Why would a locksmith who charges less, makes fewer mistakes and is more efficient at his job receive more complaints now than when he first started out? Here, the behavioural economist and Duke University professor, Dan Ariely, the author of Predictably Irrational: The Hidden Forces That Shape our Decisions, explains.
How do consumers decide if a price is acceptable or not?
There is this idea that it’s just cost-benefit analysis, what am I getting, what am I giving? But that’s not the real case. The real case is what people perceive as fair or not fair. Many years ago [Coca-Cola] started charging more for Coke in the summer than in the winter. From a pure cost benefit analysis it is a great idea. You get more value out of cold Coke when it is hotter. But the consumer hated it. It offends our sense of fairness.
So when do we feel OK paying more?
When we see people working harder. There was a locksmith who I met not too long ago and he told me that when he was starting out as a locksmith he was terrible. He would take forever and break people’s locks. He would have to replace the lock and charge for it, charge for his time. People paid him and gave him a tip. Now he’s really good. He charges less because he doesn’t break the lock. But nobody tips him and everybody argues with him about the price.
So are you saying people have become more mean?
No, he used to take 45 minutes and people saw him sweating, so they felt OK paying him. Now it takes two minutes and they say how can I pay you US$100 [Dh367] for two minutes? In reality he’s providing higher quality service, not less.
What should companies keep in mind when considering what to charge?
It is not just about the price and the benefit – a lot of it has to do with what is fair. In the digital age where things are moving online and people have no perception of effort and they think that on the effort everything is free, it is going to become more and more difficult to convince people that it is fair to charge more.
Like some newspapers in the UK and US, that have been subject to a backlash by readers who now have to pay to see stories online?
Of course, and part of the story is that newspapers don’t help people understand how much effort goes into newspapers, in the same way that banks don’t describe for people how much effort goes into [banking] … People don’t understand the cost of technology. But this is creating a huge problem. Prices go to zero and people get convinced that you can run this business by paying zero and if you ever have to raise your price you will have to fight that notion of fairness.