Product Pricing Strategies

As Product leaders, we solve customer pain points. We find ways to delight the customer. But at the same time, we create value for the business. A big part of this is pricing and I’m going to share a few distilled learnings on how pricing experiments can help increase revenue.

Product Management is (or should be) as much customer focused as it is product focused. In this role, we often find that we are able to influence change in customer behavior as a result of the product, pricing and positioning. Although human beings generally make rational decisions with the goal of maximizing their benefits (classical economics is built on this premise), there are times when we don’t make the most rational decisions. I’m going to share some interesting pricing experiments that influence customer decision making, which can be applied to business.

1. The Contrast Experiment

Which of the orange circles is bigger? The one on the right? Look again! In reality these two orange circles are the same size - absolutely identical. But the right one just appears bigger than the left one because of the contrast in size with the surrounding circles. People can’t isolate and analyze all the factors necessary for a “rational” decision-making, especially in new and unfamiliar situations where some of these factors are not known. Salesmen often use this to their advantage. They try to sell the most expensive things first. A customer who came to buy a suit is first shown the suits, then the salesperson suggests appropriate accessories, like a tie that would with the suit. Compared to the suit’s price, the tie seems relatively inexpensive and is an easy upsell. Real estate agents also use this principle often - they first show potential buyers a rather overpriced apartment that’s not so great. Then they take the future homeowner to the apartment that they actually have in mind for them. Compared to the first option, the second home seems to be just perfect - both price-wise and design-wise!

How can you apply this? 

You can modify the context of your customer during their decision-making process. You can also influence the order in which you demonstrate the features and value, as this changes the customer’s susceptibility to prices too.

2. The Bait Experiment

We rarely think in absolute terms, and we don’t have a universal measure to understand the value of a certain thing. Most things are perceived relative to something else. Therefore, we tend to evaluate things by comparing them to others.

In the picture below you can see a magazine subscription page with three options:

• a web subscription ($59)
• a print subscription ($125)
• print + web subscription ($125)

In an experiment, the first group saw this version of the page. 84% of them chose the third option, and only 16% chose the first one. None of them purchased the second option.

Then the second option was excluded, which left only two options:

• web subscription ($ 59)
• print + web subscription ($ 125)

This time the preferences looked different: 68% of customers purchased the web subscription and 32% opted for the print+web.

It turns out that, despite first impressions, the second option wasn’t meaningless. In fact, it helped nudge buyers towards a more expensive tariff plan.

How can you apply this?

Add a special “bait” price to your pricing plans, which will become “A-” for the pricing plan that you really want to sell.

3. Magic Number 9

This is something we have all seen before in prices for apps, subscriptions, retail items and more. There is an undeniable effect that the number 9 has on pricing. MIT and the University of Chicago conducted a research on this. 

They divided the subscribers of one clothing catalog into three equal groups and sent them different versions of the catalog. In the original catalog, some items cost $39, in other versions the same items cost $34 and $44. As a result, the number of orders for these positions in the original group exceeded all the others, including the $34 option. It is difficult to find a logical explanation for this, but apparently the prices that end with 9 trigger some kind of automatic mechanism.

How can you apply this?

The digit 9 has become a mandatory component of any pricing. And despite the lack of any rational explanations, “9” generally works.

4. The way information is presented, influences our interpretation and thus decision

Below are two charts demonstrating sales from two different companies. Which of them would make you feel better if you were the CEO?

Both charts show the same data. What is different is the scale on the vertical axis. The first chart is better suited for reports to investors. 

How can you apply this?

The way you present the price and product information can easily affect the buyer decision. Offering to proceed with a $1 per day and the one that costs $360 per year are mathematically equivalent, but trigger different reactions in customers. The first option can be compared to purchasing bottled water, and the second option akin to purchasing a mobile phone!

5. Presentation, packaging and branding matters

MIT ran a thought experiment - there were two stations - one serving coffee with add-on ingredients (cinnamon, cloves, nutmeg etc.) served in a plastic tray with plastic spoons. The other station offered the same coffee and add-ons but this time, in a fancy metal plates with silver spoons. The second station received more positive reviews of the coffee and the overall taste and experience, even though the coffee and ingredients were the same. 

How can you apply this?

When we make decisions, our perception is influenced by a lot of factors such as presentation, packaging, brand, opinions of people around us, opinions of experts, our own expectations, etc. Each of these factors influences how much your customer would like your product and their willingness to payt.

6. Free or paid?

As humans, we love free stuff! Years ago, Amazon started offering free shipping for orders over a certain amount. The idea was simple: order one book for $20 and pay another $5 for delivery, or buy an additional book for another $15 and get free shipping.

The results? Amazon’s sales grew significantly in all regions except France, where the situation remained the same. Why, you ask? Well, Amazon France slightly changed the terms of the offer: they reduced the cost of delivery to 1 Franc with the order amount. Then once the delivery was made free, there was a rise in sales as well.

How can you apply this?

The word “free” makes any product more attractive to potential customers. If you have a way to distribute your product for free, at least partially (free trial/freemium), then try it out. This approach will help expand the top of your funnel. Then strategize on how to convert these new free users into paying customers!

Read more about these pricing experiments at ConversionXL