Pricing

Anchoring

What we see first affects our judgement of everything thereafter

Participants were asked to quickly estimate - within 5 seconds -  the answer to one of two same calculations, anchored either low or high.

Those with the low anchor guessed 512 on average, whereas the high guessed a much higher 2,250. The correct answer was 40,320.

Put your highest price first in a list to make subsequent prices appear cheaper in comparison and increase sales. For instance, on the wine list shown, instead of putting the expensive items at the foot of the list, rearrange them in descending price. 

Don’t set your anchor price too high or the natural inclination to anchor other options against this price will diminish. Be realistic and keep it within an appropriate region of your other prices.

Audience matters. Anchoring effects  weaken for those with higher cognitive ability (Bergman et al., 2010) and those with prior product-buying experience (Alevy et al., 2011).

Zero Price Bias

We value something more when free over very cheap

243 people were split into four groups and asked about the attractiveness of one of two types of chocolate truffle at one of two prices (Hersheys at 0¢ or 1¢ or Lindt at 13¢ or 14¢).

Those in the zero-priced truffle group felt disproportionately more attracted to their truffle than those in all other truffle groups.

Replace very low cost with free.

‍Amazon famously rolled out free shipping in Europe, sales rose everywhere but France, where shipping was mistakenly set at 10¢. What small costs are you passing on to consumers?

In line with Prospect Theory, it may be better to bundle ‘the pain’ within a larger cost.

Communicate what is free.

‍Consider surfacing bundled, previously hidden value that you offer, actively highlighting the zero cost in marketing material and on invoices etc.

Nudge with small charges.

‍The flip side of zero-pricing is that incurring even a small cost quietly impacts our decisions. If you're trying to change behaviour, imposing a small discomfort can disproportionately assist.

Round Pricing Preference

We prefer and trust whole numbers over those ending in a 9

306 people visited one of three coffee shops and were asked to buy a coffee at either: €0.99, €1, €1.01 or an orange juice that was €0.15 cheaper than the respective coffee price.

Results showed that, contrary to conventional research on pricing (shown by the dashed line), the round-priced coffee saw the highest % of sales.

Use round prices to reduce fatigue.

‍There’s a growing trend for cognitive convenience in the face of Time Scarcity and Analysis Paralysis. 

A banana costing £1 is easier and faster to process mentally than one costing £0.95. UK retailer Tesco now adopts this specifically for promotions.  

If your brand places a value on saving time and energy, consider doing the same.

‍

Use for premium, green or pleasurable products.

‍Marks & Spencer (UK), Saks (US) and Levi’s now adopt round pricing, showing the zeros. Doing so signals brand quality, warmth and trust.

 Use to nudge secondary behaviors.

‍For transactions, add a Foot In The Door to give the rounded difference to charity (supermarket), savings (banks) or tips (fast food), for example.

Decoy Effect

We’re more likely to buy B over A by adding C to make B look more attractive

153 people were asked to choose between a 5-star restaurant 25 mins away and a 3-star restaurant 5 mins away. A third decoy restaurant option was then added of 4-stars  at 35 mins away.

This decoy shifted preferences from the closer, cheaper restaurant towards the 5-star option.

Determine your target.

‍What is the product you want to sell more of, next to a lower-margin competing product? Build your decoy product around this with a price or attributes that inadvertently highlight the target's attractiveness.

Don't overwhelm.

‍Offering too much choice or highlighting too many competing attributes where neither option is clearly more attractive will trigger Analysis Paralysis, making consumers' decision processes more difficult.

How is your target clearly more attractive?

Test different decoy values to optimize the effect.

Huber et al., (2014) suggest that decoys work best when it’s really easy and quick to see the dominant product, when pre-decoy desire is roughly split between target and competitor and when people don’t strongly like / dislike the decoy.

Boundary Pricing

We're more likely to upgrade if the base price feels closer

378 people were were split into two groups and offered two coffees, small and large, with prices either $0.95 and $1.20 or $1 and $1.25.

