thing right a lot of time say flight tickets they just change randomly right what is going on let's take a simple example okay suppose you have set up a cake stall at an exhibition and you have made, 1500 cakes the total cost for you was 150,000 so rupees 100 per cake and this includes everything the raw material that went into the cake the labor the cost of the
stall everything okay how much should you charge per cake uh I would tack on a 50% profit and sell it at 150 per cake where did this 50% come from why not 200 why not 250 it's it's 50 my number 50% I want 50% profit yeah I'll tell you why right that is because in seventh standard your math teacher told you that the way the price is decided is you take the cost price and you put a profit percentage and you get a price that is not how the real world Works no okay I mean see your job isn't to earn a fixed profit okay your job is to maximize the amount of money you can make so let's see how you can
maximize the money money okay good point so let me ask you this if you increase the price to 200 or 250 won't you make more money will I because the number of people who will buy it at 150 is definitely not the same as the number of people who will buy it at 250 less people will buy it at 250 ah so you have seen our episode on supply and demand you guys should also do it right yeah yeah if the price increases the number of people willing to buy decreases correct but your profit per cake is also going up right so it's not clear whether it is better okay I'll actually have to plot this on a graph and see or put like
numbers in a spreadsheet and see if absolutely great we have done that for you okay yeah so as an example I have just taken an example and let's say that I have given prices from 110 to 250 okay obviously I don't want to go below 100 because no matter how many I sell I will make a loss correct right so from 110 to 250 where I different prices and as you can very clearly see the demand curve has to be like this high demand when the price is low and low demand when the price is high right absolutely okay now which of these prices would you use uh I don't want to have any wastage but I
also want lots of money so probably 150 sounds good or maybe 200 yeah 200 well the correct thing to do is to actually do the calculation do the multiplication and find out how much money you're making so again just because you guys are lazy we have put up the table here if you see that 250 has 600 buyers so you get around 150,000 only which is basically I'm making my money back nothing no earning out of that 200 more people are buying so you end up with 160,000 right and so on if you go through the table you will see this is very typical okay that at the highest price your total profit is low
because the number of people low number of people is dominating it goes up like this and then it comes down again later because at 110 although the number of people is very high your profit is low and therefore your revenues are low so typically it'll be somewhere in the middle so yes I mean in this particular case one 50 is the correct answer right yeah right but that is not necessary sometimes the hump can be at 200 sometimes it can be at 130 correct right so it depends on what the demand for that particular product is and what is the price point that people are willing to pay for that product in this particular case it was 150 the most
important thing that is not taught in s standard math class okay is that how much it cost you to make the kick is IR relevant or at least not very relevant how much people are willing to pay how much value does it add to that person that is the most important thing in pricing okay ah that makes sense okay now I'm starting to get an idea of why we are talking about product pricing being so varied and people's perception about that pricing being so wrong right everybody when you look at the price you just assume that the cost must have been just a little bit less than the price and they are making up that little bit of
profit for themselves right that is not really true right so price should be based on how much people are willing to pay not how much it cost you understood usually small businesses firsttime entrepreneurs they end up charging much lower than what they should because they charge just a little bit above their cost right okay but they should be creating a table like this and decide what is the point at which you're total revenue is maximized but where does someone get this data from like where can you get an idea of how much people are willing to pay yeah so businesses do two things for something like this right okay one is they use surveys right Market surveys uh either
the business can do it themselves or there are companies which do Market surveys for them to get an idea of how much people are willing to pay the second thing is actual experiment M mentation right you are not in the business for just one day right corre you do this over time so you can try different price points uh the first few times you do this and that will give you an idea because you will know every time you increase the price how much the sales went down and you can uh sort of get an idea of this particular table so now do you understand how pricing happens yeah there is some sort of a
goldilock Zone this was the simple version okay okay we haven't gotten to the interesting and complex part of pricing okay let's look at the table again okay you have done this table and you have decided the price is 150 right and you sold 12200 correct so 300 cakes are wasted yeah so why don't we charge 150 for most of the people but the 800 who were willing to pay more we charge them 200 why can't we do that because the people those 800 people will get angry with us and will'll never buy from us again we losing customers that way very good point okay if you had set the price at 200 from the beginning those
800 would have happily paid 200 and they would have gone back very happy because your cake is obviously delicious but if they find out that you were selling it at 150 to other people and sold it to them for 200 they will get angry yes okay so this is a very important psychological thing that companies do have to keep in mind right correct but see companies are very smart they are smarter than you they are they find a way to somehow charge those people more without those people finding out how can you sell the same cake to two different people at two different prices let me give you an example please you said that the price of the cake is 200 okay okay
