I was aware of this phenomenon, but I did not know it was called apophenia.
When I learned about it this week I knew I had to ignore my backlog of ideas for the newsletter and write about it.
When we want to have optimal prices (who doesn’t?), there is one critical practice everyone needs to introduce in their teams: eliminate fears and emotions from the price calculation process.
One methodical way to achieve this is to take known cognitive biases and try to limit their impact as much as possible.
What is apophenia?
There are multiple definitions you can find. The version I am referring to is the tendency to perceive meaningful connections between unrelated things.
Clustering illusion is a type of apophenia.
This is the tendency to erroneously perceive small samples from random distributions to have significant ‘streaks’ or ‘clusters’.
It is likely caused by the representativeness heuristic, a cognitive shortcut whereby a small sample of data is assumed to be representative of the entire population from which it is derived.
Illusory correlation is another type of apophenia.
It’s the tendency to inaccurately perceive a relationship between two unrelated events.
Monte Carlo fallacy occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events. This is also a type of apophenia.
What this means for pricing decisions in software services
The latest project proposal you sent to a customer was lost and the feedback you received was that the price is too high.
This will typically lead managers in software companies to reduce the rates for the next project proposals, even if the potential customers are from different industries, geographies and have significantly different needs.
If 2 potential leads ask the same question about hourly billing in the same week, we might be tempted to think that the vast majority of potential customers are looking for the same thing, even if they aren’t.
If a sales team member has friends in 2 other local companies that do similar projects for similar clients and, during a dinner conversation, she hears some random prices they quoted to customers, this might lead her sales manager to change their rates to match those of the “competition”.
WHAT THIS MEANS FOR YOU
Seeing patterns and finding correlations is not a bad thing.
It is a positive effect of genetic evolution. Human creativity wouldn’t exist without it.
But too much of a good thing can lead to negative distorsions.
When it comes to pricing for software services, it helps to pay careful attention to the biases that influence you and eliminate their impact.
PS.
Here is a related challenge.
This image is a famous representation of another bias:
The first reader of this newsletter that replies and correctly identifies this bias wins 3 months free access to the beta version of the Soft Fight pricing app
(valid for a software services company).