Results showed that people were 55.5% likely to upgrade to a large coffee when the small was $1 than when it was $0.95 (28.9%). Average coffee sale prices were also higher in the boundary condition ($1.14 vs $1.02).

Offer upgrades? Use boundary pricing.

If you offer more than one product option at different prices, boundary pricing can help improve the rate of upgrades. This is because, next to a price set just below a boundary (e.g. $95), increasing a base price to just above ($105) makes the upgrade option ($135) appear cheaper and less of a painful step up. It's because of the way we encode numbers, chunking them into broader numerical categories to infer value. This increases willingness to upgrade and therefore spending.

Works with multiple upgrade options

As long as the prices all sit within the same price boundary, the effects persist for product ranges with more than two options, as was shown with further studies on purchases of apartments and cars, which both offered multiple upgrade options. Maximise upgrade range by setting your base price around a more round numerical amount (e.g $10,000 vs $11,000). This will allow you to offer upgrade options that sit within a broader, albeit the same price boundary ($10000-19000 vs $11000-11999).

Present options together, not sequentially

The effects of boundary pricing disappear when the options are shown separately (different screens / post-purchase), relying upon the user's memory in some way. Ensure that users can easily see the value of upgrading, by showing the base price next to the upgrade. Note that impact also reduces when the upgrade option sits in a higher boundary ($205) than the base ($105).

Pairings

Pricing

+

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Put decoy options in the same boundary

If the purpose of a cheaper decoy product is to highlight the relative value and attractiveness of a more expensive option, changing its price to sit within the same pricing boundary will supercharge any effects.

For instance, if you had a low price decoy product such as a half-sized mini muffin for $0.95, with a normal-sized muffin priced at $1.30, the decoy would be more effective at emphasising the normal muffin if it were easier to compare prices.

In this case, pricing the decoy muffin within the $1 boundary at or above $1 would allow people to more fluently calculate the value of a muffin that's double in size but only 30% more expensive.

Here, the appeal of a $0.95 bargain is outweighed by the spotting of greater value elsewhere, by making the cheaper bargain slightly less attractive and the more expensive bargain a bit of steal.

Pricing

+

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Round your base product price

Common convention suggests that you should make full use of just-under prices such as .95 and .99 to encourage sales. However, If you're offering more than one product in your range, these seemingly-cheap prices can make the jump to the next product in the line appear more expensive, given how we encode and categorise price boundaries.

Instead, consider use of round pricing for your base product to achieve two things:

  1. Reduce the perceived cost of upgrading to the next, more higher value product in your range. This is due to the new base price now sitting in the same price boundary and therefore making any upgrades appear less expensive.
  2. Improve both the ease of numerical processing and implicit trust in your brand with whole, round numbers.

Research shows that any loss in revenue from a slightly increased price will be offset by a higher overall sale price as customers move up to a better product in your range.

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Pricing

Anchoring

What we see first affects our judgement of everything thereafter

Participants were asked to quickly estimate - within 5 seconds -  the answer to one of two same calculations, anchored either low or high.

Those with the low anchor guessed 512 on average, whereas the high guessed a much higher 2,250. The correct answer was 40,320.

Put your highest price first in a list to make subsequent prices appear cheaper in comparison and increase sales. For instance, on the wine list shown, instead of putting the expensive items at the foot of the list, rearrange them in descending price. 

Don’t set your anchor price too high or the natural inclination to anchor other options against this price will diminish. Be realistic and keep it within an appropriate region of your other prices.

Audience matters. Anchoring effects  weaken for those with higher cognitive ability (Bergman et al., 2010) and those with prior product-buying experience (Alevy et al., 2011).

Zero Price Bias

We value something more when free over very cheap

243 people were split into four groups and asked about the attractiveness of one of two types of chocolate truffle at one of two prices (Hersheys at 0¢ or 1¢ or Lindt at 13¢ or 14¢).

Those in the zero-priced truffle group felt disproportionately more attracted to their truffle than those in all other truffle groups.

Replace very low cost with free.

‍Amazon famously rolled out free shipping in Europe, sales rose everywhere but France, where shipping was mistakenly set at 10¢. What small costs are you passing on to consumers?

