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Pricing Experiments You Can Learn From (2011) (conversionxl.com)
270 points by tekkk 10 days ago | hide | past | web | favorite | 55 comments

"Asking people what they’d pay for and how much rarely works."

Yes, asking a person about what he or she is willing to pay _hypothetically_ doesn't work. But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay. In fact, it's one of the reasons why William Vickrey won the Nobel Prize in Economic Sciences. The primary reason why you would reveal your maximum willingness-to-pay in a Vickrey auction is because you know beforehand that if you win the auction, you won't have to pay your own bid——you always pay less than your own bid as a winner. How much less is up to the auctioneer but in all cases it's less than your own bid. The pay-what-you-want mechanism cannot reveal how much a person values a product or service because there's such a strong financial incentive to simply state a low amount.

Disclaimer: I'm the co-founder of Veylinx, a platform to measure maximum willingness-to-pay of users using Vickrey auctions.

>But there are numerous scientific studies that show that using a Vickrey auction, [...], can elicit a person's maximum willingness-to-pay.

Yes, but participating in an auction is a concrete action to "commit to pay" -- and therefore not what the author is talking about.

The context of the author's quote you extracted ("asking people what they'd pay"†) is about abstract notions of what consumers think they would pay; e.g. gathering hypotheticals of prices from marketing efforts like customer surveys or focus groups.

Surveys and focus groups have no real money payment commitments. Auctions do.

† author also wrote a few sentences later: "When it comes to money, people are unable to predict accurately whether they’d pay or not. It’s much easier to spend hypothetical dollars than real ones."

I agree that skin in the game matters. But my point is a bit more subtle. Imagine the following situation: I present you a new product and I'm going to ask you how much you're willing to pay for it. Let's agree that you'll pay the amount you mention dependent on the flip of a coin. Even though you clearly have have committed to potentially paying real money, this method won't reveal what I really want to know: your true perceived value of the product (maximum willingness-to-pay). The Vickrey auction solves this problem.

Vickrey (or any) auction doesn't solve the problem if the amount of supply is greater than the amount of demand, which is the common case in software.

That's simply not true. If your maximum willingness-to-pay for a SaaS solution is, let's say $5 per month, then a Vickrey auction will reveal that and the seller can decide to sell it to you at, let's say, $3.

So you set up a focus group of potential customers and vickrey-auction (or VCG-auction) one subscription (or k subscriptions) among them, for the purpose of recording the bid distribution?

For this to work, wouldn't the participants need to believe that the auction really is the only way they can get a subscription?

Depends on what you would like to focus on. If you want to capture the complete demand curve for a product, then you're right. In that case the participants shouldn't be aware of any other alternative to get the product. But you could also choose to focus on users who aren't willing to pay the current price and better understand their distribution. This would allow you for example to determine which promotion would most likely turn a free user into a paying user.

I'm not familiar with Vickrey auctions; can you explain how they solve the problem the author is referring to?

With eBay proxy bidding, you tell eBay what the maximum is you are willing to pay. Then, if you win the auction, you don't pay your maximum. You pay just above the maximum amount of the bidder you beat (i.e. the person who would have won if you hadn't participated).

So, how should you bid if you are a rational person? You should bid the maximum you are willing to pay. As there is zero chance that you will pay more than you needed: you will always pay just enough to beat the second place bidder.

So, the incentive is such that you reveal your maximum price to eBay.

The eBay application isn't really appropriate because eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay. A pure application of the Vickrey auction gives all participants an incentive to reveal their maximum willingness-to-pay.

"eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay"

I don't understand how it removes the incentive? Would you mind going into more detail?

(I ask because I believe I am rational when I place eBay bids, and I always choose the actual maximum I'm willing to pay.)

Let's say that the first bidder placed as a proxy bid $100 but eBay only shows $1. This will already exclude everyone who has a maximum-willingness-to-pay lower than or equal to $1. A second bidder might put as a proxy bid $120. This wil result in eBay setting the highest bid at $101. At that price nobody with a maximum willingness-to-pay lower than or equal to $101 will reveal their max. The Vickrey auction doesn't reveal anyone's bid and, thus, you collect a lot more bids (demand curve data). I agree with you, however, that the eBay mechanism results in the same person winning the auction.

