A while ago I was shopping for internet plans and I was immediately struck by how consistently inconsistent the pricing regimes were.
Let’s look at Internode for example. Their “Bundled Easy Broadband ADSL2+ Plans” are:
Now the first thing that surprises me is how the broadband cost sits at $x.04, which conveniently places the total price just below a nice round dollar figure. This is called psychological pricing, and you’ve definitely seen it before:
The other thing which should not be at all surprising is the amount of extra value you get for relatively small price increments. For $10 more than the 250Gb plan, you can get a whopping 500Gb. So for a price increase of 16%, you get a 100% service benefit. You’d be crazy not to buy right?! And again, for 14% more than the 500Gb plan, you get unlimited Gigabytes, (in layman’s terms this means a hellavalotta Gigabytes). The trend can be seen in many online service providers. So, what are they getting at? Is it non-linear or pay what you want pricing, or is it just a result of a very elastic demand curve?
Firstly, humans process information in the same order as it is read. So if we read a price like $59.99, the first thing we think of is $50 something. Never mind the reality of a price perilously close to $60, we feel more comfortable processing the $50 something. The rest of the numbers are basically just noise at this point.
Secondly, non-linear pricing makes us more likely to spend more because psychologically we perceive better value for money. A 16% fee for 100% extra service feels like a great deal.
Thirdly, if the consumer wants peace of mind then they are willing to pay for a service they may never use. This taps into the “just in case” mindset of many consumers.
We see these pricing strategies in a lot of sectors where the base service is actually identical between plans, so instead we are offered increased quantities of the same thing. Think about phone plans for example, a little extra cash gets a lot of extra texts, or minutes, or Gigabytes.
When a large change in price has little relative effect on the demand quantity of a product, we say the price is inelastic. Meaning the customer is willing to pay anything to get the service because the service is a necessity, like fuel. But when a relatively small change in price has a large effect on the demand quantity of a product, we say the price is elastic. Meaning the consumer treats the item as more of a luxury and will use a quantity of the product by choice.
Internet plans are more about choice. Few people will use more than 500Gb (although the number is increasing), yet paying for an unlimited plan gives me the freedom to not have to worry if I download a lot or a little.
The other thing to learn from this kind of pricing is it tells us that the provider must have large fixed costs relative to its variable costs. An internet provider has fixed costs to:
- Keep a call centre active regardless of calls
- Keep infrastructure running regardless of condition
- Keep websites up to date regardless of traffic
Then there’s little surprise that the difference in cost associated with simply letting a user create 250Gb or 500Gb of traffic is marginal. So marginal that we can go from 500Gb to creating as much traffic as we want for a nominal increase.
In short, there are a lot of tricks being employed to get you to spend your hard earned coin. Don’t be deceived by the $ something + 99 cent ads. Don’t be fooled to pay more for “value for money”. And don’t buy something you may never use just for some peace of mind.
Keep your emotions in check. Or maybe just ask someone you trust to hide your credit card.
Iacobucci, D 2014, Marketing Management (MM4), Student Edition, South Western, Cengage Learning, Mason USA.
Live Science 2011, Why Do Most Prices End In .99?, Melina, Retrieved 30th August 2016, http://www.livescience.com/33045-why-do-most-prices-end-in-99-cents-.html
nbn co 2011, Internet Downloads Increase by 33%, Retrieved 30th August 2016, http://www.nbnco.com.au/corporate-information/media-centre/media-releases/internet-downloads-increase-by-33-per-cent-abs.html
Layton, Robinson, Tucker, 2016, MPE781/981 Economics For Managers, 1st Edition, Cengage Learning, South Melbourne, Victoria, AUS.