Price Sensitivity and Consumer Psychology

[SquarePeg]

You know, I don't get people. Are they really that friggin' cheap???? Everyone's got natural business instincts except me????

Netflix just changed their offerings, such that their old unlimited streaming with one disc out at a time plan is no longer ten bucks but fifteen bucks. Big deal!! But folks are already protesting and threatening to quit...over what, five bucks???

Seems like the service is worth well north of five -- I'd been dreaming about such a convenience since the '90s, when I'd have given $50 a month!! (Indeed, cable internet access costs that much here in Crooklyn, New Yawk!!)

Holy trickle-down economics, Batman! How much you suppose they spend on "artisan coffee" each day and yet fifteen a month is outrageous...reminds me of the Repugs and how a billion for bombs is not enough but a million for schools is two million too much!

Must be something in the air....

Anyway, how you folks in business know what prices to set?? Seems everyone's afraid of losing their "sex appeal" overnight....

[Le Roi]

Why does this bug you?

[SquarePeg]

Originally Posted by Le Roi

Why does this bug you?

You're not disgusted by a miserly mindset?? Much less catering to it, if folks (that is, likely potential customers) are really like that!

[SatvikBeri]

Originally Posted by SquarePeg

You know, I don't get people. Are they really that friggin' cheap???? Everyone's got natural business instincts except me????

Netflix just changed their offerings, such that their old unlimited streaming with one disc out at a time plan is no longer ten bucks but fifteen bucks. Big deal!! But folks are already protesting and threatening to quit...over what, five bucks???

Seems like the service is worth well north of five -- I'd been dreaming about such a convenience since the '90s, when I'd have given $50 a month!! (Indeed, cable internet access costs that much here in Crooklyn, New Yawk!!)

Holy trickle-down economics, Batman! How much you suppose they spend on "artisan coffee" each day and yet fifteen a month is outrageous...reminds me of the Repugs and how a billion for bombs is not enough but a million for schools is two million too much!

Must be something in the air....

Anyway, how you folks in business know what prices to set?? Seems everyone's afraid of losing their "sex appeal" overnight....

It's about expectation. When you consider what the world would be like without cars, gas is certainly worth the price. But people still complain about the increasing costs of gas.

I like to take the highest price I can reasonably imagine charging, and increase it by 50%. If that turns out to be too high then it's easy to drop the price and use that as marketing. But it's much more common for that price to be too low or just right-and if you charge too little at first, it's very hard to raise your prices later.

[SquarePeg]

Originally Posted by SatvikBeri

It's about expectation. When you consider what the world would be like without cars, gas is certainly worth the price. But people still complain about the increasing costs of gas.

I like to take the highest price I can reasonably imagine charging, and increase it by 50%. If that turns out to be too high then it's easy to drop the price and use that as marketing. But it's much more common for that price to be too low or just right-and if you charge too little at first, it's very hard to raise your prices later.

Hmm, interesting algorithm! Then again, I guess that's where all those crazy MSRPs come from!

I wonder why Netflix priced themselves so low (really didn't have any competition, and I still don't see that they do, even with Amazon)...I only joined last year (finally!) and was shocked to find disc and streaming for just eight bucks a month at the time!

[Le Roi]

Originally Posted by SquarePeg

You're not disgusted by a miserly mindset?? Much less catering to it, if folks (that is, likely potential customers) are really like that!

No, not really. I can understand them. Here's the funny thing though. You seem outraged that some people are outraged at the rise of those prices.

That was what my earlier question was about.

[180]

Five bucks isn't much but in an industry where you can get the latest movies by typing it in a bit torrent search for free, it's probably a lot more price sensitive.

All luxury items are more price sensitive and in cases where the commodity is not limited (ie. movies) people won't pay extra.

I guess the other issue here is the economy, While $5 doesn't seem like much people look at it from a yearly perspective. or a % scope

So it's either $60 more a year (a lot in their mind)

Or paying 50% more.

[Mounds]

Also consider who is going for those Netflix deals. I'm sure a fairly large number of the user base is extremely frugal. An extra $5 is a big deal for them.

Threatening to quit the service is also an effective tactic for consumers to get what they want. I do it on occasion with my phone and Internet companies.

