[Business] Incidental Prices, Software and Degrees-of-Freedom
The paper talks about a study about the effects of incidental prices - price of a shirt - on a customer's purchasing decision - purchase of a CD. Both products have nothing in common, but they still affect purchasing decisions.
I was reminded of this feature by Joel Spolsky, software guru extraordinaire. I have written another article,which uses the same source, however in a slightly different context.
As Joel says, software purchases are very dependent on their complements. I like to think of complements as...degrees of freedom. Given a certain product, what are its degrees of freedom. For example, a portable mp3 player can be used to store mp3s and store Powerpoint presentations. So, it has two degrees of freedom. Imagine that I write a piece of software which compresses and encrypts data as it is being downloaded onto my iPod. That introduces a third degree of freedom.
People buy software, when they can increase their degrees-of-freedom at lower prices. How is this relevant? I'd like to take it further by suggesting that people buy software when they can perceive an increase in degrees-of-freedom at lower prices.
So, I may not really have a need for encrypted mp3s... I may also never buy this software. But because I know, that I have an extra degree-of-freedom available to me , that knowledge has an impact on my purchasing decisions - I may actually buy something more expensive, because something else was priced lower. Merchant pricesmay be adjusted according to this.
While we are on the topic, we could also analyse another aspect. This is relevant in the context of marketing because the paper suggests that this could be a good way of targeting online customers.
While opening a browser with the intention of buying a book at Amazon.com, a pop-up advertisement that touts flights at Orbitz.com “starting at $124,” could make shoppers less price sensitive.
This trend, if indeed used, could very well backfire. Because, directing airline ads at a book shopper are indeed a poor way of targeting. Moreover, it is not fair to the airline. A much better option would be to identify the book's complements. But, in my limited experience, a textbook can also have degrees-of-freedom. For example, if you finish the First book of Calculus, you may understand the Second Book of Calculus.And , if you buy them both together, not only do you get two degrees-of-freedom, you get a discount!!
P.S. A good article on pricing strategies primer is a feature by Heidi Cohen.