Monetization Law Number #1

Psychology is the foundation of all monetization decisions

Why psychology is your biggest asset in pricing & monetization

Our mind plays tricks with our reasoning. In simplistic terms, our brains are no different from any other organism of a living being. It does just enough to survive. In other words, it’s lazy.

This chapter is about how you can utilise that laziness to increase your monetization. As always we break down the chapter into a rule, the rationale and the rabbit hole.

The Rule provides a quick monetization heuristic i.e. a rule of thumb in operation, a kind of —do this— and you’ll be 80% of the way there.

Rationale explains why the rule works with deeper insights and its use in practice.

Rabbit hole provides more in-depth resources and recommendations for anyone wanting to spend more hours researching each topic.

⓵ Rule 📖

⓶ Rationale 🧠

⓷ Rabbit Hole 🐇

⓵ Rule: Monetization Law #1 📖

Always use an anchor to frame your price.

⓶ Rationale: Monetization Law #1 🧠

Our mind plays tricks with our reasoning. In simplistic terms, our brains are no different from any other organism of a living being. It does just enough to survive. In other words, it’s lazy.

This was characterised by Daniel Kahneman, who wrote about the nature of system one and system two. System one is the work-horse in the relationship, with system two only awakening from its slumber when system one is pushed to the limits or defers a problem.

In simple terms, 10 x 2 would be done by system one, whereas 27 x 49 would require the use of system two. 

So what does this mean?

Well, system one, due to its heavy workload, has been honed to jump to quick answers, nee conclusions, based on its worldview of the situation. This ‘shooting from the hip’ leads to inevitable bias. Bias acts as a mental shortcut for system one to quickly rationalize and decide a course of action.

Depending on your product or service, you want to make a deliberate decision on whether your monetization messaging targets system one or system two.

For instance, the best copywriters often sell complex products or services with clear concise and simple terminology. In contrast, a simple product should be framed with longer, more involved explanations.

So how can you apply psychology to pricing derivation?  

Where psychology meets mathematics, they produce pricing options. The rise of SaaS has heralded a new era of price transparency. What was private is now public. So much so that many companies provide highly visible and transparent pricing tables online. 

The anchoring heuristic allied to power-law principles creates pricing power. We’ll explain the details of derivation in monetization law number #4.

⓷ Rabbit Hole: Monetization Law #1 🐇

Five Key Cognitive Biases

We introduce a few of the important psychological biases that affect decision-making.

Hyperbolic Discounting - is a tendency to increasingly choose a smaller-sooner reward over a larger - later reward as the delay occurs sooner rather than later. A result could be overly discounting your price to get a deal without regard to the longer term.

The Anchoring Heuristic is a cognitive bias where an individual depends too heavily on the original piece of information offered to make subsequent judgments during decision making. Once the value of this anchor is set, all future negotiations, arguments, and estimates are discussed with reference to that anchor. 

The Bandwagon Effect is a phenomenon whereby the uptake of beliefs, ideas, fads, and trends increases the more that others have already adopted. 

Status Quo bias is an emotional bias, a preference for the current state of affairs. The current baseline is taken as a reference point, and any change from that baseline is perceived as a loss. 

The Availability bias is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method, or decision.

The Economist Digital Offer

Dan Ariely conducted a study with 100 bright MIT university students. He showed them a three-tiered subscription offer from the economist and asked them to make a choice.

16 (16%) chose option A, and 84 (84%) chose option C. 

Nobody chose the middle option! 

This looks very rational for many reasons. The online version at $59 per annum equates to only $5 per month. It is also less than half the price of the combined print and online version.
The second point of rationality is the preference of print and online to just print, as most would maximize value for a given price. 

Both the print subscription and print & web subscription cost the same, $125 dollars. 

As no one chose the middle option, why have it?
He removed it and gave the subscription offer to another 100 MIT students. This is what they chose.

68 (68%) chose option A, and 32 (32%) chose option B. Startling!

In monetization terms, the lack of what could be clearly seen as an irrelevant option led to a large reduction in overall revenue. [(16 x 59) + (84 x 125)] = $11,444 v’s [(68 x 59) + (32 x 125)] = $8,012. 

The so-called irrelevant option increased monetization by $3,432.

Psychology works!

Framing

The Framing of Decisions and the Psychology of Choice” by Daniel Kahneman and Amos Tversky explain why we fall for decoys and framing effects.

They wrote, “The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways. The dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.”

This tells us that the framing has a very significant impact.

We unconsciously partake in this bias every day. The probability of a long tail risk event, say aeroplane crash, and a long tail reward event, say winning the lottery, are often similar. However, we all know that we’d happily pay 50, maybe 100 times more for insurance on the risk-mitigating event v’s the reward-seeking event, even if they offer symmetrical economic utility. 

Your customer is not always going to act rationally. Your pricing should benefit from this fact.

🐇 Additional Research 🐇

There are so many books on psychology, that you could end up permanently down the rabbit hole. So, here are three of my favourites that will deliver 95% of all you’ll ever need to know in relation to monetization psychology.