LinkedIn and Apple’s Psychological Pricing Tactics

About a month back a friend of mine called me for some advice.  He was planning to buy LinkedIn’s Job Seeker service and wanted my help to choose a plan.  Even though I regularly use LinkedIn for networking purposes, I had never before looked at the premium package plans.  As I got to studying the different plans, I suddenly felt that there was a peculiarity.  I kept the page open, gazing at the ticks and numbers, but somehow what I saw didn’t leave me comfortable.

As a pricing guy, I always thought the customer who buys more gets a better price (per unit), or, at worst, expects the same value.  In this case that very premise seemed contradicted.   The guy who chose the “Job Seeker” plan paid INR400 more than the guy who chose “Job Seeker Basic” plan and in exchange got 5 “InMail Messages”.  In other words, this guy paid INR80 for every InMail Message (per month).  Is that expensive or is it a good deal?  It was difficult to valuate.  Then I looked at the “Job Seeker Plus” offer.  This plan offered 5 more InMail Messages (for a total of 10), and charged the user INR2,400.  This implied that for the five additional messages the user effectively paid INR200 per message.  What is LinkedIn up to?  Why is the guy who is paying the most (INR2400 for Job Seeker Plus) being charged the most per message (INR140 per message if I took the “Job Seeker Basic” as a reference)?

At first I thought in terms of the value of an InMail Message.  Are five InMail Messages a month not enough to land a new job?  Does research show that on average a candidate needs to send eight such messages to get a job through LinkedIn?  Somehow none of these thought trains made sense beyond a point. I kept wondering whether it was impossible to land a job through LinkedIn without using the in-mail services! I felt, it was not. However my friend needed an advice – and needed it quick! “Go for Job-seeker “, seemed the most politically correct answer. That ways he would not have to pinch his pocket too much by buying the overpriced in-mail facility (that’s how I classified the Job-seeker plus plan) and at the same time he wasn’t running the risk of not choosing in-mail service at all. But the question remained – was in-mail required at all?

I am not mentioning here what advice I ended up giving my friend!  What goes without mention however is the fact that I kept studying the “LinkedIn strategy” for quite some time thereafter.  That was when I was hit upon by one of the most beautifully imperfect pricing strategy –decoy pricing!  In fact I felt tad embarrassed by the fact that despite being in the profession of pricing – I had never known about the strategy before.

Dan Ariely, in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions, first brought the Decoy effect in pricing to public attention.  In the book he mentions the case of The Economist.  The magazine created the following offers for student subscribers –

Option A – A subscription to the online version of their magazine for $59 a year.

Option B – A subscription to the print version of their magazine for $125 a year (without access to the online version).

Option C – A subscription to both the online version and the print version for $125 a year.

100 students were provided the offer and asked which option they would choose.  The survey findings showed that 84% of the students went for option C while 16% of the students went for option A.  Of course nobody chose option B!

However a control experiment was done whereby the students were provided only 2 options: A & C.  The control experiment result showed that 68% students went for option A and 32% went for Option C.

In short the presence of “B” (the irrational decoy) caused a whopping 52% respondents to change their choice from A to C (in other words convinced them to pay $66 more each!).

Outside the laboratory, in the big bad real world, LinkedIn was doing exactly the same thing to my friend (and many other social job seekers).  Of course they are not alone.  Apple is doing the same in their own way –

The snapshot from the iPhone 5S page demonstrates how the price changes for the three models.  The models differ on only one parameter: storage memory.

For 16GB to 32GB the price goes up by $100.  In other words, Apple is charging $6.25 per extra GB.  From 16GB to 64GB the price goes up by $200.  In other words Apple is charging $4.17 per extra GB.  Not to mention for migrating your buying decision from 32GB to 64GB you are paying $3.13 per GB.  All of a sudden the highest price 64GB option begins to look “reasonable” – not based on what Apple’s competitors’ pricing, but based solely on Apple’s own price segmentation.  To understand how much it would cost Apple to provide the additional memory, I can provide an indication.

The storage memory type in iPhone is Flash.  The average memory prices by density as per Digikey are as follows:

So the cost of migrating from 16GB to 32GB is $15, while the cost of migrating from 32GB to 64GB is $23.  In both cases the customer pays $100 more.  Please note the prices considered are for unit buy.  For production buy (given iPhone volumes) the cost/unit would be at most one tenth that of the prices shown above.  Thus the cost difference between 16GB and 64GB is not expected to be more than $3.8. The price difference is $200. So it’s evident why it makes sense for Apple to sell more of 64GB phones while cannibalizing 16GB sales.

In the case of LinkedIn the cost difference would be even more miniscule (if even non-zero)!

I decided to wind up my research by running an experiment myself.

The experiment was simple.  I created the following Facebook post:

I then posted the same on various Facebook groups that I am a member of.  In some groups I posted only option 1 & 2.

The results were as follows:

It was evident that Option 3 (the imperfect one) caused a shift of response from 1 to 2.

In the sequel to this article I will discuss the process of planting a decoy and taking advantage of it.  I will also provide my views on its applicability in different business situations.