A Guide to Pricing Plans

That said, the more I have learned about psychology and behavioral economics/finance, the more I have come to understand that humans are fundamentally irrational (at least on a surface level). The more I use that as my operating assumption when modeling customer behavior, the more accurate my models have seemed to be.

On the surface, that seems to be a depressing assumption to make about humanity. What I have come to understand/believe is that the surface level irrationality of most customers is actually fairly rational once the whole person is taken into account — especially their psychological make up.

Using the 100-220-500 example, some people will rarely or never take the highest priced option of something. They use this as a (useful, imho) quick and dirty heuristic to avoid being or being seen as a spendthrift. You seem to be assuming that everyone has the heuristic of “what's in their own best interest given accurate information”, and my data over the decades is that this stance is relatively rare (Note that “not being a spendthrift” is just one common heuristic. Another is “not being or being seen as cheap”. Another is “not being seen as different or rocking the boat” (this is why “most popular” works as a label on an option). Another is “being seen as rich” (some folks will just go in and buy the most expensive option as the default) or “being seen as significant” (patio11 has an example of his Japanese manager not being willing to take a smaller SAAS option because he didn’t want to present the label “freelancer” on an expense request).

The list goes on, and these are all very real heuristics that people use to make decisions — and they use these heuristics much more often than a holistic analysis of what is best for them or their organization.

Given the above, are these techniques “tricking people”? Maybe. I personally consider them to be tools that can be used responsibly or irresponsibly. An organization with rock solid ethics can use these techniques to hack their users brains to get them to more accurately do what is in the purchaser’s best interest. At least that is my opinion and my approach. YMMV.

While I agree that people are far from perfectly rational, I strongly disagree with the viewpoint you are taking here. You do not know what is in the purchaser's best interest. Only they do.

Remember that the maxim that humans are far from perfectly rational applies to you too. If you think you are hacking users brains in their own best interests, is that really true, or has your own brain figured out a fancy rationalization that lets you do what's in your best interests even if it harms others? My money is on the latter.

1. In many/most cases, there are a very limited set of user profiles that can be used to model purchaser behavior. A well-designed pricing scheme will accommodate these purchasers needs and wants. In some cases, a good pricing scheme will push the purchaser to be more analytic in matching their package with their actual needs (e.g., by not presenting them with an option that can satisfy a default heuristic that may not be useful in the specific purchasing context).

2. (See 2a for a succinct summary of this point. I am leaving this hear because it is a decent example.) In many cases, the consumer is price indifferent -- most or all of the options work for them, and the price (within a relatively wide range) will not make a difference in whether to purchase or not. In this case, it is in the provider's best interest to maximize the price. A simple example of this is the wine prices at my friend's winery. He makes a ridiculously good wine, with a very low tonnage per acre (leading to a very concentrated flavor), high quality french oak, etc. The amount of wine that they can make like this is limited by the terroir and the amount of land they own. Folks who are willing to buy wine of this quality are fairly price insensitive -- they just want a really good wine and (ideally) a really good story to go along with it. While his other wines are in the $20-$60 range, these top end estate wines are much higher (and should be even higher, imho). The folks who can pay $120 a bottle can pay $150 or $180, and that difference is insignificant to the purchasers. Their only top end is that they don't want to seem like they were ripped off, which basically means "not as high as their favorite hard-to-get wines". The extremely high margins on these wines make a real difference to my friend's bottom line.

2a. Let me try to summarize #2 better. Most cases of pricing have some sort of pricing asymmetry -- that is, the price within a wide range doesn't matter for one party, but it matters a lot, often on an existential level, for the other. Optimizing what the price-indifferent party pays is a reasonable and logical decision, imho.

3. Your are absolutely right that I have created a fancy rationalization for myself. I am both aware of that (and try my best to keep it in check), and I am OK with that -- it's a very human thing that allows us to live without falling into analysis paralysis.

4. Given #3, understanding why people make the decisions they do has literally been a lifelong mission for me. When I was in high school and early in college, I assumed that people were hyper-rational like I thought I was (I was not), and I assumed that all they needed was accurate information in order to make the "correct" choice. I cannot begin to tell you how wrong I was. What I have learned in behavioral psychology, behavioral economics/finance, and cognitive development has shown me that human needs and wants are shaped by a variety of factors. That said, the potential range of complex factors is actually fairly limited, but it is not as limited as "make a rational decision on the needs of the immediate context". Far from it. This is an area of specialty for me, and I consider it to be a very powerful specialty. I will admit that it gives me a massive unfair advantage in a lot of interactions. That said, I try my best to use my specialist knowledge responsibly. I don't always succeed, but I definitely try. When I am able to help people make better pricing decisions using my specialist knowledge, I do it with holistic good intent (whatever that means). I hope you can appreciate that not all sales and marketing actions are inherently evil, and an incredible amount of purchasing decisions happen in the realm of "price within a wide range does not matter for one party".

I hope you find this post informative. If you still think that price optimization is an elaborate scheme that tends to harm other people, then I am happy to agree to disagree and move on. That said, I hope my reply has shown that the issue has many layers of complexity that most people do not consider.

The 6-month pricing seems unnecessarily manipulative.