Kristen Berman is the co-founder of Irrational Labs. Rohini Venkatraman is a product manager at Livefyre.
It’s Friday at 5 PM and you’re wrapping up work after an intense week. A drink sounds great right about now and you text a few friends to meet up for happy hour. Plans are made and the laptop is closed. It’s time to roll.
You walk outside, open your phone and tap to call a Lyft, the popular service that lets you order a ‘taxi-like’ driver directly from an app on your phone.
But, as you open the app, you are greeted with a surcharge. “25% higher than usual?! Yikes, everyone must have had the same idea,” you say to yourself. This price increase is not ideal, but you could really use an hour of happiness.
At this point you have a decision to make. You could suck it up and pay more or walk along the street to find a taxi with standard rates.
What do you choose to do? We surveyed 300 people using Google Consumer Surveys and asked participants this exact question.
How long would you be willing to walk to avoid a 25% fare increase?
44% of people said they would walk over 5 minutes to avoid this fare increase.
There are of course many ways to communicate a price increase. What if instead the price increase was framed as a 1.25x increase. This is, in fact, the natural experiment that is going on right now between Uber and Lyft.
So the question is: When a price increase is framed as 1.25x vs. 25%, do we walk more or less to avoid the higher rate?
To recreate this, we turned again to our Google Consumer Surveys participants and asked them how much they would walk to avoid a 1.25x increase.
Let’s be clear – this is no trick. This is the same math. 25% vs 1.25x is the same $5 increase on a standard $20 fare. The opportunity cost of being late, missing happy hour and paying full-price for drinks is the same. There should be no reason why we would prefer a 25% increase over a 1.25x increase or vice versa.
In our survey, significantly less people choose to avoid the 1.25 fare increase by walking 5 minutes than people who choose to avoid the 25% fare increase by walking 5 minutes.
What about more extreme changes? For example, a 75% fare increase vs 1.75x.
Again we got the same pattern of results where the percentage framing caused many more people to decide to walk instead.
In fact when we compare the propensity for walking between the 25% percent framing and the 1.75x numeric version, we saw that people were more willing to walk 5 minutes when prices were increased by 25% vs 1.75x. (Note: 25% is smaller than 1.75x!).
This means that Lyft may actually ‘fare’ better by calling their increase a 1.75x relative to a 25% increase framed as a percent.
Are people doing faulty math or is there something else going on?
Power of Percentages
In general, people in our study were most sensitive to price increases when they were framed as a percentage. What is special about percentages?
One possible theory is that we are simply more used to dealing with percentages, as discounts and price increases, for example. We take a cognitive shortcut and focus on the percent increase because we know what it generally means in the context of an original price. On the contrary, we don’t really know how to deal with 1.25x — so we just don’t.
It is also possible that we interpret the percentage as more because the absolute number is bigger (25) than that of the decimal format (1.25). Studies have shown that we are vulnerable to similar perceptual heuristics when evaluating prices. For example, we perceive sale prices to have better value when they are written in small rather than large fonts. In the same way that physical magnitude is related to numerical magnitude, it is very possible that we only look at the absolute value of a price and compare which is bigger.
So does Lyft or Uber have the right strategy?
Lyft’s per-mile rates are 11% lower than Uber’s. To repeat: Lyft is cheaper than Uber. But by avoiding the use of percentages to frame price increases, Uber softens the fare increase blow while Lyft magnifies it. Small details do matter and consumers may be more willing to pay an additional cost when it is framed a different way.
With this same logic however, Lyft has still managed to capture the power of percentages. 50% off? Now Lyft has the right idea – Happy Hour here we come!
UPDATE 6/22: Based on this analysis, Lyft is testing new ways to communicate their Prime Time pricing. They moved to use multiples (1.25x) vs percentages (25%) as of 6/22.
Want to learn more about how small details have a big (revenue) difference? Applications now open for StartupOnomics.com
Irrational Labs is a non-profit consulting firm applying behavioral economics findings to product, marketing and organizational design problems. The firm was founded in 2013 by Dan Ariely and Kristen Berman. Dan is the New York Times bestselling author of three books on human behavior, and the James B. Duke Professor of Psychology & Behavioral Economics at Duke university. Kristen formerly worked in product management and marketing for Intuit and Lytro. Follow Irrational Labs blog, http://irrationallabs.org/blog/, and on Twitter @IrrationalLabs.