How relative pricing shapes customer choices
The Economist ran an ad for annual subscriptions to the magazine. The options were:
Behavioural Economist Dan Ariely spotted this ad and was puzzled. Why would anyone choose the second option? Had the Economist made a mistake or was it deliberate, he wondered. So he asked them. However, he did not get clarity. The ad disappeared and the trail went cold.
Dan decided to run an experiment with his students. Firstly, he asked 100 students to choose between the three options with the following results:
So the majority chose Print & Web (5 times as many as Web). Sensibly, none chose Print. This begs a question. If the Print option is so clearly a poor choice, why include it? Dan ran a second test. He removed the Print option then asked another 100 students to choose. The results were:
Now, Web was twice as popular as Print & Web. Removing the decoy option, the one no one would logically choose, made the difference. As Dan said of the result, This was not only irrational but predictably irrational as well. How so?
As Dan explains, We are always looking at things around us in relation to others. This is true not only for physical things, e.g. toasters, puppies and spouses, but for experiences, e.g. holidays and educational options. We always compare jobs with jobs, lovers with lovers and wines with wines. We not only tend to compare things with one another, but tend to focus on comparing things that are easy to compare - and avoid comparing things that cannot be compared easily.
Three tiered pricing model psychology
We often judge things by comparison and let relative impressions distort absolute judgments. - Nassim Taleb
When establishing a pricing structure with three tiers, Small, Medium and Large, the positioning of the Medium price can significantly influence customer behaviour. People evaluate options in comparison to one another, not in isolation.
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Imagine we have a Small option priced at ￡5 and a Large at ￡10. By strategically setting the Medium price close to the Large (say, at ￡9) we make the Large seem like an incredible deal. It’s only ￡1 more for significantly greater value. This small price gap between Medium and Large creates a psychological nudge, making the Large option the obvious choice for many customers.
Conversely, if our goal is to sell more of the Medium option, we widen the gap between it and the Large. For instance, pricing the Medium at ￡7.50 and keeping the Large at ￡10 makes the Medium appear like the most reasonable and balanced choice, substantial enough without the perceived extravagance of the Large.
No matter the pricing strategy, it’s hugely beneficial to have an expensive option available. Even if it doesn’t sell frequently, its presence reframes the relative value of the other tiers, making the lower-priced options seem more appealing by comparison.
Other resources
Are We in Control of Our Decisions? talk by Dan Ariely
Less is More in App Design post by Phil Martin
The Secret to App Pricing post by Phil Martin
Rory Sutherland sums up the general concept. People don’t buy things based on value; they buy things based on the perception of value.
Have fun.
Phil…