Dr. Jonathan Levav gave his talk on "Inside the Mind of Today's Fan" on Dec. 4. Below are some of the "lessons learned" from his presentation.
Two Tips On Pricing: Add Context, Remove Complexity
Pricing is both art and science, and Stanford Professor Jonathan Levav, who researches the psychology of decision-making, has two pieces of pricing advice: add context to give meaning to the number, and strip away the clutter.
That advice may seem contradictory – after all, doesn't adding contextual information complicate the decision-making? No, Levav said. Numbers generally aren't meaningful for people. The simplest way to make them meaningful, one used all the time on restaurant menus, is to provide a high-priced item and a low-priced item to make the prices on the mid-range items seem reasonable.
But there are more sophisticated ways to make numbers meaningful. One, for example, was the shift from “miles per gallon” to “gallons per mile,” which created a number to which more drivers could relate: how much gas will it take for me to get where I am going? Graphs, charts, and other visual information also help make numbers meaningful to customers.
Presented properly, contextual information doesn’t complicate the decision-making; it simplifies it. Reducing a lot of data points to a clear and relevant chart that helps the buyer visualize the value of what they’re buying increases the likelihood that they will make that purchase decision and not succumb to decision fatigue.
Research shows that when asked to make too many decisions in succession, or to wade through a series of decisions in order to make the ultimate decision, people will often either give up and procrastinate or make the easiest decision possible. For example, Levav noted research he and Israeli collaborators did on the decisions of parole boards on applications for prisoner release, and it became clear that as they became fatigued at certain points of the day, they simply made the easiest, safest decision they could – leaving the convict behind bars.
Think about how people are being asked to make the decision about buying your product, Levav said. Provide context, and keep it easy.
Dr. Jonathan Levav
Jonathan Levav is an Associate Professor of Marketing at the Stanford Graduate School of Business. His research is aimed at understanding consumer’s judgments and choices by using tools from experimental psychology and behavioral economics. In particular, he studies the contextual factors that influence people’s choices and judgments. His research is both basic and applied–from probability judgment to product customization decisions.
Jonathan received his PhD in marketing from the Fuqua School of Business, Duke University, and his A.B. in public and international affairs from Princeton University. He is the winner of the Hillel Einhorn Young Investigator Award, awarded biennially by the Society for Judgment and Decision-Making. Prior to joining Stanford he was a member of the faculty at the Columbia Business School.
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