Behavioral Pricing: Why coffee and music don't mix
Let’s talk numbers. Say a specialty drink at your favorite coffee shop costs $5. If you gave up two of those drinks per month, you would have enough money to pay for a standard $9.99 per month subscription to a music streaming service such as Spotify or Apple.
I used that example recently in a talk at the New Music Seminar and have seen people make similar comparisons on social media. It is convenient and it also gets people’s attention. Both coffee and music are very familiar staples in the daily routines of millions and millions of people.
This coffee vs. music comparison has a fundamental flaw, however. And that flaws lies on the fault line between classical economics and behavioral economics.
The former tells us that a dollar is a dollar is a dollar. That means that swapping the two coffees for a month of music adds up. The latter says that we don’t actively process how we pay for coffee and how we pay for music in the same way. Our minds unconsciously put them in different “buckets”, each subject to different rules and perceptions. Coffee might go in “food”, music in “entertainment” or “monthly subscriptions”, for example. These buckets might also define our value and our priority for spending. So a dollar isn’t a dollar isn’t a dollar after all. It depends on the mental bucket we put it in.
This is “mental accounting”, a concept developed by University of Chicago economics professor Richard Thaler. For a full treatment you can read this paper. For a quicker read, you can take a look at this article.
The challenge for music – or for any product or service which buyers apparently massively undervalue – is to find a better bucket to target in customers’ minds. This is very hard to do, but not impossible. Some potential approaches include:
Making your product a small part of something bigger: Imagine that music were a utility and a streaming service was a small add-on to monthly rent? I’m not advocating that, but rather using the example to make a point. If we are already making a big-ticket purchase (buying a car, paying rent) we are more inclined to tack on a little extra.
Changing the context of the purchase: Where and when we buy something can change our perception of its value. This explains why a can of soda can cost 5 times as much at a hotel mini-bar, and twice as much as the hotel lobby store, than it does at the convenience store across the street. The same goes for candy sold in the theater versus in a drugstore. People feel an increased need or desire for a product at certain times, which can allow funds to change buckets to make a more expensive purchase. By adapting your product placement, you might be able to work around some of the mental buckets.
Comparing the product to an indirect competitor: Coffee and music don’t compete in most any category. But Netflix, whose share price rose by around 18% this week competes indirectly against cable, not just against direct competitor streaming services such as Hulu or Amazon or HBO Go. And all of those services are far less expensive than a basic cable television package as well as many of the cable add-ons. This makes them all look like great deals, even when the services make significant price increase as Netflix did a few years ago, compared to cable. The larger bucket of “entertainment” might be able to shuffle funds between “cable and television” and “Internet or streaming”, but not likely that “food” will move to “entertainment.” Finding an appropriate indirect competitor might allow for the same to happen with your product.
Picking the right basis of comparison is not easy. Encouraging someone to stop smoking by telling them the kind of vacation they can take with the savings may be plausible and sensible on a dollar-for-dollar basis, but that incentive is diminished by mental accounting. We don’t easily switch money across buckets that way.
The bottom of music’s bucket is filled with the dregs of free and low-priced alternatives. Success does not hinge on competing with free. It hinges on taking free and cheap out of the discussion by helping people learn to associate paying for music with another type of higher-value transaction. It hinges on buckets.
I don’t have an answer to what the better bucket is for music. But it is worth thinking about.
Frank Luby is co-founder and CEO of Present Tense LLC, a communications company dedicated to helping people express their ideas through better business storytelling. He is co-author of the short ebook “10/10: How to write business content that is memorable and effective”, available on Amazon and other major e-book retailers. To learn more about Present Tense LLC, please visit us at www.presenttensellc.com and follow our regular blogs and posts. You can also follow Frank on Twitter: @FrankLuby