When I bid on coins I NEVER bid the actual maximum on ebay; I just use gixen.com and place my actual willingness to pay there.

The reason is that for most goods (luxury goods, stuff with resale value, stuff where you might now all the details, etc.) you are actually dealing with a common value auction, so you DON'T want to reveal your cards before hand.

For instance, suppose I see an auction with 5 existing bids.. I stop and say wait that's probably something interesting, and start doing a bit more research on the value of the coin.

Similarly, I might do some quick research and decide that a coin is valued at $10, but if I see bids at $100 that means that either my prior was wrong or the bidders are wrong, and thus I do a bit more research and try to see if there is anything special about the coin (e.g. the quality is actually higher than what the auction description says).

Then besides all these rational motives, you have the irrational ones. A lot of people bid on things almost like gambling (bid the maximum+1, if that doesn't make them the highest bidders, then keep bidding). If you don't place your bid out there, you prevent this problem altogether. [1] https://en.wikipedia.org/wiki/Common_value_auction

The basic problem is what price to set. You don't want to take the risk to set the price too high (probability of not selling at all) but at the same time you don't want to set the price too low (profitability). What if you could measure the complete demand curve for a product? Then you could simply select your ideal price without taking any risk while maximizing revenue or profitability. Vickrey auctions allow you to do exactly that because it incentivizes participants to reveal their maximum willingness-to-pay and a demand curve is simply the set of maximum willingness-to-pay sorted from high to low. How is that possible? Well, it involves a bit of game theory: https://www.quora.com/Why-in-a-Vickrey-auction-does-one-pay-... (Note that a Vickrey auction can be generalized to more than one winner and, thus, the price is not always the second highest price.)

auctions also put up pyschological barriers for some customer segments, so aren't always the best choice.

another (classic) alternative is conjoint analysis: https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing)

it's difficult to do well, but will reveal willingness-to-pay without requiring the commitment of real dollars.

"But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay."

Sounds like a catch-22 situation, how did these studies determine they actually measured a person's maximum willinges-to-pay? Even when a person has decided what their maximum is, there are many known sales tactics that can increase it beyond what the buyer initially decided. Some, like bait-and-switch are so effective that they're outlawed. So, it'd be really interesting to hear how these studies actually determined they actually measured what they said they did.

It's done with so-called value induced auctions. In this type of auction you simply bid on a voucher that's worth $x dollars, where x is different for each participant. Theory predicts that your bid should be $x (your maximum willingness-to-pay). Considering value is induced, researchers know both the prediction and the observation, and calculating the difference determines the 'truth revealing efficiency' of an auction. See for example: https://www.sciencedirect.com/science/article/pii/S016726810...

I sense an upcoming reckoning against these techniques.

Big "SALE!" signs and prices ending in 9 aren't benign: they're malevolent attempts at psychological manipulation, and they degrade consumer trust the minute customers recognize them as such. While it's likely impossible to fully counter the bias, I've started clutching my purse strings more tightly since those big glowing signs became less of a declaration of value, and more of a warning that "We don't have your best interests at heart"

These techniques work, but only because people view this manipulation as acceptable and commonplace. It would do wonders for consumer confidence (and therefore sales) if stores could give a credible and transparent promise that they make every attempt to inform consumers about the value of their products. Shoppers like myself (busy, uninformed about most categories of things they buy, and unconfident that they can navigate the "DEALS" landscape and come out ahead) would not only shop there: they'd pay a premium to do so.

>Big "SALE!" signs and prices ending in 9 aren't benign: they're malevolent attempts at psychological manipulation, and they degrade consumer trust the minute customers recognize them as such. While it's likely impossible to fully counter the bias, I've started clutching my purse strings more tightly since those big glowing signs became less of a declaration of value, and more of a warning that "We don't have your best interests at heart"

You won't see this - someone has already tried before it and it nearly financially ruined the company.

The sad thing is it works and people are easily manipulated. Ron Johnson (former CEO of JC Penney) nearly bankrupted JC Penney with his "fair and square" pricing. Consumers are so used to being manipulated by fake sales and xx.99 pricing that having merchandise advertised without any gimmicks actually results in worse sales. [0]

I'm hoping one day people will turn around and be against being psychologically manipulated, but I don't see it happening anytime soon. After all, many people still defend advertisements. A socially accepted form of psychological manipulation that is intended to make you feel worse about yourself and your life unless you buy <product> because <product> will make you happier.

