Ultimatum Game

Ever heard about the ultimatum game? It’s probably one of the most important concepts related to entrepreneurship, and one that had profound impact on my business.

Here’s how it works:

You’re walking down the street when someone approaches you with a weird proposal: he’s offering you $100 that you get to share with a random stranger who gets to decide how to split the money between both of you. If you agree on the split, you both take your shares and walk away with free money. If you don’t agree, neither of you gets any money.

Now if the other person deciding the split is fair enough to offer you a 50/50, or a 40/60 split to his advantage, you’re most likely to agree and take the money. But something interesting happens around the 30/70 split: most people reject the offer and walk away with NO MONEY.

In other words, you’ll walk away from getting $30 of free money because you don’t think the other person should get $70…

Because you don’t think it’s a FAIR deal.

And this is a good example of how our emotional justice system overrides our rational thinking, causing us to miss great opportunities in many cases.

Why is this important for entrepreneurs?

As you’re creating your product, you often think about what would be a “fair price” for you and your customers. Most entrepreneurs use a formula that is a combination of the time/effort it took them to create the product, and a percentage of the value it’s providing to potential customers.

But what if instead, you decide on offering a price that makes your customers feel YOU are getting the unfair end of the deal? What if you let them run with the $70 or even $80, and you get to keep only a $20?

Here’s an example on how I’ve applied this concept and got amazing results.

When I launched Keynotopia 3 years ago, I promised customers free updates for life. Since then, I’ve added thousands of new UI components and icons that provide more than 10x the initial value they had paid for, and they all got all of these updates for free!

Whenever there is a new update, like the recently launched iOS7 prototyping templates, I get some customers asking where they need to pay to get it, and others emailing me to advise me to charge monthly fee for these updates.

And my answer has been always the same: “enjoy it, it’s a free update.”

I could definitely be making extra money by charging a recurring monthly fee, or an annual update fee, but I’ve always decided against it.

Whenever we launch a new free update, I receive dozens (sometimes hundreds) of emails from existing customers thanking me for it, sharing with me stories about how the templates enabled them to validate their ideas, get angel funding or land new clients, and promising to spread the good word about the product. That’s worth a lot more in personal gratification and word-of-mouth advertising than the money I’d be getting from charging for those updates.

To my customers, I am getting the unfair end of the deal, and they try to make up to me by spreading the good word about the product.

At the end, I think we’re all getting our fair shares of that deal, but it wouldn’t have worked out that well if I were too concerned about having my fair share in the first place.

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