Pricing is not just about having the right price point, but to a large extent also about having the right price perception. Behavioral pricing is an area that provides you with several different tactics on how to communicate price and adjust your offer so that the price looks right.
#1 Offer alternatives and the 'anchor’ effect
Let us show to you how important it is to offer alternatives. In an experiment, we offered a group of people 2 different bank accounts. One for free and one for a dollar. 66% went for the free offer. In a second group, we offered an additional third account for €2. Only 12% went for the free offer and the majority took the €1 account. Simply by introducing a third offer acting as a price anchor, we were able to significantly boost revenues.
This works in all kinds of industries. Consumers have the tendency to avoid extremes. Think about the wine menu in a restaurant. You don’t want to be the guy who buys the cheapest bottle of wine and looks like a loser. Nor do you want to waste money on the most expensive bottle on the menu, where you can’t even taste the difference to the next-best wine. So the majority of people would go for somewhere in the middle.
#2 Change the relative value with suboptimal alternatives
A similar approach to adding a premium alternative is to add a suboptimal alternative. In an experiment with a leading publishing house, one group was shown two alternatives, namely Online and Print+Online. The majority went for Online only, since the price was less than half of the Print+Online offer. Another group was shown an additional Print only offer at the same price as the Print+Online. Obviously, the new product was not very attractive since it had a lower value, yet the same price as the Print+Online. But even more interesting is the fact that it drove consumers from the low price offer to the premium offer. Introducing an inferior alternative changes the relative value of the products and can thereby alter a customer’s buying decision.
In this example, the average revenue per subscriber increased by 43% without needing to modify a single price, but instead by adding a product nobody wanted at the given price.
"[...]the average revenue per subscriber increased by 43% without needing to modify a single price [...]"
#3 Introduce the right default offer
The next pricing tactic is the default option. In the following situation, participants were divided into two groups and asked to choose between two travel packages. They could choose between half-board and full-board at the same hotel. In Group A the half-board service was priced at $210 as the default option, with it being possible to upgrade to the full-board service for $30. Only 50% of participants actually upgraded and paid the $30 more. When the full-board service was the default service for $240 and you could save $30 by downgrading, only 23% actually ended up doing so. So this time 77% took the offer for the higher price.
Again, we didn’t change the pricing, only the price perception.
#4 Take advantage of the ownership effect – free trial
A very powerful tactic is the free trial. Let your customers have a look at your product and experience the benefits before charging a price. The reason for that is the ownership effect and this can easily be explained using the following experiment. After giving a group of people a coffee mug and then asking them for how much they would sell it the average value was $5.25. Another group was not given the mug and asked for how much they would buy the mug. The average value was $2.75. So once we are in possession of something we think it is more valuable than something we do not own.
This is the reason many companies offer free trials to get customers on board. The rationale behind it is that once consumers have experienced a product, they may have a higher perception of the value.
Consumers are very often irrational and emotional in their buying decisions. Many companies struggle with price increases and should instead have a good look at the described pricing tactics. Making the right adjustments in the product offering and the way you communicate price can boost revenues without increasing price.
#1: Trevisan, 2013
#2: Dan Ariely, 2008
#3: Bussolon, Bonini, 2012
#4: Kahneman, Knetsch and Thaler, 1990