Is 99 cents a lot? What about $1.99? Depends who you ask, I guess.

Earlier this year, the slide-out keyboard on my Motorola Droid became even more deadweight and stopped working. I went to a Verizon store to see about getting a replacement.

At the time, I wasn’t sure how I would recover my paid apps, so I asked one of the store reps about it. He told me he hadn’t a clue. Furthermore, I was the first person he’d ever met in the store that had actually paid for an app. Wow.

Maybe the guy was new. Maybe he wasn’t. Maybe I’m an oddball. Okay, I know that last bit is true, but let’s stay on topic.

Stats support the notion that free is preferable. A recent study found that 81 percent of all app downloads in Apple’s App Store are free.

App (user) behavior

There is a funny paradox with paid apps. People have such an expectation of free that even something that’s slightly not free (99 cents) presents a major rationalization problem.

I think this inebriated logic is brought on by a cocktail of anchoring bias and loss aversion.

People get too hung up on the price tag of an app, no matter how small when making a purchase decision because there are so many free apps out there (anchoring bias). The mere existence of a non-zero price tag is an impassable obstacle.

And as soon as a financial cost is imposed on a decision, you have the chance of losing something. Studies show that the fear of losing something usually outweighs the prospect of a gain (loss aversion). Put simply, the fear of losing 99 cents when an app doesn’t work as advertised takes center stage in your mind; the possibility that the app will work faces unfair odds.

What makes this more paradoxical is that (I suspect) many of the same people that cringe at a 99-cent price tag don’t give the same amount of concern to their monthly mobile bill, or more importantly, the total cost of ownership of their mobile device.

For example, an iPhone or Android phone costs about $200 with contract, and let’s just say that most people pay at least $85 per month for service (rough guessing for the sake of illustration). Over the 24-month contract period, that totals $2,240.

A 99-cent app is about 0.04% of that total cost ownership. Why does 0.04% of the cost generate so much more anguish than the rest?

It’s really a problem of mental inertia, one of the most powerful anti-logic forces in the universe. How powerful? Think about it: the $85 bank draft happens 24 times over the contract period, each time with virtually no mental angst, yet you may stalk a 99-cent app for days as you weigh scenarios in your head.

You’re resigned to spending the $85 in 24 installments, but pulling the trigger on 99 cents requires a standalone, optional decision.

And here’s the thing: Your “app phone,” is worthless without the apps. Just like a computer is worthless without software, an app phone can’t reach its full potential without great apps.

Practically efficient tips for fighting irrationality

  • Fight anchoring bias by thinking in terms of value. What are you getting in return for that 99 cents? If an app solves a problem and makes your life better and more efficient, I’m guessing that it’s worth more than 99 cents. In some cases, it may be worth a lot more.
  • Fight loss aversion by not looking at purchase decisions in isolation. Adopt a the mindset of an experimenter. Accept that some things will fail, and that you will lose money on lemons. But you will never find the winners if you don’t experiment.
  • Fight mental inertia by looking at the “lifetime cost” of decisions. Try very, very hard not to focus on monthly or recurring prices. Maybe you should allocate more thought to the decision to buy that iPhone. It’s not cheap over a two-year period. Companies advertise services as “only $30 per month” instead of “only $360 per year” for a good reason. One looks a hell of a lot better psychologically.

The bottom line, your bottom line

Value is worth paying for. This concept extends well beyond apps. How do you make value-conscious decisions?

Disclaimer: I am not a psychologist. Rather, I’m someone with an interest in behavioral finance who probably spends way too much time relating it to tech trends.

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