Do you know why we sometimes find ourselves excitedly buying things we don’t really need?  I came across this outline from a book by Dan Ariely called, “Predictably Irrational” that had some incredibly insightful information about people and why we at times seem to act completely irrational. It covers giving away  things for free, putting high price points on products to create demand, and even the benefit of arousal!

The Truth About Relativity

• When Williams-Sonoma introduced bread machines, sales were slow. When they added a “deluxe” version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain
• When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7
• When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7

The Fallacy of Supply and Demand

A good portion of what you may have learned in your high school economics class may not necessarily be true. By piggy backing on other brands and setting a unique price point and targeting a higher class of consumer you may find that you can put yourself in the same class as the greats:

Savador Assael, the Pearl King, single-handedly created the market for black pearls, which were unknown in the industry before 1973. His first attempt to market the pearls was an utter failure; he didn’t sell a single pearl. So he went to his friend Harry Winston, and had Winston put them in the window of his 5th Avenue store with an outrageous price tag attached. Then he ran full page ads in glossy magazines with black pearls next to diamonds, rubies, and emeralds. Soon, black pearls were considered precious.

Supply and demand doesn’t necessarily pertain to products either, we’ve all seen that club that’s got a line out the door every Friday Night. (that’s probably devoid of any chicks on the inside.) The illusion of demand creates demand.

The Cost of Zero Cost

When we first started Assault, we charged for shipping. After realizing that that was a huge part of what kept people from buying our product we decided it would be good to try giving our visitors free shipping to simplify the process. We were amazed to see that getting hit with a shipping cost was a huge stopping point for most consumers and we’ve never looked back. Ariely noticed similar things with some of the tests that he tried on students:

• Ariely, Shampanier, and Mazar conducted an experiment using Lindt truffles and Hershey’s Kisses.
  • When a truffle was $0.15 and a Kiss was $0.01, 73% of subjects chose the truffle and 27% the Kiss
  • When a truffle was $0.14 and a Kiss was free, 69% chose the kiss and 31% the truffle
  • According to standard economic theory, the price reduction shouldn’t lead to any behavior change (relative price and expected pleasure should be equal between the two experiments)
• The same experiments were conducted with Kisses going for $0.02, $0.01, and free…and free again made a huge difference.
• Ariely’s theory is that for normal transactions, we consider both upside and downside. But when something is free, we forget about the downside.
  • “Free” makes us perceive what is being offered as immensely more valuable than it really is
    • Humans are loss-averse; when considering a normal purchase, loss-aversion comes into play
    • But when an item is free, there is no visible possibility of loss
• Ariely conducted a variation, where people were offered a choice between items.
  • He gave kids (and students) 3 Kisses and offered to trade 1 Kiss for a small Snickers, and 2 Kisses for a large Snickers.
  • The subjects overwhelmingly chose the large Snickers (which is rational, given the weights of the candies)
  • When he instead offered to trade 1 Kiss for a large Snickers, or let the person take a small Snickers for free, the subjects overwhelming went for the free offer.
  • The zero price effect applies even when money is not involved.
• In the real world, this effect was demonstrated by Amazon’s free shipping.
  • After Super Saver shipping was introduced, Amazon saw sales increases everywhere except for France
  • It turned out that the French division offered 1 franc ($0.20) pricing instead of free pricing.
  • When this was changed to free, France saw the same sales increases as elsewhere

The Influence of Arousal

Another astonishing piece of information was the interviews of people when they were “sober” and after in which they had “aroused” themselves. People’s minds  function entirely differently when under the influence of… well ya know. (We didn’t have to tell you that sex sells. That’s why our site is absent of pictures of Craig and myself on product pages…)

Ariely and Loewenstein conducted an experiment on Berkeley undergrads (Ariely tried to do this at MIT, but couldn’t get the necessary permissions).  They asked them a series of questions.  Then they had the undergraduates stimulate themselves to a state of sexual arousal, and asked them to answer the same set of questions.

• Some of the results from their experiment:
  • Can you imagine having sex with a 60-year-old woman
    • Sober: 7%
    • Aroused: 23%
  • Could you enjoy having sex with someone you hated?
    • Sober: 53%
    • Aroused: 77%
  • Is just kissing frustrating?
    • Sober: 41%
    • Aroused: 69%
  • Would you slip a woman a drug to increase the chance she’d have sex with you?
    • Sober: 5%
    • Aroused: 26%
  • Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?
    • Sober: 86%
    • Aroused: 60%

A few other interesting pieces of information

In 210 BC, Xiang Yu led an army against the Ch’in Dynasty.  While his troops slept, he burned his ships and smashed all the cooking pots.  He explained to his troops that they had to either fight their way to victory or die.  His troops won 9 consecutive battles.  Eliminating options improved the focus of his troops. We feel compelled to preserve options, even at great expense, even when it doesn’t make sense.

Companies that try to market based on social norms (“like a good neighbor…”) but fail to follow through (e.g. imposing nuisance fees) end up in a worse position. Consumers take personal offense when a relationship framed as a social exchange turns out to be a market one.

If you think you need to play rough, don’t waste money making your company the fuzzy feel-good choice. State what you give and what you expect in return–it’s just business.

A salary alone will not motivate people to risk their lives. Police officers, firefighters, soldiers–they don’t die for their weekly pay. It’s the social norms–pride in their profession and a sense of duty–that will motivate them to give up their lives and health.

Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.

Some of this information is invaluable to you when you’re planning the little things on your site or company that you may have never thought of. Free shipping, pictures of pretty girls wearing your product, offering coupons everywhere you can, picking your price point–all of these irrational behaviors have alot to do with the way humans have been wired weather it’s social pressure, or some sort of marketing pressure. I highly recommend reading the book outline of Dan Ariely’s book, checking out his official website, or go look at the Predictably Irrational website.

Feel free to arouse yourselves and go buy some of our shirts.