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Psychological Pricing on Mass Market

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There are two group of consumers who will respond differently when it comes to pricing. One group of consumers who are super price sensitive and another group of consumers who are very willing to pay for premium price (think of consumers of branded shoes and five-star restaurants).

The rule of thumb in economics is, if you sell at a low price, many people will buy from you but the profit margin will be low. If you sell at high price, you get higher profit margin but less people will buy from you. It has always been a dilemma for marketers to set their pricing as there are plenty of factors to take into consideration to decide whether to target profit quantitatively or qualitatively. But think about it, why the marketers have to choose? Why not let the consumers to choose instead?

Therefore, the ideal strategy is always to leverage the situation by creating a pricing strategy where you can get customers from both sides of the extreme – The thrifty ones and the extravagant ones.

The leader of genius must have the ability to make different enemies appear as if they belonged to one category. – Adolf Hitler.

Consider a menu in a restaurant with this pricing:

Chicken Burger (plain burger) – $2

Special Chicken Burger (plain burger + egg) – $3

Roasted Schnitzel Chicken with Cinnamon Bread ( roasted chicken + cinnamon bread + vegetables ) – $7

Imagine yourself looking at the menu – Roasted Schnitzel Chicken with Cinnamon Bread surely sounds more ‘premium’ compared to Chicken Burger, no? There are many people out there who will be more than willing to pay extra $5 dollars to eat something deemed more luxurious than just a plain burger. But think about it, it doesn’t really cost that much to roast a piece of chicken, giving cinnamon bread and putting in some vegetables. I doubt the cost would exceed more than $1 by giving all these extras. Yet, if we to charge $5 extra, people are still willing to pay.

Hence, it gives an illusion to the consumers as if they have a choice – to eat thriftily or to eat extravagantly. It gives an impression to people that either they can be a cheap skate and eat thriftily or be generous and eat premium food. And the thing with human mind is, typically, we will always want to avoid getting the impression that we’re cheap if we could afford not to be cheap.

Long story short, the majority of thrifty people will always choose a plain chicken burger because most probably they just want something which fills up their stomach while people who are willing to pay will always associate themselves with luxurious food. Through this strategy, organization will be able to target customers from both side of the world.

The example I gave above is quite distinctive. In the real world, the pricing is much more subtle than this. Consider Starbuck’s menu (I got this from the Undercover Economist book)

Cappuccino – $1.85

Hot Chocolate – $1.89

Caffe Mocha -$2.05

White Chocolate Mocha – $2.49

Venti White Chocolate Mocha – $3.09

The cost of making all the drinks above is almost the same. Perhaps the more expensive one will have slightly bigger portion with a little extra chocolate powder and some added whipped cream. But what Starbucks could achieve is to target customers from the entire spectrum.

I will share a personal story to illustrate another example:

I was considering to get myself a 1TB external hard disk a while ago and Western Digital’s MyBook look to be a fine choice. So I came across 2 models – WD MyBook Essential which is RM450 and WD MyBook Studio which is RM600+. From the first impression, I was thinking of getting WD MyBook Studio as i thought it must have some pretty uber cool features which make the hundred bucks difference. But surprise surprise … the extra features was merely :

1. Several bundled software like automatic back-up software (which can easily be downloaded off the net for free)

2. Fire-wire (which is not really necessary for myself)

3. A little bar on the cover of the hard disk which indicate the space capacity left. (which is pretty cool but also not necessary)

4. Supports MAC (which I don’t have)

It’s quite astonishing that all these minor add-on and extras actually cost 150+ bucks difference. I almost fell into the trap of psychological pricing. With that in mind, I became a cheap skate and chose the cheapest model.

PS: I glanced on my draft list and realized I still haven’t complete my post Knowledge Worker’s Motivation Hierarchy yet. Oops.

Written by elan85

December 11, 2008 at 11:16 pm

Posted in Neuromarketing

Subtle Marketing

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Few weeks ago in a business meeting, a lady told me that Tobacco companies (British-American Tobacco and Philip Morris) were actually the main contributors to the multi-million dollars anti-smoking campaigns in Malaysia, few years ago.

I was puzzled as to why tobacco companies will want to contradict their business model. She assumed it was part of the corporate social responsibility plan.

But I wasn’t convinced, I think there’s more on to that.

After reading an article just now, I finally realized the ultimate reason why tobacco industry are willing to splash huge money on anti-smoking campaigns – it’s all part of subtle marketing.

Tobacco causes addiction, and people always have hard time resisting cravings. Therefore, when a tobacco-addict come across an anti-smoking advertisement, the image of cigarette will simply activate the brain’s nucleus accumbens, an area associated with cravings. Tobacco addiction actually outweighs the fear of  damaged lungs graphics when computed by our emotional calculator while viewing the ad.

In a simple emotion-rule – Addiction > Fear

Crazy bunch of marketers.

Written by elan85

November 27, 2008 at 1:11 pm

Posted in Neuromarketing