Saturday, October 26, 2013

Selling on Amazon #3 - Left-Digit Bias

+ECON's "Selling on Amazon" series includes tips on how to successfully sell products on Amazon based on experience and economic principles:

Post #1 - Background & Invitation to Become an Amazon Seller
Post #2 - Quasi-Hyperbolic Discounting
Post #3 - Left-Digit Bias (below!)
Post #4 - Condition Notes

Tip #2 - Use Left-Digit Bias (LDB)

Sadly, I don't have a video on this yet, but if you really want something, listen to these while you read.

LDB (or "left-digit effect") is a big reason why prices are listed as $1.99 instead of $2.00.  Our brains like shortcuts, or "heuristics", when solving problems and making decisions. When evaluating numbers (e.g. prices), we put more weight on the left-most digits, even when there's a lot of money involved.  For example, our brains like to think the difference between 1.80 and 4.10 is larger than the difference between 2.10 and 4.40, but both sets have the same difference.

Let me reiterate that this effect can be very costly.

Let's apply LDB to Amazon pricing. This one's easier to apply than my last tip. First, list prices below even numbers (e.g. list $49.88 instead of $50.00).  Second, list prices more than a dollar below the next listing so you appear the obvious winner. 

For example, I like my price to appear much better than the next guy down, so I usually price whatever I think makes it look like the next listing down is $2 more.  Listing one cent lower doesn't usually bother the customer, but if the seller below you has listed a product for $95.00 and you list for $93.89, your price looks much better.  This is especially true if you can get the left-most digit different (e.g. $88.99 vs $90.00 - I'll add here that I don't do $X.99 prices because I think many people have a heuristic to auto-round a number ending in .99; no research to support this, just my gut).

Pretty simple, right?  Now just make sure you aren't affected either!  It's usually worth spending an extra two cents or dollars to purchase from a higher rated seller, just like it might be worth giving up a dollar to outsell a competitor.  

This also implies you should never get into price wars over a few cents - often a competitor will see your price and lower theirs to $0.01 below yours and you wonder "should I lower my price now? How far will this go?!".  Rather than starting a price war that hurts both of you, and as long as your two left-most digits are the same, why not raise the price a few dozen cents?  Most customers won't notice, and those who do will be willing to pay more because of your excellent condition notes, which is what my next post is on!

Let me know your thoughts in the comments or on Twitter: @plusECON - cheers!

Selling on Amazon #2 - Quasi Hyperbolic Discounting



+ECON's "Selling on Amazon" series includes tips on how to successfully sell products on Amazon based on experience and economic principles:

Post #1 - Background & Invitation to Become an Amazon Seller
Post #2 - Quasi-Hyperbolic Discounting (below!)
Post #3 - Left-Digit Bias (upcoming)
Post #4 - Condition Notes

Tip #1 - Beware of Quasi Hyperbolic Discounting (QHD)

I explain QHD (AKA "present bias" or "temporal discounting") conceptually and mathematically in this video.

What you need to understand is that you have a "present self" and "future self".  Your future you is much better at making decisions.  Your future self is working out, eating better, watching less junk, subscribing to +ECON, and an all-around better person than your present you (though I must applaud present you for reading the +ECON blog instead of this).

QHD in a nutshell: If I were to offer you a choice between $20 right now or $25 a week from now, research has shown you're most likely to choose the $20. If instead I offer $20 in 52 weeks or $25 in 53 weeks, your future self will likely decide to take the $25.  One year later, we meet again and I ask if you'd like the $20 right now or the $25 in a week; your present bias is likely to take the crisp Jackson and leave Lincoln on the table.

Your future self wants the extra $5, but your present self makes the decision.  Now, "a dollar today is better than a dollar tomorrow", but this choice is fundamentally different (unless your currency is experiencing hyper-inflation).

Let's apply QHD to Amazon pricing: Don't match the lowest price.  Instead, try to position yourself as the 3rd, 4th, or 5th price.  You're item might sell slower, but for a better price. Amazon and your present self want the low price because it means faster money, but it really means less money.  Additionally, Amazon only pays you every so often, so waiting an extra week or two to sell an item for a higher price might actually be a choice between $0 in a month or $5 in a month.

When I just opened my seller account, I was looking at the prices of a textbook I had to sell; the low price was around $60, as was the second lowest.  Interestingly, the third lowest price was around $95.  I realized that one person desperate for cash discounted the item tremendously, and the next person to list the product matched.  If I matched, I could sell faster (and possibly keep the price permanently lower, if people continued to match, etc.), or I could list just under the third seller, hold out for the other two to sell, and make about $35 more.  That's exactly what I did.  It took about two months to sell, but waiting gave me lunch for a week for minimal effort.  

