Dan Ariely Interview

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Dan Ariely Interview

Author of Predictably Irrational and The Upside of Irrationality

David Pierpoint:  Today I have the pleasure to be talking with Dan Ariely. Dan is a professor of psychology and behavioral economics at Duke University, and a founding member of the Center for Advanced Hindsight. He’s also the author of two New York Times bestsellers, “Predictably Irrational” and “The Upside of Irrationality.” Dan’s research has been published in leading psychology, economics and business journals, and he’s a popular speaker at events around the world. So, welcome, Dan.

Dan Ariely:  My pleasure. Nice to be here.

David:  Perfect. Well, all right. Let’s just jump right in. My question for you today is, based on your own personal experience and some of the research that you’ve done, what’s your favorite marketing strategy or tactic that seems to be working really well for you or others right now?

Dan:  I think that my favorite one has to do with how you establish a basic idea of value early on when a new product is introduced.

David:  OK.

Dan:  The idea is as follows. It turns out we have a very hard time to know how much something is worth. We deal with money all the time, so we think we’re really good at it. But the fact is that if you stop for a moment, and you asked yourself, “how much is a cup of coffee really worth to me in terms of pleasure?” you would realize that it’s really hard to do. What do people do when we have a task in which it’s very hard to accomplish it correctly? We find wrong ways to do it. One of the wrong ways in which people think about value is they look at the past decisions, and they say “What did I do before? What I did before must have been fantastic. Let me just repeat that again.”

So what does this strategy look like? Let’s give an example of the iPhone. Do you remember when the iPhone was first introduced? It was introduced at $600, then a few weeks later they said, “Sorry, sorry, sorry. It’s only $400.” Now was this a smart strategy or just a stupid strategy?

Let’s think about the following. Imagine that you saw a new type of a phone, with a new type of screen, and you – as the consumer – ask yourself, “how much is this worth to me?” It turns out it’s a very hard question to answer. Here’s a phone with a screen where the main feature is that you can pinch and make the pictures bigger and smaller, and you can slide right and left. It’s not really clear how much you should pay for that particular privilege.

But now, let’s imagine that Apple has anchored you on the price of $600. What would it do to your willingness to pay $400? Imagine two universes. In universe one – it’s the one we are living in – the iPhone was first introduced at $600 and then a few weeks later, they said, “Sorry, sorry, sorry. It’s only $400.”

But in the other universe, let’s say it just started at $400.

Ask yourself, in these two universes, which one of them would you appreciate the iPhone more, and would you be willing to pay more for it? The argument is that when it starts at $600, even though it’s no longer the price you’d pay, it still influences your assessment of its value. You’re still thinking about it; thinking about it too much, and actually thinking now that $400 is a really great deal.

It basically tells us that early prices really matter, because they tend to stick in people’s minds. They tend to stick in people’s minds for a long time, which means that once we adapt to a certain price, we get used to it. Once we get introduced to it, we don’t keep on asking ourselves, “should I do it or shouldn’t I do it?” But, in fact, we just accept the price. We assume it’s a reasonable price, and we just keep on repeating our behavior over and over.

David:  Interesting. That’s a great example, Dan, and I’m curious what your thoughts are about how this works with other products or services. With the iPhone, because it was so new and so unique, I’m wondering if they had an easier time establishing a high value, which they then reduced – versus some sort of product or service that people are already familiar with, and therefore have an established price-point in mind?

Dan:  Yes, that’s exactly it. You’re right. When you have something to compare it to, you have a very simple standard. Let’s think about something like coffee. If coffee at Starbucks costs $2.20 and somebody else comes out with coffee that costs $2.18 or $2.22, we will compare it relative to Starbucks coffee. There’s no escape from that, because that’s defining the relative comparison. But if there was no Starbucks coffee, all of a sudden, those things would not matter as much.

So, it says two things. One is that when you introduce a new product, you should think about the natural comparisons, but it also says that you can actually have some control over what the comparison is, and controlling that could have a long term impact.

For example, think about something like TiVo. Was TiVo supposed to be framed as an alternative to a VCR, or would it be better if it was framed as a Linux‑based home entertainment system? How would these two examples have affected your willingness to pay for it?

[…read full interview]

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