The fact people are okay with ads in any context completely baffles me. There are people who are totally fine with being emotionally and psychologically manipulated in return for something being "free". To the point where people in western cultures associate the colors red and yellow with food and don't question why.

[0] https://www.cbc.ca/radio/undertheinfluence/the-real-reason-m...

He failed because sales for JC Penney fell, but in a sense perhaps he succeeded in preventing people from purchasing clothes they didn't necessarily need?

It would have been a success if he had gotten people to pay a premium for the clothing they did need.

He definitely couldn't take a customer base used to and desiring sales and "convert" them to an alternative. To what degree you could seek out and train a customer base to non-sales non-negotiable prices is less clear.

I personally like the information provided by ads. It provokes me to do research. I view the first search results I get as similar to ads. It educates me on how to refine my search.

I think it is pretty clear that sales do attract customers, though, even when the "sale" price is the same as a non-sale price at some other time during the year. The interactions are complex, though - see [1]. For example, it's a well-used tactic for Amazon sellers to increase their prices slightly and then offer a discount to attract people who aren't tracking price trends since many consumers are somewhat addicted to "getting a deal" regardless of whether the "deal" is in comparison to the true base price of a product or just its current advertised price.

[1] https://www.sciencedirect.com/science/article/abs/pii/S01482...

> I've started clutching my purse strings more tightly since those big glowing signs became less of a declaration of value, and more of a warning that "We don't have your best interests at heart"

This is how I started viewing that decades ago. I have learned to become very suspicious of "sales", and the louder the deal is shouted, the more suspicious I become.

I think of it as similar to the "chandelier rule" in business (when you're being pitched a deal, the larger the chandelier in the room, the worse the deal is for you.)

cory doctorow had a good piece on our "mental immune system": https://locusmag.com/2018/01/cory-doctorow-persuasion-adapta...

You assume people have control over their actions. I don't believe this is the case. And I'm not talking about some "lesser people", you know, a "stupid majority", I'm talking about myself. I may think I'm rational, I may feel that in the given moment I'm doing what I want for myself, and, actually, I know quite a lot about all these marketing and psychological tricks, but in the end I'm just a monkey. I will buy more food than I need if I'm shopping hungry and w/o a list, I'll notice pretty packaging first, and even though the more subtle and complicated psychological tricks get, the less predictable the behavior is, they still essentially work. If 29.99 pricing tag wouldn't bring wholesalers more money than 30.00 pricing tag, they would sell it for 30.00.

The notion that you must be good at selling shit is reinforced in most companies, colleges and probably schools.

The idea that choosing products and making correct economic decisions is a skill - this idea is formally taught almost nowhere.

Is there any surprise that manipulative techniques work so well?

If you think this is driven purely by self-interest of companies, you're probably wrong. Employees in most big corps waste immeasurable amounts of resources on "internal marketing" (from resumes during hire, to presentations, to emails sent to their bosses). Most big companies still believe it's better train 100 workers to sell their shit, than to train 1 VP to use basic math and critical thinking. Similar situation with resumes. HR bemoans people lying on their resumes, and then do absolutely everything possible to incentivize applicant to lie as much as possible.

Heck, even here. Where are the articles titled "here is how I rationalized my shopping"?

As far as pricing, I think one way to combat the manipulation is to put prices on your shopping list and never buy anything just because it's cheap, unless it's already on your list.

Another strategy is to ignore prices altogether and just skip items that are too expensive before the final checkout.

I remember reading that article about having three variants of a product. I think it was something like that:

1. one really cheap but bad

2. one better but much more expensive

3. one even better, and more expensive

Since for most people, the middle option (2) made more sense than the cheap one (1), they would all buy the last option (3) because for a bit more money you had something better than 2.

Apple seems to be using a similar strategy with very limited capacities for their first option, which makes most people buy the more expensive option to have more capacity. From there it's easy to jump to more expensive stuff, or to add options and accessories.

This is price bracketing, which is a form of anchoring.

The idea is that if you had two items, one for $10 and one for $40, adding a $200 item is going to increase sales of the $40 because it makes it seem more reasonable in comparison. It's not going to push a lot of people to the higher-priced item.

