Anchors, Bundling and Un-bundling

Back in 2011, when the New York Times decided to start charging for access to its online content, everyone wondered: how could that possibly work? If most other news sites were free, who would pay for this one site alone? Another issue comes from behavioral economics, the branch of economics that is based on the obvious fact that humans aren’t rational most of the time. Let Dan Ariely explain the problem of “anchors”:

“The main problem of this approach is that over the years of free access, the New York Times has trained its readers for years that the right price (or the Anchor) is $0 – and since this is the starting point it is very hard to change it.”

So then was the New York Times doomed to fail? Not necessarily, said Ariely:

“The trick with anchoring is that although we are not willing to pay more for the same thing, we are willing to pay more for different things.  What this means is that one approach that the New York Times could take is to present us with a new experience so that we don’t associate it with the previous anchor, and are open to new pricing.”

A different approach is to create a “new experience” that “makes comparison shopping difficult”, says Shane Parrish. Take the case of the different plans provided by your telecom provider. Notice how they are sold as “bundles”?

“With one plan you get X minutes of talk time and Y data. Another offers Z data with W minutes.”

That makes it hard to compare two plans. It means more effort for you to decide which combo is best for you. Asking others doesn’t help since their usage patterns might be different from yours.

Airlines have gone the other way. Earlier, a flight ticket meant you got a seat, the right to carry a fixed amount of baggage, and a meal. Today, many airlines, specially the low-cost ones have “un-bundled” the package: your ticket only guarantees you a seat. Baggage, meals, even water costs extra! They don’t do this (only) to fleece you:

“The real purpose of separating costs (unbundling) is to make it harder for consumers to directly compare prices between airlines. It is now almost impossible to directly compare total prices for one airline to another without a lot of thought.”

So what do we do when it’s so horribly complicate to compare options? We fall back on rules of thumb or gut feelings. Inevitably, they are imperfect. But those imperfect choices can be predicted with a fair degree of accuracy. And companies use this fact to their advantage.

The solution then? If you can afford to pay for it and the cost doesn’t make any real difference to your life style, then go for whatever your imperfect rule of thumb or gut feeling tells you. And then (this is the key) stop thinking about it.