Now you may be telling yourself that you'd rather have the $60 two months earlier, I'll counter by saying that it's likely all three of the bottom products were purchased in the same week.  This is because people usually demand books around the same time (e.g. the month before a semester starts, when a professor publishes the required book list, etc.). 

The only times you should match the low price are:
  1. When you have a lot of products and need to make room in your home;
  2. If the product is approaching a major depreciation. This often happens when a new version of the product is coming out (e.g. I sold my brother's iPad Mini the day before the new version was released - I sold it as the lowest price on the same day, but the next two days the price had dropped by 15 percent).
Disagree? Have questions? An experience? Comment below! My next post will be on how to incorporate left-digit effects in your pricing. Cheers!

For some application to daily life, Dan Ariely discusses how this and procrastination affect us in chapter seven of his book, "Predictably Irrational":


Thursday, October 24, 2013

Selling on Amazon #1

My "Selling on Amazon" series includes tips on how to successfully sell products on Amazon based on experience and economic principles:

Post #1 - Background & Invitation to Become an Amazon Seller
Post #2 - Quasi-Hyperbolic Discounting
Post #3 - Left-Digit Bias (below!)
Post #4 - Condition Notes (still drafting, sorry)

+ECON isn't just a YouTube channel, it's also a 5-star rated seller on Amazon!

My religion thinks intelligent financial stewardship is important, so a financial adviser was asked to teach a class on a random Sunday at the chapel I was attending several months ago. My father is an accountant, so I'd heard most of it before; I never pay interest or fees on credit cards or bank accounts, but reap all the cash rewards I can (for reals, I've made maybe $1k on opening bonuses, etc.) and I'm generally a conservative spender.

There was, however, something I hadn't really heard before: the adviser told us he tells his clients to go on treasure hunts.  Basically just look around your house for stuff you don't need or use and sell it anyway you can.  My wife and I took this to heart and even had a competition to see who could make the most money over four months. In striving to win this competition, I not only learned how to become an Amazon Seller, I feel I've mastered the pricing games on Amazon, even more so than many of the big pros :-)

I've recovered several hundred dollars on textbooks, electronics, and other junk I had laying around.  Not only have I recovered cash locked in depreciating assets that I'll never use again (be honest with yourself, you'll never open any of your textbooks again and the longer you hold onto them, the more outdated they become!). I've even started using Amazon's Price Checker app to decide if free/cheap stuff is worth taking to sell - using the Price Checker to see the selling prices of books, I made about a hundred bucks from a pile of books I rifled through that a professor was throwing out.

Let me offer any friends reading this two things:
  1. If you have textbooks or (certain) electronics, give them to me and I'll sell them for you on my 5-star rated seller account. Some friends have just given me stuff they don't want, but I'd honestly rather share the profits with you.  Earlier this week, a friend gave me a stack of textbooks he's had in his trunk for months (maybe years?!) - within 48 hours, three have sold and we're both happy ;-)
  2. If you'd like to sell your own stuff, you should!  I'll have another post soon with some tips on pricing and advertising...
After my post with tips, I'll have a third post on this type of stuff and "prospect theory" - whoot! In the meantime, I hope everyone goes on a treasure hunt, gets some money out of their junk, and tells me about it - cheers!

Another First Post

I love making videos for my YouTube channel, +ECON, but I need a place to just let out a quick thought on economics sometimes that doesn't require filming and editing or accosting an acquaintance with a discussion.  So I'll write down thoughts on here from time to time.

Right now I'm working on a video about the top five reasons you shouldn't vote - controversial, right?  I also feel I should make a short thank you video for when I hit my first big benchmarks on YouTube: 100 subscribers and 10,000 views!  If I'm lucky I'll have hit both by Halloween, but we'll see.

My main view and subscription driver is my tutorial video titled Price Elasticity of Demand, which, as I've been told in person and in the comments, explains the concept and math of elasticity quite well.  I've definitely made some poor videos though, but I'm trying to hone this new craft of mine.

I started plusECON in part because all the economics videos online are old men in front of whiteboards (with the notable exception of Jodi Beggs, who is a young woman in front of a white board - she's definitely the best right now if you want straight-up mathematical tutorials and help with econ homework); honestly, even Khan Academy's econ vids disappointed me .

Another huge reason I make these videos is that economic literacy is low; I felt someone needs to make interesting videos that discuss how the concepts may affect one's daily life.  I firmly believe anyone who takes time to understand basic concepts (e.g. sunk costs) or even more advanced ones (e.g. quasi hyperbolic discounting) will make better decisions and, therefore, be happier.  Economics may be called the "dismal science", but the principles revealed by it can be breathtakingly beautiful.

I'll try my best to write excellent posts and create great videos to spread economic literacy.  Cheers!