Customer behavior does not always correspond with what you expect. Sometimes customers act in a way that might not seem rational. For example, customers frequently say they prefer transparent, no add-on pricing, but StubHub has recently learned they behave differently. Customers have said they prefer simple prices like $15.00 rather than $14.99, but evidence shows they actually pick $14.99 items more frequently. So if you are setting prices or developing pricing strategies, make sure you understand or test how your customers behave before making big pricing changes.
Last week, in a Wall Street Journal article, StubHub Sings the Blues After Shifting Fees, we learned that Stubhub had suffered a sales decline in the three months since they eliminated add-on fees. StubHub did not say how deep the sales decline was, but some ticket brokers who sell on the site had estimated decreases of 15% – 50%. StubHub had heard from their customers that they don’t like add-on or hidden fees. It was cited as the number one customer frustration, so StubHub added the fees into the quoted price, enabling customers to see the total price. What happened? Customers appear to be buying their secondary-market tickets from other sites with lower headline prices but additional transaction and delivery fees. That does not seem rational, so why did it happen?
In Thinking, Fast and Slow Daniel Kahneman described two psychological systems we all use to manage problems. System 1 operates very quickly with minimal effort, and is a sort of triage for problems. System 2 gives more attention to more difficult mental activities like calculations and difficult choices. System 1 is the first responder to all problems and choices. Although I am not doing justice to Kahneman’s work in the book, I suggest StubHub’s customer defections are due to System 1 decisions. When a customer has to make a choice between an all-in ticket price on StubHub and a lower price on another site which requires adding up the pieces, the customer’s System 1 will quickly choose the lower headline price. Unless it is a very expensive ticket, System 2 is unlikely to ever be engaged, and the customer will go with the first choice.
There are many cases of customers behaving differently from how they said they would behave or different from typical expectations. For example, customers say one of the most hated shopping experiences is negotiating for a car. They really hate the back and forth with car sales people, checking with the manager, and spending hours at the dealer. With that much dislike of the process, we should expect no-haggle pricing of cars to be the standard. While there are some examples of that being successful, GM’s Saturn brand is an example where it was not successful. Saturn cars had generally better quality and reliability than other comparably equipped GM cars, and their prices were lower. Saturn also had no-haggle pricing and the other GM brands maintained the traditional individually negotiated prices. Logically Saturn should have sold more cars than their GM counterparts, but they did not and Saturn is now out of business. No doubt Saturn’s results were based on many things other than pricing, but the customer-stated preference for no-haggle pricing should have given Saturn an advantage, but ultimately did not.
Notwithstanding everything I just wrote, I am not in favor of just following the herd. In fact, I have written multiple blog posts arguing you should avoid the “We can’t do that in this industry” mentality. StubHub tried to innovate and deviate from the industry norm, and they appear to have lost some sales as a result. I applaud StubHub’s efforts to innovate, but like JC Penney, they have learned that major changes in pricing strategies can be dangerous. Perhaps it will all work out, but I would try these changes on a smaller scale and test the customer reactions before deploying it broadly.
The need to validate customer behavior is the biggest take-away for me. There is no certainty in business, and pricing strategies and tactics are essentially bets on how customers will react to certain price structures and levels. Playing it safe and following the herd will result in mediocre profitability at best. But, you can improve the odds of your bets succeeding by testing customer reactions to smaller changes before placing big bets on major price changes.
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