A large part in your marketing strategy of a service or product will be the pricing decision. In which variations are you going to offer your product/service and how much should you charge. Today, I want to focus on the effects of price anchoring and give you a recipe to sell more, just by increasing the available options.
How humans make decisions
From the perspective of economics we traditionally assume a rational consumer that uses all available information in order to make a rational decision. However, we know that this is hardly ever the true case. Humans are irrational by nature. In the field of behavioral economics, human decision making is studied to see what influences us to sway from the rational decisions.
Psychologists Kahneman and Tversky suggest that we tend to make decisions based on heuristics (using previous experience to solve new problems). By doing so, we speed up or decision making, but instead in general make less rational decisions. This finding has considerable impact as we will see here, amongst other things when we talk about pricing and positioning.
Price Anchoring: We Make Relative Decisions
When we make a purchase decision we tend to make it extremely simple: We look at things relatively. That is, we look at the options presented to us and try and find the best value within them.
A classic example here, and one I am borrowing from Dan Ariely and his excellent book Predictably Irrational, is that of newspaper subscriptions. Have you ever gone to subscribe to a news paper only to be offered with a few different options, for example:
Print Only: $10/month
Digital Only: $10/month
Print + Digital: $12/month
In this example, we would easily choose the print and digital and percieve it to be a great deal, regardless of whether we wanted the print edition or not. What’s more, we are also far more likely to make the decision as it is made easier for us by this apparent excellent “one superior choice”, since we value the options relative to each other.
Offer Three Packages and Sell More
Looking around you at daily purchases, you will notice that you are often faced with choices between three packages. Whether for software or your cup of coffee at Starbucks, you see this popping up wherever you look. Is this a coincidence?
Of course not. You see, it turns out that through the power of price anchoring and the relative decision making that we use, it is highly likely that we will pick the middle package.
The reasoning will go something like this (regardless of product or package contents): The small product is definitely too little for what I need. On the other hand, the really big product is a bit pricy for my needs. I’ll just go with the middle product.
Purchase statistics prove this as well. While there will always be the people who buy the small (price conscious, or on the level of what they can afford) and people who shell out for the biggest option (I want the best, whatever the cost), most people will settle for the middle package. Another upside is that you have at the same time just made it easier for them to make the purchase decision in itself.
Conclusion
Touching the surface of the field of behavioral economics, we have looked at some short theory on how we tend to make decisions based on previous experiences. These findings, we use to construct offerings that not only help people make up their mind to purchase in the first place, we use them to construct an offerings structure that puts our most desired sell in the middle for maximum sales.
If you want some further reading, I highly suggest you to pick up a copy of Dan Ariely’s book Predictably Irrational which offers a good primer to the field and has more of these examples.
