#1 rule of economics: customers don’t want to feel like chumps

If you’re like me, you’ve read way too much about Apple’s $200 price drop on the iPhone. But there’s one more worth reading. Economist Steven Levitt (author of Freakonmics) asks “Should Apple Burn Its Economics Textbooks?” Apple’s
$599 initial price and subsequent price cut was very much in line with economic theory.

But it ignored the fact that customers don’t want to feel like chumps. We typically hate the companies that use elaborate pricing models: airlines, hotels, car dealers. We hate airlines that charge us $300 for a flight when the person next to us paid $150. (That anger isn’t entirely alleviated when on the next flight the situation is reversed.) We hate to pay $300 for a hotel room when we know that someone got a similar room in the same hotel on Priceline for $75. It may be the best economics, but it doesn’t feel right.

My personal favorite is Ticketmaster’s TicketFast fee. For an extra $2.50, you can print out your tickets at home. Or you can pickup tickets at will call for free. I’m saving the venue money by not having to serve me at will call and I’m shortening the line for others. They want me to pay them extra for it? They should be giving me a discount.

Then I do my own economic analysis and determine that it’s worth $2.50 to me not to have to stand in line.


About Rakesh Agrawal

Rakesh Agrawal is Senior Director of product at Amazon (Audible). Previously, he launched local and mobile products for Microsoft and AOL. He tweets at @rakeshlobster.
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