Managing Digital Products: Insights on the book “The Psychology of Money”, by Morgan Housel
Understand consumer behavior and emotional factors when creating and pricing products with insights into The Psychology of Money by Morgan Housel.
The Psychology of Money, written by Morgan Housel, delves into the complexities of how people think and behave when it comes to money. One of the book's main takeaways is that our relationship with money is deeply personal and emotional. This is especially relevant when it comes to managing products, as the digital economy is constantly evolving and changing.
Below, I have listed my insights relating to product management from reading the book.
Emotional Factors
One of the biggest challenges when it comes to managing products is understanding how consumers think and behave regarding the spending of money online. Financial Psychology helps us understand that consumers often make decisions based on emotional, rather than rational, factors. This is important for product managers to keep in mind when creating and pricing their products. For example, consumers are more likely to buy a product when they see it as a solution to their problem, another hypothesis is when they perceive the product as a status symbol.
The Psychology of Losses and Gains
The book highlights the importance of understanding the psychology of losses and gains when it comes to money. People tend to feel the pain of a loss more than the pleasure of a gain. This is known as "loss aversion" bias. In the matter of digital products, this means that consumers may be more hesitant to spend money on something they have never tried before, as they are likely to feel the pain of a loss if they are not satisfied with the product. As a product manager, we need to understand and think about alternatives to alleviate this consumer feeling, think about alternatives such as free trials and refund guarantees, which can make the consumer more likely to purchase the product.
Understanding Perspective
Another important lesson from The Psychology of Money is the importance of perspective when it comes to money. People tend to think about money in relative terms rather than absolute terms. This means they are liable to compare their wealth to others rather than thinking about it in terms of their own needs and goals. For product managers, this means they need to be aware of the competitive landscape and understand how their products are perceived compared to others. For example, a consumer may be more likely to purchase a product that they consider to be of greater value than similar products offered by competitors.
The Power of Anchoring
The book explains that people usually rely on the first information they receive to make subsequent judgments. This is known as "anchoring" bias. For digital product managers, this means they need to be aware of the effect that initial pricing or offerings can have on subsequent decisions. For example, a consumer may be more likely to purchase a product if it is initially offered at a high price and then discounted.
The Scarcity Effect
According to the book, people normally fancy things that are rare or unavailable more than those that are readily available. This is known as the "scarcity effect." For digital product managers, this denotes that they need to be aware of the limited availability effect on consumer demand. For example, a consumer may be more likely to purchase a product if it is only available for a limited time or in limited quantities.
The Influence of Herd Mentality
The author explains that people are inclined to follow what others are doing. This is known as "herd mentality." For digital product managers, this means they need to be aware of the social proof that exists around their products and use it to their advantage. For example, a consumer apparently will purchase a product if they see that other people are using it or if it has a high rating in the app store.
Composition
The book defines the concept of compounding as the process by which the value of an asset grows over time as a result of interest or dividends. Product managers can use this concept and think about how to update their products over time and retain customers by continually providing value to their users.
Mental Accounting
"The role of mental accounting" refers to the way people are apt to mentally separate their money into different categories or "accounts" for different purposes. This concept is related to the idea that people tend to think about money in relative terms and not in absolute terms. Understanding the role of mental accounting can help product managers better locate their products. For instance, a product manager could benefit from a pricing strategy, considering the different mental “accounts” that consumers may have for their own money. Therefore, it is plausible that consumers will purchase this product if it is marketed as a "smart investment" rather than an "unnecessary expense”, according to their “accounts”, respectively.
Morgan Housel's Financial Psychology provides valuable insights into the way people think and behave when it comes to money. Understanding these psychological factors is crucial for product managers. By taking into account the human psychology behind consumer behavior and financial decision-making, product managers can create products that resonate with their target audience, leading to greater customer satisfaction and revenue growth.
Did you read the book? Did you have different insights? Share in the comments.