Maximizing revenue via irrational behavior of consumers

Tiger mom Amy Chua is out with a new book which controversially suggests that a principal reason certain ethnicities have better academic and career outcomes is their ability to control impulsive behavior in most facets of life. Presumably such behavior results in more sustained efforts and deliberating before acting. While academics and others debate the merits of her polemical book what is clear is that a sustained effort at steering humans away from impulsive behavior likely will result in many tradtional pricing models being upended.

Pricing models across many industries consciously or not seem to rest on irrational behavior among consumers such as the desire for instant gratification and the anchoring effect. Instant gratification often makes people settle for less as when someone chooses a half a box of chocolates today as opposed to a full box the next day or more frequently (and expensively) in car showrooms when customers often buy a "fully loaded" car frequently with unneeded features and colors that they did not intend on initially. Anchoring is more pervasive in brick and mortar retail  where customers tend to splurge based on the suggestions of the sales people about a supposedly "marked down" item. Another characteristic is confirmation bias where consumers have established notions of what they want in a product or service. This often works to a merchant's advantage as they can pander to those biases in order to draw and retain customers.

Thinking on the fly is also what drove a a 3 level pricing model the Economist briefly (and successfully) used. As Duke professor Dan Ariely explains the newspaper had an offer for new subscribers to choose one of 3 subscription options: $59 for digital, $125 for print or $125 for both print and digital. The print only offer seems to make no sense but it did serve to drive more new subscribers to choose the more expensive option rather than the considerably cheaper digital, a medium that is generally far more popular. 

In the preceding example with the Economist, Ariely notes the expensive print offer only served to underscore the "attractiveness" of the combo with the publication reaping rich dividends as a consequence of lazy thinking . It is a surprisingly sparingly used tactic.  Hotels could, for instance, on low occupancy days could use it to bundle room sales with restaurant offers; the latter being a notoriously poor draw in most hostelries.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.