Imagine the following very regular situation- after a great Saturday night out at his favorite country bar, Jim decides to call it a night and head back home. He steps out and sees a line of yellow cabs waiting. He ignores them and pulls out the Uber app on your IPhone. The app informs him that surge pricing is at 2x. This means his uber ride will be more expensive than hailing a regular cab.
Yet Jim ignores both the cost and additional waiting time and sticks to the Uber ride. Seems familiar? Irrational?
The reasoning behind such a counter-intuitive decision taken by majority of individuals lies in what is referred to as ‘taking away the pain of paying’. This is the benefit that Uber provides and regular yellow cabs do not. Jim’s Uber app already had all his billing info stored and ready to be processed. On getting to his destination he simply walked away from his Uber.
There was no physical need to pull out his wallet, swipe his credit card, or bring up any mention of how much the ride cost. Somehow such an experience feels like “free” even though we know better. Essentially Uber takes away the pain of paying. The exchange of money is taken care of in the background. During your actual ride, no monetary associations are created and there is no reminder that we are parting away with money.
As someone who is obsessed with behavioral economics, I am always fascinated by its applications in different industries. More often than not, these applications tend to be seen in newer business models or emerging trends. The storage industry is no different- in this post I will explore two behavioral economic trends that address taking away the pain of paying.
The first concept is called the path of least resistance, something that is prominent in the cloud storage world today. Cloud storage providers have been aggressively advertising their pay-as-you-go business model. This model has its obvious benefits- a shift to an OpEx based business model, try-and-buy capabilities, lower acquisition costs, etc. However one hidden benefit here is that of taking away the pain of paying. Unless there is an abnormal event, individuals tend to follow actions that are the most hassle free- the actions they default to or that require the least involvement. Traditional consumer companies have been utilizing this phenomenon for decades. While it can be argued whether or not cloud storage companies such as AWS, Azure, etc provide cost advantages, their ability to auto-bill users on a periodic basis (without going through the painful acquisition process required by traditional vendors) provide these companies with a significant strategic advantage.
Another behavioral economics trend that capitalizes on taking away the pain of paying is that of “All-Inclusivity”- the behavior wherein consumers are willing to pay much more toward an ‘everything is included’ single price over an a-la-carte pick your adventure experience. This is particularly prominent in software defined and appliance based models where all-inclusive models let vendors introduce higher margins. Even though these solutions come with less flexible offerings and unwanted features/services, user satisfaction tends to be much higher. Again this is because users make a one-time payment and do not feel the pain of paying for individual services or additional features after a solitary purchase. In fact now services that they otherwise may not have picked seem like a bonus and provide vendors with an opportunity to get customers used to new features.
The pain of paying and it’s correlation to increasing consumer’s willingness to pay is explored in more detail in Dan Ariely’s book Predictably Irrational. If you haven’t already read this, I highly recommend it.