except that there are discount coupons which are available outside near the parking or something like that right okay now imagine somebody comes up if they're willing to pay 200 they will just say you know what this discount coupon sounds like too much work I'm not going to go all the way there the dollar value of my time is more than 50 rupees yes there's an episode check it out okay absolutely the point right so those people will buy it at 200 correct but the ones will say you know what 200 is too much I'm not going to buy that cake and then their kids say but I want cake so then they say fine let's go over
there let's go get the discount coupon right basic idea is that they make the cheapos jump through hoops don't call them cheapos this is called Extreme Couponing and there is an entire Community around it people actually go hunting for coupons and get the best value out of it exactly CC Geeks I see you yeah so basically the people who wanted to buy at 150 will find all these coupons and ways to do it and put in whatever effort and the people who are richer and have the money and couldn't care less they will pay 250 right yeah so for example on pretty much any app where you are buying things there's always a section called coupons which
some people go into it in great detail whereas some people is like that doesn't sound like worth my time and just go and pay right this is what is happening so this is one category right make them jump through hoops okay the other category let's say you had priced it at 200 and there are still 600 people for whom you want them to pay 250 oh yeah then what you should do is create a special premium category okay okay now you have the same cake here except that it is premium so that you use a slightly different color icing on it okay or two color icing okay or the Box doesn't come with an ad or or or just the box is nicer okay
so for you the cost maybe went up from 100 to 102 but the price has has gone up from 200 to 250 right and there are people who are like oh yeah I want premium and they will buy the premium whereas the ones who couldn't afford 250 for a cake they are going to pay 200 for the regular cake or use coupons and pay 150 for it exactly right and then you could do even something more drastic to go catch the people who are at 130 and 110 uh price points don't take these as instructions he's basically telling us what to look out for are not instructions for you to fleece your customers well it is not called fleecing
okay it is called customer segmentation at which point it is all acceptable and aboveboard and ethical and honest okay customer segmentation remember that word okay don't do too much customer segmentation with your products okay I'm watching you all right so those are two methods one is you make people jump through hoops two is you have a premium segment in which you essentially offer the same product but with little more bells and whistles kind of thing a different category of charging more is to charge more for desperate people desperate people yes okay okay simple well-known examples right Uber used to charge higher for customers whose phone battery was low oo that is you can see I mean
the person doesn't have a choice batter is going to die then they will not be able to order an Uber at all so higher price is okay that same customer would have thought twice if they were doing it when battery wasn't a problem right yeah and that's that's that's that's fleecing man that's definitely fleecing yeah so Uber did get into trouble for that see again there is a grone here right because when people found out this is happening they got very mad at Uber and then Uber had to do like a whole bunch of damage control rightfully so rightfully so right there are other ways of doing it for example there are some apps that are paid apps the same app
usually costs more on an Apple device compared to an Android device I cuz you just know that Apple people are used to paying more right they won't even check how much it costs on Android there's no choice they have yeah because a apple is a very closed ecosystem and I haven't used an apple but uh yeah this is very much possible I can completely agree with this and you can see there is a this is a different kind of desperation right that guy even if that guy finds out that it costs less on Android it's not like they're going to switch to Android just to get the cheaper things although I know a few people who have
done that but most people will just suck it up and pay all right true yeah okay so that's category number three get uh desperate people to pay more for the same product of service correct when you take this to an extreme there is dynamic pricing fully personalized pricing okay which online companies can do because what they are doing is they are collecting lots of information about you not just on their own app and on their own website but they are buying data from third parties right as soon as you go to their website just from your IP address they can guess where you live they can guess what is your rough income range right because some areas of town
are uh higher income range and some areas are lower income range and as soon as you log in they know who you are and from your past Behavior they will have a pretty good guess that you are a 30-year-old and you are single or you are married and things like that yeah yeah they have detailed profiles on all of us especially if uh you don't bother about third party cookies and having ad block on and all of that they essentially have you nailed down to your last bit of preference that you thought was hidden they know that also so real life examples are of course that you know Uber Amazon do charge different prices to different users yes they also charge
different prices for logged in versus logged out users right when you're logged out they have less information about you yes whereas when you're logged in they can be more precise yeah and often times they uh mask this by saying logged in users get a better deal on the product but the fact is they are essentially they know what kind of a user you are what's your buying frequency and all of that and they charge you accordingly just your buying history is enough often times to give them an idea of what you are able to pay for a product which is essentially the entire purpose of being in business yeah the most fascinating one though for me