I don't quite see what the outrage is about myself either

[James81]

I think it's more the vibe that people get from them than anything else. Remember when they caved to the movie companies and stopped releasing new release movies right away? That kind of thing does NOT build a relationship with their customers (or make them feel like they are in their corner). That kind of stuff makes customers think like they are influenced more by other means that that of SERVING the customer and making the customers happy.

I think the outrage you see is sort of like the culmination of that, and the changes that netflix has been making here and there over the past year or so. This is a good sign that Netflix hasn't been properly building relationships with their customers, so a price range is way less accepted than if they had approached it from a different angle.

I like netflix, but I see it as a frugal option in lieu of cable TV rather than something I'd pay a lot of money for. That's PART of what makes netflix so great, actually, was how CHEAP you could have unlimited movies for. That's how they FOUNDED themselves. And now that the competition is out of the way, they start raising their prices. I'm not saying that it's wrong for them to do that. I'm just saying that that is poor customer relations on their part. This could've went a lot smoother for them if they had been building proper customer relations. It's essentially taking what they founded themselves on and changing it in people's perception of them.

So, in essence, they deserve the backlash they get. Hopefully, they choose to learn from it.

[Brutha]

Remember when they caved to the movie companies and stopped releasing new release movies right away?

If the movie companies don't give them a license to release movies right away they can't sent them.

[Monty]

Originally Posted by SatvikBeri

It's about expectation. When you consider what the world would be like without cars, gas is certainly worth the price. But people still complain about the increasing costs of gas.

I like to take the highest price I can reasonably imagine charging, and increase it by 50%. If that turns out to be too high then it's easy to drop the price and use that as marketing. But it's much more common for that price to be too low or just right-and if you charge too little at first, it's very hard to raise your prices later.

True, but this is a buy-in model which works in reverse. You get people to buy in, invest or register to your site with cool free stuff and then raise the price by moving the money line.

[Curtis2011]

1. Many people will complain.

2. Few will follow through with their complaints.

3. The world will move on.

[SquarePeg]

Originally Posted by Le Roi

No, not really. I can understand them.

Well, help me understand, then: why do people undervalue that which gives them so much value -- and vice-versa??

This is so prevalent that there must be some underlying (or, to take a bird's-eye POV, overarching) universal reason...if so, this can be a code for cracking just about any market, selling to just any person!!

Originally Posted by Le Roi

Here's the funny thing though. You seem outraged that some people are outraged at the rise of those prices.

That was what my earlier question was about.

I don't know if you're autistic or just being a little smarmy-snarky about it (or maybe you're supposed to be a Zen master doing your thing), but most people are disgusted by cheapskates, and even more disgusting are those pennywise but pound-foolish cheapskates who save pennies and lose big bucks -- spend $10 on coffee each day yet protest fifty cents a day for streaming movies and a disc out at a time.

This site of Steve Pavlina's is big on self-limiting beliefs. I suppose my disgust at human behavior/mass dynamics can be self-limiting...and I imagine that maybe if I can understand it, I'd be a whole lot more entrepreneurial, "naturally"....

[SquarePeg]

Originally Posted by 180

Five bucks isn't much but in an industry where you can get the latest movies by typing it in a bit torrent search for free, it's probably a lot more price sensitive.

Sounds like a tidy theory, but I believe the on-demand market is quite different from "the freeloading community." For one thing, the overwhelming vast majority of folks don't want to deal with unzipping files, pasting together files, and looking for the damned files in the first place, never mind inadvertently downloading malware and the like!

No, aside from kids and hackers, I think the vast majority of freeloaders are like my boss: find now-playing movies online in order to avoid the theater while maintaining Netflix and HuluPlus accounts for all else.

Originally Posted by 180

All luxury items are more price sensitive and in cases where the commodity is not limited (ie. movies) people won't pay extra.

Eh???

I'd imagine luxury items to not be too price sensitive -- do rich folks care whether a Ferrari is a hundred bucks cheaper if they "hurry now while supplies last!!!!" -- and if anything Netflix has become something of a necessity, such that there are protests by people, common people!

