A few months back Threadless did a t-shirt sale where you get Free Shipping for orders over $75. I found myself looking for an extra $9.99 t-shirt to put me over the top. This is when I realized I just spent $10 more to save $5 in shipping.
Companies do this all the time. They make you think you are saving money by actually spending more.
The car wash down the street had a sign that said “25 cents off per gallon with purchase of Car Wash”. I rolled in and found out the car wash was $25. On average car washes in the bay area cost $15. I thought “whatever I’m going to save a bunch of money on gas”. After pumping some gas and doing the math I realized that I actually only saved $3 in gas.
Coffee shops are amazing at this. The small coffee (12 oz) is $1.75, the medium coffee (16 oz) is $1.95 and the large coffee (20 oz) is $2.10. I can get an extra 8oz for 35 more cents. That is a great deal. It is easy to convince a customer to upgrade and spend more money.
Service based businesses that charge on a monthly basis (like Verizon and Comcast) get their customers to pay more by offering the ability to pay yearly with a discount. Cell phone companies offer you a hefty discount on your new phone if you sign up for a 2-year plan. By getting the customer locked into to a 2-year plan it guarantees that the customer will stay on for a long period of time. A $200 discount on a phone gets you to pay about $2,000 over a 2 year period.
Behavioral Economist, Dan Ariely gave a Ted talk where he showed a copy of the the Economist pricing subscription page.
He passed out the Economist’s subscription pricing options to his students and studied the results. He first passed out a pricing page that list only two options:
Option 1: Online Only – $59
Option 2: Print Only – $125
The result was majority of the students picking option 1, the cheaper option at $59.
Next, Dan passed out a pricing page with three options:
Option 1: Online Only – $59
Option 2: Print Only – $125
Option 3: Online + Print – $125
The result was majority of the students picking Option 3, the expensive option at $125.
This is a pretty powerful example that shows you can get the customer to spend more money if they feel like they are getting a great deal. Option 3 makes you feel like you are getting the online version for free! You can watch Dan explain the study in this YouTube video around 12:30.
So next time you are trying to figure how to get more money from your customers figure out a way to help them “save money”. Do you have any examples of how companies got you to spend more money? Would love to hear about them in the comments.
I’m a huge sucker for Amazon’s “Super Saver Free Shipping” if you buy $25 worth of stuff. I always end up buying something stupid that I don’t need to get the free shipping.
I know a lot of people that do this. I wonder how much the “Super Saver Free Shipping” makes Amazon?
Rish,
Good stuff, especially in light of what I’m experiencing right now in Australia. We just moved here last week and I have been blown away by the price of everyday things like a burger or soda. Fast food joints have a clever way of tricking your brain into thinking you’re getting a good deal with the McD’s style “Extra Value Meals”, but with the prices inflated to two or three-times what I’m used to, it’s clear that they’re gaming me. “10 bucks for a chicken sandwich, but only 5 bucks more for a soda and giant serving of fries I’ll never finish? Count me in!” Trying to save money (or lose weight) definitely keeps your mind more aware of these kinds of pseudo-bargains. Also, feeling like a bloated fried potato at the end of a meal.
But in the case of things like cell phones and internet service, sometimes you really can’t beat those two-year deals (Personally I buy my smartphones used and go pre-paid — it cuts down our phone bills by half or more but the tradeoff is I have a year-old phone). We’re only here for a year and a half, but had to sign a two-year internet contract to get a decent rate. I did the math and figured out that even with the cancellation fee, we would save money in the long term. So every case is different.
Good point Mike. These cheap fast food deals is probably what is killing us these days.
I agree on the cell phone – thanks for mentioning that. You really need to do your math on things to see if you are actually saving any money. In your case and maybe even in most cases a 2-yr cell phone contract is the cheapest.
Good one…very basic simply explained and next time I see this on streets would remind me of Rishi Shah….
thanks
Hey Rishi,
Great Post! There are so many great examples of companies doing this to consumers. One that sticks out to me is with Spirit Airlines. My first and only experience with Spirit Airlines was on my trip to Atlantic City. I was shocked at how low their prices were in comparison to everyone else. However, after getting to the airport, I realized they charge you $30 for each carry on bag and $28 for each check-in bag each way! On top of that, there is no complimentary in flight service, including water. At the end of the trip, you are paying about the same if not more in comparison to some of the bigger airlines.
$30 for each carry-on bag!! That is crazy and what a crappy first time experience. Did you ever fly spirit airlines after that?
You should have just worn all your clothes like the dude in Cool Runnings.
Wow, Rishi. Seems like you’re always getting duped into spending more! I get duped all the time, too. Mostly with groupons. I go in thinking I’m spending $30 on $60 of something and some how leave spending $50 more than I expected to. I should have just never brought the groupon in the first place! I would have never went to the store and if I had, I would have probably stuck to my budget better instead of convincing myself I had already gotten 50% off and thinking it’s okay to spend more…
They do the side-by-side pricing thing a lot with electronics for BestBuy and Future Shop ads, and I get suckered into them even when I’m aware of them 🙁 Being a good shopper has never been so hard!