is where they actually restrict a product to reduce the price okay restrict it to reduce the price yeah I will tell you a lovely lovely example okay before the Pentium chip there used to be a chip called 486 yes I remember yeah so 486 used to come in two variations 486 DX and and 486 SX okay 486 DX had a math co-processor that's why it was more expensive and the SX did not have the math Co processor that's why it was less expensive yes do you know what Intel actually did those two chips were identical except that in the SX the one connection between the math Co processor and the rest of the CPU was cut
off okay so in was selling the exact same thing but with one feature disabled at a lower price okay so clearly they were not doing it because oh math processor is more expensive because yeah they produced the math processor on the SX also this was customer segmentation people who are willing to pay more buy the DX and pay more people who are willing to pay less but the fact that we know about it today means that somebody actually found out that the dxn SX were essentially same and also found out a way to make the SX into a DX I'm pretty sure of that I'm I think I have read about this but I'm not really sure what
it is go look for it and do put it in the comments if you find the link to it yeah a modern example of this is most online apps which have subscription pricing right say Spotify and things like that for them it costs almost nothing to let two people use it versus six people using it but the prices are different these are just different ways of customer segmentation and when you think about it the app is exactly the same for the paying user and the non-paying user so the features are already there in the app it's just one password or one username or one flag that changes right exactly exactly the same concept all right so that is
another category of customer segmentation that the world is full of customer seg mentation you just don't know it because you were not paying attention you just thought that every company puts 20% profit on top of their costs that's not how it works yeah but hearing you talk all of talk about all of this uh makes me think that all of this is so unfair differential pricing is so unfair to people I mean well I mean you know there are two ways of looking at it right okay one is that why do you care about how fair or unfair it is right you think about how much value it is providing to you how much you're
willing to pay for it and as long as the price is that much or below you should be happy taking it right that's one a different way of looking at it is that this actually is a good thing okay how this is for example there is a concept called sliding scale pricing right textbooks in the US are ridiculously expensive yes but the same textbooks can be bought in in India for much cheaper prices for the simple reason that in India nobody will or can pay those prices for textbooks yeah $200 for a textbook in India which is 16,000 rupees or 17,000 not going to happen right so that's why they come up with Eastern economy additions and on that there is
like a big scary warning saying that you're not allowed to take this back to the US with you and things like that but yeah you know but it's a good thing overall right otherwise people in India wouldn't have those textbooks yeah right uh with case in case of textbooks yes uh the sliding scales pricing definitely works or purchase parity pricing as it is also sometimes known as that works and I've seen some conferences also do do this kind of well there are lots of other examples right when you go to study abroad International students get charged more right this is really customer segmentation but nobody complains because they think huh that seems reasonable right when people come
to India and go to see the Taj Mahal Indians are charged like 10 rupees or 50 rupees or something like that whereas foreigners will be charged $50 right a huge difference but everybody just accept it h right so it's it's it's funny when it uh is happening to someone else but not so funny it is happening to you there's another category where nobody complains about differential pricing okay that's when the goods or services are not seen as a purely commercial offering example places of worship ah lawyer fees right educational institutions medical fees right where you know it's like oh it's that person's duty to provide cheap services for the poor people and charge how much of to the rich people Robin
Hood pricing I think it is called and people are sort of okay with that right yeah right I mean those are also life saving services in a way so to speak all of those examples that he gave temples lawyers and doctors life saving but yeah it does make sense that of course the most common pricing mechanism on the internet today is also a form of this which is premium right YouTube right most people see it for free that doesn't mean that it is actually zero the company is making money from ads correct but some people pay for a subscription and YouTube is making more money from those so that is customer segment yeah actually when you think about it
premium models is definitely customer segmentation because you're watching the same channel future IQ which rant and naven and you either paying for it or paying for it through ads so I think take-home message is that pricing is a very complicated thing H there are people sitting in companies with phds in economics and lots and lots of data who were just trying to figure out how much you are willing to pay and then figure out a way to charge you that much right what I would suggest is that when you are young and you have a lot of time on your hands look for ways in which you can get the price reduced there will always be ways right the company also
wants to sell it to you for less money if it is possible to do that without pissing up the of the rich people right but later on as you start making a reasonable amount of money stop worrying about it focus on how much value it is adding to your life and just pay it don't waste too much time on it because the time value of your money is more important right the money value of your time is more important yes and also in some sense time value of of your money is also important because time is money boss yeah and thank you for spending this time with us srikant naven future IQ go watch the episode on the
dollar value of your time or money value of your time have fun