Gym-Pact offers what Zhang calls motivational fees — customers agree to pay more if they miss their scheduled workouts, literally buying into a financial penalty if they don’t stick to their fitness plans. The concept arose from Zhang’s behavioral economics class at Harvard, where professor Sendhil Mullainathan taught that people are more motivated by immediate consequences than by future possibilities.

When social and market norms collide, trouble sets in. Take sex again. A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. They go out a third time, and he’s still springing for the meal and the entertainment. At this point, he’s hoping for at least a passionate kiss at the front door. His wallet is getting perilously thin, but worse is what’s going on in his head: he’s having trouble reconciling the social norm (courtship) with the market norm (money for sex). On the fourth date he casually mentions how much this romance is costing him. Now he’s crossed the line. Violation! She calls him a beast and storms off. He should have known that one can’t mix social and market norms-especially in this case-without implying that the lady is a tramp. He should also have remembered the immortal words of Woody Allen:

“The most expensive sex is free sex.”

Between reading the WSJ article “The Price Isn’t Right” and buying a new accessory from HP, I came to realize a serious design problem with most consumer online shopping experiences — promo code fields (also known as coupon code fields).

Now, I have nothing against price discrimination, but the promo code field seems to me to be a poor design choice for a user experience.  It basically says “this is not the lowest price you have to pay” since its presence implies that all you have to do is type the magic password and voila, a new price will appear.  

At times, I feel like I’m overpaying as a result and come away dissatisfied even if I originally thought the price was okay to begin with.  Sometimes I will just search Google really quickly with “website name + promo code” to see what comes up and more often than not, a decent $5 off or 10% off promo code will appear.  When this happens, I’m happy but really because I beat the company which is probably not the user experience you want your customers to be having. 

Solution #1: Don’t have promo codes and tell everyone that

Zappos.com practically invented this solution.  They have a whole page talking about The Truth of Zappos.com Coupons that basically says why they don’t have promo code fields.   I never feel like Zappos isn’t giving me their best price and so I always check out feeling like the company treated me, as a customer, with respect.  

Solution #2: Do have promo codes but don’t distribute them publicly

If you are going to have promo codes, just don’t send them out to coupon/promo code aggregators.  Try to stop them from being indexed.  You can try to make it dynamic so they are very unique to a customer set and useless to the general public.

The idea here is you don’t want people to easily find this and get upset that they weren’t getting the best deal.  After a few simple searches that yield no results, I feel satisfied knowing I am probably getting the best price. 

Solution #3: Price discriminate subtly behind the scenes

A lot of websites now will change the pricing automatically depending how you get there.  If you click on an ad behaviorally targeted just for you, you may pay $15 for the product you were searching for.  If you get an email (since you are a repeat customer that opt-in), you will need to click on a special link to activate.  If you log into your existing account, you might even get a special offer or free shipping.  I think these are fine from a design standpoint since it’s not blatantly built into the customer experience that they are getting different treatment.

Solution #4: Give everyone a promo code

Okay, I’ve never seen this before and I’m intent on doing this once on my own sites, but I think it would be an awesome idea to put next to promo code fields a public promo code for anyone to use.  It could be like “type FREESHIPPING if you have no promo code” or something more creative like “type ALIBABA if you have no promo code.”  It’s be even more awesome if something unexpected happened.  

This may delight the customer even more than not having a promo code field at all — especially if the reward keeps changing.  Behavioral econ tests have even shown that if people win variable payouts, they’re more likely to try something.  

Bottom line: Don’t give customers a reason to doubt they are getting a good deal!

note: I feel like this applies primarily to consumer facing business. B2B companies cater to a group in which pricing is taken for granted to be negotiable. However, I can’t see how some design tweaks would hurt B2B sites to do.

Great video on what truly motivates people whose work doesn’t involve manual labor.  Tip of the hat @bfeld

Key takeaways:

(1) Monetary incentives work for mechanical tasks and not cognitive tasks

(2) Pay people enough so they don’t think about money or else they won’t be motivated

(3) People want autonomy, mastery, and purpose.  

Pricing strategy fascinates me because when you look at a menu of prices, you are seeing a story.  The question is, “what is the author trying to saying in this story?”

The New York Times yesterday dissected the economics of book publishing in digital and print.  The list price is what publishers want the public to think a book should cost, but there is a wholesale price booksellers pay to publishers and then mark up to generate a profit.

The other week, I went to Amazon to purchase Marc Benioff’s Behind the Cloud: The Untold Story of How Salesforce.com Went from Idea to Billion-Dollar Company and Revolutionized an Industry.  That’s where the story of the e-book really began for me.

I was planning to buy the print copy as I normally do so the first thing I noticed was the price — a reasonable $18.45 for a hearty tome of knowledge.  While no chump change, I consoled myself with the fact it was 34% off the list price.

Like many users, I considered myself getting a good deal whenever I shop at Amazon and I only need to look at how much “You Save” to confirm what I already thought about Amazon as a low-price seller of books.  This is a natural tendency known as the confirmation bias, and Amazon is smartly taking advantage of this ingrained tendency of its customers.

Of course, I wasn’t running the actual analysis like the New York Times which points out the $27.95 figure is rather imaginary to begin with and Amazon is probably only paying for about half that figure — everything above that contributes to Amazon’s bottom line which is great for them but shows how arbitrary my point of reference is.  Amazon is making use of another cognitive bias known as anchoring.

(For behavioral econ nerds out there, I wonder whether framing a necesary purchase with the “savings” plays to people’s huge fear of loss or smaller desire for gain)

At this point, I realized that I could buy the Kindle edition now that I have a Kindle e-reader (from Christmas).  The pricing starts to make the purchase even more interesting:

Clearly, buying a Kindle Edition represents a huge savings — perceived as 50% less than the hardcover by most consumers (mind you this is before Amazon began raising Kindle prices for some titles).

So now I was wondering why would I be a sucker and ever pay the list price of $27.95 or even the discounted $18.45 hardcover price.  So of course I took the plunge and bought the Kindle version.

So why would any book publisher let Amazon do this if everyone would spend less money?  Why would Amazon pay a wholesale price of $13.95 and sell me a digital copy for $9.99?

The answer turns out to be pretty simple.  Amazon is trying to drive people to buy the Kindle e-reader and purchase e-books through them.  They are willing to eat the loss per book because they make something from the device.  Users want Kindles to get to cheaper books and Amazon wants these users to start on its platform because the switching costs will be too high for users to leave.  Convenience, being a huge driver in consumer action, will lock users in.

Meanwhile, publishers aren’t happy because consumers like me start to see through the list prices and question anything above $9.99.  Since the time I bought the book, select large publishers have begun to force Amazon to raise prices, but it may be too late.

Amazon continues to mark whatever books its can at $9.99 which will make those digital titles more popular than competing ones marked higher by large publishers.  Smaller publishers seeking to drive sales numbers can choose not to cooperate with large publishers and continue allowing books to be priced at the $9.99 rate which will only help drive adoption of the Kindle.

In case you were wondering, Behind the Cloud is a book about moving software usage to the Internet.  Fittingly, its pricing is an interesting story about how Amazon is moving reading onto e-readers.  It’s a fascinating example of modern economics — COGS, behavioral economics, and game theory.

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