Are You Losing Money by Not Using These 3 Pricing Techniques

Pricing your product takes more than merely allotting a number after the dollar sign—and this is one area where you cannot ask customers for what they want it to be—it requires you to understand buyer psychology. 

Jason Kook tried an entirely different strategy when selling his bundle of design resources for freelancers. The entire value of the bundle was $3000, but he launched it for $1. 

The only condition with this “Bundle of Awesome” was that the price would go up by a dollar as each person bought the bundle. 

Sort of a dime sale for the product, except that the price increased by a dollar. 

It’s important to know that Jason already had a well established email list with over 21,000 subscribers, a website and social media following of 65,000 followers. 

Jason mailed his list and reached out to social media followers with the offer.

There were 6,810 unique visitors to the landing page of whom 852 people clicked the purchase button, which is a CTR of .12%.

The current price of the bundle is $233 and the bundles sales netted them over $26,000.

They could have priced it at $99 or $1000 and still have made a lot of money. But it’s doubtful if the launch would have gone viral, the way it has with this way of launching it. 

With the price increasing with every purchase, there was no doubt that the strategy kept the visitors on their toes and added a sense of urgency that no pricing strategy discussed up until now does.

Pricing strategies are a dime a dozen, but people are always curious about something new and different.

The truth is, even people buying your product aren’t sure what the right price is. In such a confused world, how would you go about pricing your product right?

Don’t worry, I’m here to help.

The following three pricing strategies and experiments will help you make up your mind.

Decoy Pricing

The Decoy effect (or asymmetric dominance effect) is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated.  

Let’s say we have two price options: A (first option) and B (second option).

Let’s say this second option is inferior to the first option (maybe because of the higher price point). However, in comparison to the recently introduced third option which we would call (A-) the second option offers more features for a slightly higher price point.  

Now, the second option becomes a more preferable choice.

It’s superior to the third option (asymmetrically dominating it) in terms of features and has only slightly higher price. The third option (A-) acts as a decoy and takes away the reader’s attention from the first option, which is the cheapest.

Case Study 1

In Dan Ariely’s book, he talks about an example where he priced the Economist subscription differently to see the effect it had on buyers.

The Economist’s subscription page had three options—a $59 web only subscription, $125 print only edition and another $125 both print and web edition.

When 100 MIT students were asked to choose from the subscription options, an overwhelming 84% went with the third option. The remaining students chose the first option.

Since no one opted for the middle option, Dan removed it and presented the subscription offer to yet another 100 students.

This time, almost 68% of the students went with the $59 web edition. The middle option was relevant after all. It presented the third option in better light and made it seem more valuable.

Case Study 2

In this example, a hypothetical website offers two different plans. The basic plan allows customers to build 3 websites with team integration and office support and cost $20/month. 

The Pro plan allows them to build up to 10 websites, with all features of the basic plan, along with 24*7 customer support.

The PRO plan is priced higher at $65 per month. Most customers choose the basic plan, which is the cheapest. 

To encourage people to go for the PRO plan, which is the most profitable for the company, they introduced a decoy plan priced at $58/month.

The decoy plan offers customers the choice of building five websites with team integration and office support. 

But now the PRO plan seems like a deal. For just $7 more, customers can build 5 more websites compared to the intermediate plan.

Should you end the price points at 9?

Often when shopping at Walmart, you might see prices ending at the digit 9.

$2.99 does seem lower than paying a full $3.  However, evidence shows that customers increasingly prefer to deal with round numbers.

Is it because people don’t like dealing with chump change?

Let’s see an example.

Case Study 1

The developers of World of Goo, a physics-based puzzle video game, decided to celebrate its anniversary differently.  People were invited to download the game for any price they wished. 

More than 65,000 purchasers paid sums ranging from a cent to $150.

57 percent of consumers picked round, whole-dollar amounts ending in zero, and an additional 4 percent chose to pay round, half-dollar amounts. 

Since all the payments were sent via PayPal, it seems improbable that people prefer round numbers to avoid dealing with the mess of chump change and small numbers.

The practice of $.99 pricing is so ubiquitous, it seems that now that people have learned to ignore it. 

This kind of pricing structure can be seen from early 19th century. In other words, people seem to like round numbers better. 

What should you do?

My guess is that even when sending money with PayPal people have to manually type in 5.99 when sending the amount. Why the extra effort? It could be the principle of least effort at work.

And if it’s $6 that they want to send, then there’s no need to hide that. I feel there’s a tendency to be expressive in the amount they are sending.

So can we conclude that customers prefer round numbers?

Not too soon.

Case Study 2

In an experiment conducted by University of Chicago and MIT, a piece of women’s clothing that was sold for $39 was offered at two different prices of $34 and $44. 

The Results of the experiment:

The $39 item beat both the $34 item and the $44 in sales volume.  It’s interesting to note that the cheaper version of $34 didn’t beat the $39 version.

Professor Robert Schindler, of Rutgers Business School, conducted a study on a women’s clothing retailer. He too found results in agreement to the above example.

1 cent difference between prices ending in .99 and .00 had "a considerable effect on sales". Items ending with .99 had far more purchases than items ending at 00.

Study conducted by Kenneth J. Wisniewski from the University of Chicago, when the price of margarine dropped from 89 cents to 71 cents at a local grocery chain, sales improved by 65%. 

But when the price fell two cents more to 69 cents, sales increased by 222%.

It seems that both round numbers and the digit 9 have their place. As always, you should conduct an A/B test and see which one works for you. 

What’s the anchoring effect and does it work?

Anchoring effect is when you perceive the value of a certain object to be.

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.

It’s particularly effective when designing pricing pages. You may have seen sales pages where a higher price is shown. It is then crossed with a big black line to reveal a much lower price. 

Even in sales pages that show only one price, the sales page often builds up to something that offers products worth thousands of dollars for an insane discount.

In all such examples, the anchoring effect is at play.

Case Study 1

For example, in 2006, Dan Ariely asked students at MIT to bid on items using their social security numbers as their anchor.

The researchers would first hold up several items and describe their benefits and features. Then, each student had to write down the last two digits of their SSN as the price of the item. 

If the last two digits of the SSN were say 26 then that was the price of the item they had to write down as.

After they wrote down the pretend price, they bid. This anchoring affected their sense of judgment. Students with high social security numbers ended up bidding 346% more for the auction items. 

Deals and discounts that we often see on various online shopping sites are employing this very effect.

Case Study 2

In a case study conducted by Strack and Mussweiler (1999), graduate students were asked general knowledge questions with an anchor. 

If the question was, "How old was Mahatma Gandhi when he died?", it would be prefaced with an anchor number to one set of students like, "Did Gandhi die before the age of 9?"

The second set of students would be asked the same question but with a different preface, like, "Did Gandhi die before or after the age of 140?"

The results?

The first group guessed an average age of 50 and the second, 67. 

The real age up to which Gandhi lived was 87. This is another clear example of cognitive bias when exposed to an anchoring element.

Concluding thoughts

The most important takeaway from this post is that people have a vague and ill-formed sense of price when it comes to buying things. 

As such, they rely on value, looks and other information (like peer pressure) to justify the price they are paying. Chief among this list is the value on offer. If people find things to be valuable, then they don’t mind paying a higher price. 

There are certain ways you can make a product or a pricing plan seem more valuable. One way to do that is to introduce a decoy so that the attention shifts from the cheapest option at hand.

Another way it to make it very clear who the pricing plan is for, i.e. by creating a unique and solid value proposition for each pricing plan. 

People are incapable of making choices based on facts alone. As marketers, we need to make it for them.


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