Unpopular Pricing And The Megapixel Bias

William Poundstone, author of the illuminating book Priceless: the myth of fair value, writes:

We've heard a lot about one health insurer raising its rates by up to 39 percent. Yet in the past year, the price of another widely used commodity has gone up 50 percent industry-wide. Not only that, it's for something that was free prior to 2008: the privilege of checking a bag on a U.S. airline. The average price for the first bag is now around $25.

Charging for bags is an example of what price consultants call unbundling (and everyone else calls “nickel- and diming.”) Instead of offering checked bags (meals, headphones, blankets, etc.) for “free” with the ticket, they price them separately. The reason is simple: Most travelers pick an airline based on the lowest fare….We all remember the days when baggage was free. That makes any charge seem like a gouge.

Unbundling is a powerful technique for drawing customers. They just might not be happy customers…The culprit may not be the airlines so much as human nature. Because prices are quantitative and easily compared, they carry undue weight in our decision making. We don't pay quite enough attention to the intangibles of comfort and convenience, simply because they are intangible. In another context, this is known as “megapixel bias.”

Camera buyers favor cameras with more megapixels, even though such cameras don't necessarily produce the best pictures. But megapixels are numbers, and everyone knows an 8 megapixel camera has more of something important than a 7 megapixel model does.