The Apple example I like is the iPad. It's priced against both the 512gb version (+$350) and the Wifi+Cellular (+$130) so you think that the $649 version is a bargain against $1129 and you don't compare it against the Amazon Fire at $49.99.

An iPad wouldn’t be compared to an Amazon Fire because they aren’t comparable products. If you value iOS, Facetime, iMessage, and Apple’s general product experience, then others would also have to provide a similar experience to be comparable.

Most people I know watch videos and read books on their tablets, which works equally well on an iPad as on a Fire HD.

Most people I know FaceTime...every single older person in my extended family. It would be useless without them being able to Facetime with their grandkids.

That should be most older people you know, then. Older people often choose Apple products due to the comparative simplicity of the operating system and UX. However, Android is far more popular in terms of total units sold on both phones and tablets, so the parent comment is broadly true.


I don't know anyone who uses Facetime and I know a bunch of people with iPads.

This is the worst most distracting website to ever exist. As soon as I start reading a line something pops up (first a man, then another popup at bottom then sharing buttons covering up more screen). Why do you do this :(

And yet, they are responsible for millions in extra top-line revenue for massive companies. These guys are good at what they do :)

Likely because it works in some capacity.

Reader view on Safari.

I feel like this is the same general pricing experiments/info we have seen synthesized for the past few years in giant articles. I was hoping there were some new juicy SaaS pricing experiences to be shared.

Not that the information in this article is bad if you haven't seen it before or haven't fiddled with pricing in a while

TIL: People are weird and irrational, and there’s much we don’t understand. Like why do shoppers moving in a counterclockwise direction spend on average $2.00 more at the supermarket?

Only in the Northern hemisphere. In the Southern hemisphere, shoppers moving in the clockwise direction spend more money, due to the Coriolis effect.

Have you got a link to the study about this? To be honest, I feel a lot of these claims are like nutritional studies, where when you look into it the original study wasn't great or are for highly specific scenarios but the general claim will be spread for decades anyway.

For this one for instance, what was being bought? How expensive? How did the prices vary? What about shelf positions? Who were the customers? How many customers? How were they made to pick a direction? How long were they shopping for? What factors were and weren't controlled for?

Usually when the controls aren't great, you find that further studies that improve on the controls lead to the measured effect size getting smaller and smaller.

Maybe not the case here, I don't know, but I'm very skeptical about general claims that sound hard to measure.

Anti-clockwise is the mathematically positive direction. Also, NASCAR.

Confusing to those who navigate by compass, though.

OT amusement: After school and teaching and spending half a career so-encumbered, I took up boating and took a marine navigation course. At first it drove me crazy because all of their + and - direction changes were backwards and I was screwing them up.

Counterclockwise is an anti-pattern (at least for me), my guess is that it makes shoppers move more slowly, pay more attention to displayed items and spend more time at the shop.

Right-handed people, with their bias toward turning right, tend to walk anti-clockwise when entering a loop from the outside (such as grocery stores), and clockwise when entering from the inside.


People who travel anti-clockwise see more stuff, because if they travel clockwise, then they'll turn right and toward the front/exit before they finish a complete loop around the store.

Forced pricing is exactly why theaters sell 3 sizes of popcorn, with large "only being 25 cents more than medium. The goal isn't to get you to buy the large, it's to get you not to buy the small. There was a book I read years ago about this sort of psychology and food, but I can't recall the title.

He lets a lot of weird behavior slide. Like this one:

"Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo (almost 17 times more than before), but customers paid only $.92 on average.

The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. This is a substantial result, especially since it came from a real setting."

Why does pay what you wish with half going to charity slash sales in half compared to standard pay as you wish?

A simple guess would be that people feel comfortable low balling the theme park but not the charity, even if any amount would help.

Data Scientist / MBA Marketing here

There's a difference between "how much would you pay for X?" versus "would you pay N for X? How about M for X?"

You can also conduct a Discrete Choice experiment, asking respondents to choose between priced bundles (repetitively) to estimate the value of each component

I really dislike this type of articles, because for any such statements to be true, they have to be replicated by different vendors on multiple occasions. When one vendor does one thing and gets a result once, it does not mean that this is a pattern than can be exploited.

I would love to see recommendations for articles like this but for b2b pricing. I suspect there are better ways to price professional buyers.

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