Pricing Experiments You Might Not Know, But Can Learn From
Matt Nunogawa stashed this in Pricing
Stashed in: #TED, Steve Jobs, Economics!, Influence!, Decisions, @ifindkarma, Negotiation, Awesome, Monetization, Psychology!, Selling!, Consumers, Retail, Illusion of Choice, Price Is Right!, Freakonomics, University of Chicago, Cognitive Bias, Pricing!
Humans are weird and there is nothing rational about pricing...
The decision to buy is an EMOTIONAL one, not a logical one.
There are a LOT of great stories in this article. Thank you for stashing, Matt!
I love this:
Why do shoppers moving in a counterclockwise direction spend on average $2.00 more at the supermarket?
Why does removing dollar signs from prices (24 instead of $24) increase sales?
What will work for you depends on your industry, product and customer. When you try to replicate what Valve did to increase their revenue 40x, it might not work for you, but then again, why not give it a try?
It’s worth remembering that people really don’t know how much things are worth, what’s a fair price (which is the reason TV-shows like “The Price is Right” can actually exist).
William Poundstone, the author Priceless: The Myth of Fair Value says this:
“People tend to be clueless about prices. Contrary to economic theory, we don’t really decide between A and B by consulting our invisible price tags and purchasing the one that yields the higher utility, he says. We make do with guesstimates and a vague recollection of what things are “supposed to cost.””
My jaw dropped when I read the example you refer to in the picture you stashed:
Dan Ariely describes this famous example in his amazing book Predictably Irrational. He came across the following subscription offer from The Economist, the magazine (he’s also explaining this in his TED talk here):
Both, the print subscription and Print & web subscription cost the same, $125 dollars. Ariely conducted a study with his 100 bright MIT students. 16 chose option A and 84 option C. Nobody chose the middle option.
So if nobody chose the middle option, why have it? He removed it, and gave the subscription offer to another 100 MIT students. This is what they chose now:
Most people now chose the first option! So the middle option wasn’t useless, but rather helped people make a choice.
How you can use it: Add a decoy package or plan to your offer page, next to the offer you really want them to take.
Here's Dan Ariely's TED talk:
This example still haunts me.
9 is a magic number:
Go to Wal-Mart and you see prices ending with 9 everywhere. Does it really work? Surely all intelligent people understand that $39 and $40 are basically the same.
Well, in eight studies published from 1987 to 2004 charm prices ($49, $79, $1.49 and so on) were reported to boost sales by an average of 24 percent relative to nearby prices (as per Priceless).
In one of the experiments done by University of Chicago and MIT, a mail order catalog was printed in 3 different versions. One women’s clothing items tested was sold for $39. In experimental versions of the catalog, the company offered the same item for $34 and $44. Each catalog was sent to an identically sized sample.
There were more sales at the charm price of $39 than at either of the other prices, including the cheaper $34. $39 had both greater sales volume and greater profit per sale.
People used to download music for free, then Steve Jobs convinced them to pay. How? By charging 99 cents.
The explanation of why numbers ending with 9 work better has been much debated over the years. Mental rounding alone can’t explain it. Seems that 9 truly is a magic number.
Marketing professors at Clark University and The University of Connecticut found that consumers perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface. In our minds, physical magnitude is related to numerical magnitude.
Oh yeah, when you go to Nordstrom, you don’t see any prices ending with a 9. The subliminal message here is “expect to pay”.
Anchoring and the contrast principle is truly genius:
Do this test at home. Pour water in 3 bowls. Fill one bowl with cold water, the second with hot water and third one with lukewarm water. Now stick one hand in the cold water and the other one in the (not too) hot water. Keep them there for 30 seconds or so. Now put both of your hands into the lukewarm bowl. One hand will feel the water is warm, the other one that it’s cold.
It’s about the contrast. The same principle applies to price. Nothing is cheap or expensive by itself, but compared to something.
Once you’ve seen a $150 burger on the menu, $50 sounds reasonable for a steak. At Ralph Lauren, that $16,995 bag makes a $98 T-shirt look cheap.
What’s the best way to sell a $2000 wristwatch? Right next to a $12 000 watch.
This mental process has a name. It’s called anchoring and adjustment.
How you can use it: Start throwing out high numbers. Add some very expensive products to the selection (that you don’t even intend to sell). If the final price of your service / product is a result of negotiations, start high. If you’re competing on price, state how much others are charging before revealing your price.
The 3-option trick works, too:
People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer.
Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.
Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and arounf 10% opted for the most expensive $3.40 beer.
Some people will always buy the most expensive option, no matter the price.
You can influence people’s choice by offering different options. Old school sales people also say that offering different price point options will make people choose between your plans, instead of choosing whether to buy your product or not.
How you can use it: Try offering 3 packages, and if there is something you really want to sell, make it the middle option.
Putting all of the insights together:
- Create 3 different plans/packages, and intend to sell mainly the middle one. If your product is expensive, make your website look expensive.
- The first plan is a decoy. It’s similar to the middle plan, but offers visibly less value while costing almost as much. Think of it as A- .
- Second plan, the one you want to sell, offers good value for money. The price ends with 9. Maybe it even shows that it has been reduced from a previously higher price or it’s a sale (either way, it has to be true / ethical).
- Third plan is to serve as a contrast to the middle one, its role is to anchor in a high figure. Make it much, much more expensive than the middle plan. You don’t actually intend to sell it, but there always the type that wants the most expensive plan – so make sure you can actually deliver on it.