In line with Prospect Theory, it may be better to bundle ‘the pain’ within a larger cost.

Communicate what is free.

‍Consider surfacing bundled, previously hidden value that you offer, actively highlighting the zero cost in marketing material and on invoices etc.

Nudge with small charges.

‍The flip side of zero-pricing is that incurring even a small cost quietly impacts our decisions. If you're trying to change behaviour, imposing a small discomfort can disproportionately assist.

Round Pricing Preference

We prefer and trust whole numbers over those ending in a 9

306 people visited one of three coffee shops and were asked to buy a coffee at either: €0.99, €1, €1.01 or an orange juice that was €0.15 cheaper than the respective coffee price.

Results showed that, contrary to conventional research on pricing (shown by the dashed line), the round-priced coffee saw the highest % of sales.

Use round prices to reduce fatigue.

‍There’s a growing trend for cognitive convenience in the face of Time Scarcity and Analysis Paralysis. 

A banana costing £1 is easier and faster to process mentally than one costing £0.95. UK retailer Tesco now adopts this specifically for promotions.  

If your brand places a value on saving time and energy, consider doing the same.

‍

Use for premium, green or pleasurable products.

‍Marks & Spencer (UK), Saks (US) and Levi’s now adopt round pricing, showing the zeros. Doing so signals brand quality, warmth and trust.

 Use to nudge secondary behaviors.

‍For transactions, add a Foot In The Door to give the rounded difference to charity (supermarket), savings (banks) or tips (fast food), for example.

Decoy Effect

We’re more likely to buy B over A by adding C to make B look more attractive

153 people were asked to choose between a 5-star restaurant 25 mins away and a 3-star restaurant 5 mins away. A third decoy restaurant option was then added of 4-stars  at 35 mins away.

This decoy shifted preferences from the closer, cheaper restaurant towards the 5-star option.

Determine your target.

‍What is the product you want to sell more of, next to a lower-margin competing product? Build your decoy product around this with a price or attributes that inadvertently highlight the target's attractiveness.

Don't overwhelm.

‍Offering too much choice or highlighting too many competing attributes where neither option is clearly more attractive will trigger Analysis Paralysis, making consumers' decision processes more difficult.

How is your target clearly more attractive?

Test different decoy values to optimize the effect.

Huber et al., (2014) suggest that decoys work best when it’s really easy and quick to see the dominant product, when pre-decoy desire is roughly split between target and competitor and when people don’t strongly like / dislike the decoy.

Boundary Pricing

We're more likely to upgrade if the base price feels closer

378 people were were split into two groups and offered two coffees, small and large, with prices either $0.95 and $1.20 or $1 and $1.25.

Results showed that people were 55.5% likely to upgrade to a large coffee when the small was $1 than when it was $0.95 (28.9%). Average coffee sale prices were also higher in the boundary condition ($1.14 vs $1.02).

Offer upgrades? Use boundary pricing.

If you offer more than one product option at different prices, boundary pricing can help improve the rate of upgrades. This is because, next to a price set just below a boundary (e.g. $95), increasing a base price to just above ($105) makes the upgrade option ($135) appear cheaper and less of a painful step up. It's because of the way we encode numbers, chunking them into broader numerical categories to infer value. This increases willingness to upgrade and therefore spending.

Works with multiple upgrade options

As long as the prices all sit within the same price boundary, the effects persist for product ranges with more than two options, as was shown with further studies on purchases of apartments and cars, which both offered multiple upgrade options. Maximise upgrade range by setting your base price around a more round numerical amount (e.g $10,000 vs $11,000). This will allow you to offer upgrade options that sit within a broader, albeit the same price boundary ($10000-19000 vs $11000-11999).

Present options together, not sequentially

The effects of boundary pricing disappear when the options are shown separately (different screens / post-purchase), relying upon the user's memory in some way. Ensure that users can easily see the value of upgrading, by showing the base price next to the upgrade. Note that impact also reduces when the upgrade option sits in a higher boundary ($205) than the base ($105).