Originally Posted by 180

I guess the other issue here is the economy, While $5 doesn't seem like much people look at it from a yearly perspective. or a % scope

So it's either $60 more a year (a lot in their mind)

Or paying 50% more.

Do people really think like this?? I mean, in the United States???

Hard to believe a nation of credit card debtors have become so ferocious about their budgets!

Honestly, I wonder if there isn't something in our psychological makeup which predisposes us to undervalue the valuable and overvalue the relatively valueless...surely there's research on this in the annals of industrial/corporate psychology???

Anyone know?

[SquarePeg]

Originally Posted by Mounds

Also consider who is going for those Netflix deals. I'm sure a fairly large number of the user base is extremely frugal. An extra $5 is a big deal for them.

Really?? "Extremely frugal" folks would find Netflix a luxury, no?

Or is it, as I suspect, some kind of Zeitgeist, some spirit of our times, something in the air, in the water??

Seriously, you know how people's tastes change, their beliefs change, and the market responds to it...thus, dolphin-safe tuna, no blood diamonds, et cetera...well, how did a nation of credit card debtors come to protest a very modest cost of a luxury service??

Originally Posted by Mounds

Threatening to quit the service is also an effective tactic for consumers to get what they want. I do it on occasion with my phone and Internet companies.

Hey, how do you threaten to quit your ISP?? Here in NYC, if you want fast residential internet that means you go through the cable TV monopoly!

Originally Posted by Mounds

I don't quite see what the outrage is about myself either

I don't, but I wish to understand it (and in the process, I suppose, understand myself...).

[SquarePeg]

Originally Posted by James81

I think it's more the vibe that people get from them than anything else. Remember when they caved to the movie companies and stopped releasing new release movies right away? That kind of thing does NOT build a relationship with their customers (or make them feel like they are in their corner). That kind of stuff makes customers think like they are influenced more by other means that that of SERVING the customer and making the customers happy.

Hmmm, interesting! Yeah, that's it, that must be it...perception, the perception that they're being taken for granted!

Originally Posted by James81

I think the outrage you see is sort of like the culmination of that, and the changes that netflix has been making here and there over the past year or so. This is a good sign that Netflix hasn't been properly building relationships with their customers, so a price range is way less accepted than if they had approached it from a different angle.

How ironic, considering that for years they ranked highly for customer service satisfaction, beating out Amazon!

Originally Posted by James81

I like netflix, but I see it as a frugal option in lieu of cable TV rather than something I'd pay a lot of money for. That's PART of what makes netflix so great, actually, was how CHEAP you could have unlimited movies for. That's how they FOUNDED themselves. And now that the competition is out of the way, they start raising their prices.

Hmm, you do realize that prices are rising because it's getting harder for them to pay the movie studios, right? 'Cause the movie studios weren't taking this on-demand thing seriously at first...and now that contracts have run out on content, Netflix has to contend with new content provider demands!

How interesting that you perceive it as a Microsoft-like case of wiping out the competition and charging exorbitant prices...again, perception!

Yes, Netflix definitely didn't do a good job of explaining themselves.... great textbook case of corporate miscommunication!!

Originally Posted by James81

I'm not saying that it's wrong for them to do that. I'm just saying that that is poor customer relations on their part. This could've went a lot smoother for them if they had been building proper customer relations. It's essentially taking what they founded themselves on and changing it in people's perception of them.

So true!!

Originally Posted by James81

So, in essence, they deserve the backlash they get. Hopefully, they choose to learn from it.

Wow, it's gonna be interesting what they do now...hire a p.r. firm??

What would you do if you were Netflix CEO??

[SquarePeg]

Originally Posted by Monty

True, but this is a buy-in model which works in reverse. You get people to buy in, invest or register to your site with cool free stuff and then raise the price by moving the money line.

I guess that's what these protesters feel...weird, but why haven't folks in this country been protesting rising food prices and/or diminishing quantities?? It's really weird, consumer psychology....

[SquarePeg]

Originally Posted by Curtis2011

1. Many people will complain.

2. Few will follow through with their complaints.

3. The world will move on.

Indeed. But no one's protesting rising food prices and diminishing quantities. Wonder why Netflix has gotten a bunch of people protesting while everything else going up seems to be met with resignation!

