I was thinking about buying a beer on a flight the other day. While I was pondering buying it or sticking to ginger ale, I noticed that I felt guilty about spending the money. It felt like a superfluous expense. I started to wonder why that was, especially when I often will have a drink in an airport bar without any guilt at all. The beer on the plane cost $7, about the same as a beer in the airport bar. If anything, I expect that I would enjoy the beer on the plane a bit more than in the bar. So why did I have pangs about spending the money on the plane that I didn’t have in the airport?
The more I thought about it the more it seemed like a part of a pattern. This phenomenon can be generalized to “varying willingness to pay for a fixed amount of value based on context.”
I think the reasons for this phenomenon lie in a few cognitive quirks. Before discussing those, here are a few analogous examples I came up with.
Netflix for the price of an Old Fashioned
I am always curious when people are indignant when Netflix raises the prices of a subscription by a couple of dollars. There are many people who spend 30+ hours a month watching Netflix and presumably get an enormous amount of value from the product. I’ve observed some of these same people order a cocktail for the price of a month of Netflix and not think twice about it. There is an inconsistency in the true value of the offering and the willingness to pay.
I never want to pay for apps even though I should
I have been puzzled about my own reluctance to pay for mobile apps. I am sure this has something to do with the high friction of paying for or cancelling payments in iTunes, but it feels like more than that. I see a price tag of $3.99 and it feels like an exorbitant price to pay for an app. Of course, I spend >10 hours a week on my phone and apps can deliver enormous benefit; often much more than the marginal $6 kebab I order on a weekly basis. Again, there is inconsistency. In the context of the app store, I am reluctant to pay a trivial amount of money for value, while at the kebab shop I hungrily fork over $6 without a second thought.
The cognitive biases behind this phenomenon
I suspect part of this phenomenon is present bias. We see the benefit of the kebab or the drink instantly, while the benefits of Netflix or an app are not fully realized until weeks or months in the future. But a more interesting thing to me is the context of the spending.
Could it be that we don’t like to pay for things in contexts where we’re used to getting things for free? That seems to be the case in the app store, where I’m used to downloading free apps, and on the plane, where I’m used to being served free refreshments.
This touches on the concept of “anchoring,” a phenomenon wherein people tie their perceptions of value to (sometimes arbitrary) prices. In the case of the app store, the deluge of free apps has set an anchor of $0 that is hard to budge.
It also hits on the outsized impact of “free” on our psychologies. When a free option is available, people will flock to it in irrational proportions, overvaluing it compared to options that cost money but deliver substantially more value. The behavioral economist Dan Ariely has written extensively and captivatingly about this.
Tactics for businesses to combat these biases
What should companies do to coax people to pay for value in contexts like these? I think a good example is software companies offering trials for a dollar instead of for free. This conditions the customer to pay for the service, even if it is a trivial amount. It also drastically reduces the payment friction when it comes time for the customer to renew at full cost or churn out.
Another tactic could be to architect the environment to feel more like a setting where the customer is used to paying for things. Perhaps I would be likelier to pay for a drink on the plane if instead of seat service (where I am used to getting soda and peanuts for free), a stewardess sat behind the cart in the back of the plane and took orders and payment, simulating a normal bar where I am used to paying for drinks.