Drive to despair – price strategies for consumers

It is enough to drive one to despair. Despite the benefits of “dynamic pricing” (or surge pricing) many consumers are happy to over-pay prices by agreeing to follow a flat-rate, fixed tariff.

This situation is most evident in taxi fares; such as Uber; but is found for other products and services.

Consumer biases drive the problem. In short, many consumers mistakenly believe that by choosing a flat-rate they are obtaining a better deal than a metered one.

The reason being cognitive bias; a condition affecting people’s perceptions and judgements, such as pricing. Ted talks, as lecturer, Julia Galef, explains well. Cognitive bias has been deciphered by the Nobel laureate Daniel Kahneman in his tome; Thinking Fast and Slow”; as well as another three Noble laureatesYet, cognitive bias remains poorly understood by many, particularly John, Jane, me myself and Irene.

Price-setters/suppliers benefit. This inherent consumer weakness situation favours those suppliers/price-setters who understand the workings of cognitive bias behaviour.

In many industries, consumers can choose to pay either a metered or flat-rate price. These industries include: Utilities; Mobile phone companies; Online video streaming and gaming services; Rental Car companies; Retail Banking (ie monthly vs individual transaction charges); and Insurance companies.

A recent study at Researchgate by casts light on the economic benefits. Raktas’ study shows the benefit can be 5-59% improvement in costs/profits. Furthermore,

Uber’s impending flotation, and its eye-watering valuation (latest estimate USD120 billion) will provide further evidence of the value of understanding cognitive pricing.

Consumers drive themselves. What is surprising is that a consumer’s cognitive biases overwhelm economic logic and many chose the sub-optimal flat-rate. Thus, consumers literally drive themselves into sub-optimal pricing decisions. For the price-setter/supplier, fixed rates are more profitable if the rate is near the likely metered-one and “churn” is reduced.

Consumer protection? There is a range of protection available including more consumer-oriented firms and government policies. But at the end, consumers are best placed and the most powerful force to protect their own wallets.

‘Caveat emptor’ and exercise ‘choice’

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Do read my other blog entries!

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Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.ee