[180]

Originally Posted by SquarePeg

Do people really think like this?? I mean, in the United States???

Hard to believe a nation of credit card debtors have become so ferocious about their budgets!

Honestly, I wonder if there isn't something in our psychological makeup which predisposes us to undervalue the valuable and overvalue the relatively valueless...surely there's research on this in the annals of industrial/corporate psychology???

Anyone know?

People are terrible at comparison. For example, the economist ran a special with several options. 1 was you could get the internet only version for like $40 (I don't remember the exact number. You could get the paper version for $120 and you get the internet AND paper version for $120. What they found was by running this ad instead of the regular one, more people would see value in the both combo because they add up the two values off $40 and $120 to believe total value = $160, but believe they are getting a bargain.

But if they phrased it just like Internet or Newspaper and internet and left out the third expensive option, people wouldn't buy as much.

Human psychology only allows humans to do things on a comparative level. We cannot make judgements unless we have some comparison and often people use a comparison that they are familiar with.

So let's say for example, someone decides to buy a car. What is an expensive car? Well since BMW's are considered semi-luxury we consider around 35,000 a bit expensive side. While a Kia is about 10-15k. But take someone who has NEVER seen or heard of car prices. They may very well believe a car is nothing but a four wheel bicycle and compare prices to a bicycle. To them a car could seem much too costly.

I have more examples but I'd rather not flood the idea.

Oh and to answer your question, humans do value the valueless. I often think of handbags as a prime example. Women pay premiums for designer bags that hold no significant value. I used to sell fake LV bags and often women would demand the real thing. Now, the here's the kicker. My "fake" bags were the real thing. They came from the same factory, the only difference was that they didn't have the label. People were willing to pay almost $500 more for a stitched label. This is something I can understand but don't really sympathize with.

[Mounds]

To be honest, I wouldn't lose my mind over a slight increase. I would kill to acquire Netflix but unfortunately:

1. Canadian Netfilx is awful (1/10th of what Americans get)

2. My internet has a 10 GB monthly cap

This is the way certain business models work. They start out cheap so more people adopt the service. Once they have a solid user base, they increase the price. They'll likely lose a percentage of clients and hopefully retain enough so that their profits bridge the gap.

For the individuals screaming about the increase, I wouldn't pay them any mind. Like I said earlier, some people are that frugal. IMO, that's frugal to the point where you lose sight of the big picture. Sure, Netflix went up by $5/month. It's still cheaper than basic cable and it's on demand.

I would suggest to these people that if they have that big of a problem with the $5 increase, sell a single Fiverr gig per month. Work an extra hour per month. Bum some change. Lastly, stop watching so much TV and go outside.

If you're looking to learn about business, I would suggest taking a general business course, followed by a marketing course. Most of the questions you've asked will be answered in those courses.

[James81]

Originally Posted by SquarePeg

Hmmm, interesting! Yeah, that's it, that must be it...perception, the perception that they're being taken for granted!



How ironic, considering that for years they ranked highly for customer service satisfaction, beating out Amazon!



Hmm, you do realize that prices are rising because it's getting harder for them to pay the movie studios, right? 'Cause the movie studios weren't taking this on-demand thing seriously at first...and now that contracts have run out on content, Netflix has to contend with new content provider demands!

How interesting that you perceive it as a Microsoft-like case of wiping out the competition and charging exorbitant prices...again, perception!

Yes, Netflix definitely didn't do a good job of explaining themselves.... great textbook case of corporate miscommunication!!



So true!!



Wow, it's gonna be interesting what they do now...hire a p.r. firm??

What would you do if you were Netflix CEO??

Er...would you like to try that response again? (Hint: Try it without the sarcasm this time.) <--- (Like the irony there?)

[SquarePeg]

Originally Posted by James81

Er...would you like to try that response again? (Hint: Try it without the sarcasm this time.) <--- (Like the irony there?)

I wasn't being sarcastic at all! I thought it was an obvious (in retrospect; perhaps Netflix executives are rather like me in their optimism) matter of not preparing their customers properly, not communicating proactively, preemptively...glad you pointed it out!

