I keep getting more requests for more “blog-style” updates. I guess you guys are getting tired of the whole “article” schmojo everyday. Anyways, I had my first day of class today and really enjoyed it. There was one thing that stuck out from my Government and Politics class that I thought would be relevant to share with all of you.

My professor told us a very interesting story that is supposed folklore from Berkley(?). It’s a basic economics rule of thumb, but I thought it’d be very important to share it with those who have never heard the story before. I believe its from Berkley Universeity in California from an Economics class, but I could be wrong.

There are two professors who walk the same route home everyday after teaching. Each day, they always encounter the same homeless man. From the very beginning, the professor had offered him (as a joke) the choice between $0.50 and $1.00.

As easy as the choice may seem, the homeless man continuously takes the $0.50 over the dollar.

After about a month of doing this, the other professor who wasn’t handing him the money asked him, “why do you take $0.50 over a $1.00? You do know the dollar is worth twice as much right?”. The homeless man looked at him and smiled and explain, “well, if I had taken the dollar the first day, he would’ve never given me another.”.

What does this economic story teach us? Simple - price point is critical to the survival of your product or service. Besides seeing how much money you could get away with charging people, price point is used to build trust and loyalty between the customer and business. This turns into long-term loyal customers who will continue to strengthen your brand by buying more of it.

By taking only the $0.50, the homeless man was able to build a relationship with the professor and maximize his potential revenue.

The moral can apply to anything. The core customer base of your product will be repeat customers (or at least that’s what you should always aim for), and the only way you can continue to build relationships is by offering your product at a price that is competitive enough to your competitors.

A company like Flickr is a great example. Flickr charges a measly $24.95 for an annual membership. They could easily get away with charging upwards of $30.00 year, or even a low monthly fee of $4/$5.00 (which even I’d pay). But yet, they keep it low and affordable and people continue to buy pro accounts.

Just today’s thought.
Bryan