On App Store Price Anchors

December 26, 2011 § Leave a comment

Dan Ariely is one of my favorite academics in the business world. He’s written such great books as Predictably Irrational (or the TED talk) and (my favorite) The Upside of Irrationality. He’s got a post on his blog about why it’s so hard for smartphone users to shell out a buck for an app on a phone, given that we spend so much on crap we don’t really need. For anyone familiar with basic concepts in behavioral economics, marketing, or psychology, this is a textbook example of anchoring. Consumers’ willingness to pay is very much determined by how much they have seen similar items priced, as opposed to how much they think an item is intrinsically worth. Ariely’s post nicely outlines this concept, you should read it. But, he says nothing of how app developers can overcome this problem. I propose a solution I will deem the Starbucks Solution.

Before Starbucks arrived the typical cup of coffee went for about a dollar. Four dollars for a cup of coffee?! Not a chance. But Starbucks made a point of charging people for the “experience“. They realized you can’t easily move price anchors. So they convinced people that they weren’t buying a cup of coffee (which is only worth $1), but were buying a lifestyle. It also didn’t hurt that they made damn good coffee.

This isn’t necessarily completely applicable to an iPhone or Android app, but it does illustrate a way in which developers can position their product to undermine consumers’ cognitive bias. If I were launching an app today I would charge a lot more for it than developers are charging now. First, I would build a great app, this is the sine qua non of ALL product market strategies. I would price in the $15 – $25 range. And by that I mean the $14.99 – $24.99 range of course. This may seem absurd. It is much more than people are used to paying, but that is the point. You may ask: “why not move the price point incrementally, say to $3 or $5?” Because you have to shock people out of their price anchor. You have to convince users that they are not buying an app, they are buying something different. If people are accustomed to paying $1 for an app and you get them to buy a something from their phone for $25, they will not think that something is just another app, it’s known as cognitive dissonance. Cognitive dissonance is real and more powerful than anchoring in terms of psychological pressure.

So my advice seems trite: charge more. But it’s a bit more nuanced than that: charge a lot more and when describing your product, don’t ever use the word “app”. This is not entirely novel. Remember the diamond app when the iPhone first came out? It cost $999 and put a picture of a diamond on your phone…I doubt those guys made a ton of money, but I’m SURE they broke even, which is more than most developers can say for themselves. Gimmicks aside, not many serious productivity- or utility-focused apps have tried to aggressively push out the price point.

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