So how would you salvage the situation? Apologize and explain why costs must go up??

[SquarePeg]

Originally Posted by Mounds

To be honest, I wouldn't lose my mind over a slight increase. I would kill to acquire Netflix but unfortunately:

1. Canadian Netfilx is awful (1/10th of what Americans get)

2. My internet has a 10 GB monthly cap

Yeah, I just found out about that, which is why Netflix ain't working so well up north!

Originally Posted by Mounds

This is the way certain business models work. They start out cheap so more people adopt the service. Once they have a solid user base, they increase the price. They'll likely lose a percentage of clients and hopefully retain enough so that their profits bridge the gap.

What I don't understand is why folks don't understand how Netflix was super cheap to begin with -- and why it still is very cheap right now! Really curious about consumer psychology WRT prices...I mean, fifty cents a day?? People honestly complain about a fifty-cent luxury??

Originally Posted by Mounds

For the individuals screaming about the increase, I wouldn't pay them any mind.

Thing is, lots of businesses seem to be really afraid of raising prices, and that's what struck me most, how companies are deathly afraid of it. I'm just really shocked, since people's rents are going up all the time, their pay is going down all the time, and yet an extra dime or quarter on a relative luxury is going to send them into hissy-fits!

For example, my boss has been reducing his already way-below-market fees (at least a third less than what standard rates are)...I just don't get it....

Originally Posted by Mounds

If you're looking to learn about business, I would suggest taking a general business course, followed by a marketing course. Most of the questions you've asked will be answered in those courses.

Yeah, like I've said elsewhere, am saving up to take the Kauffman Foundation-backed Who Owns the Ice House? online course, as well as possibly that offered by the guy who wrote The Personal MBA....

Just exploring the likely syllabus on my own before the semester starts!

[SquarePeg]

Originally Posted by 180

Human psychology only allows humans to do things on a comparative level. We cannot make judgements unless we have some comparison and often people use a comparison that they are familiar with.

Hmm, yes...but is Netflix pricing itself above what the current market for on-demand video charges? I don't think so; it's still the cheapest by far, when comparing like with like (that is, Amazon VOD offers mostly the same catalog but relatively few in HD)...so it's like these protesters (and, by extension, it seems to me, most protests against prices) aren't using "a comparison that they are familiar with"...they're not comparing, period!

Originally Posted by 180

Oh and to answer your question, humans do value the valueless. I often think of handbags as a prime example. Women pay premiums for designer bags that hold no significant value. I used to sell fake LV bags and often women would demand the real thing. Now, the here's the kicker. My "fake" bags were the real thing. They came from the same factory, the only difference was that they didn't have the label. People were willing to pay almost $500 more for a stitched label. This is something I can understand but don't really sympathize with.

True, I agree! But for them, of course, the value lies in the label itself and their own self-images, et cetera...I guess Netflix just didn't do its marketing/public relations right...maybe they sold themselves as a commodity when in fact they are offering something of a luxury service, and when prices go up people get upset since, it seems, folks are willing to cut luxuries a lot of slack while they feel entitled to expect commodities to remain stable...?

[180]

Originally Posted by SquarePeg

Hmm, yes...but is Netflix pricing itself above what the current market for on-demand video charges? I don't think so; it's still the cheapest by far, when comparing like with like (that is, Amazon VOD offers mostly the same catalog but relatively few in HD)...so it's like these protesters (and, by extension, it seems to me, most protests against prices) aren't using "a comparison that they are familiar with"...they're not comparing, period!

In this regard, that is most certainly true. But people don't necessarily always make horizontal comparisons, in this case vertical ones instead. (time focused, ie, how much i paid last year versus how much i pay this year)

[James81]

Originally Posted by SquarePeg

I wasn't being sarcastic at all! I thought it was an obvious (in retrospect; perhaps Netflix executives are rather like me in their optimism) matter of not preparing their customers properly, not communicating proactively, preemptively...glad you pointed it out!

So how would you salvage the situation? Apologize and explain why costs must go up??

Wow, I reread your post and it came across very differently to me today. I've been dealing with some personal gunk over the past few days. Sorry for the misinterpretation!