A to Z of Pricing for Product Managers - Part 3
Decoy pricing, anchoring, reframing the price, scarcity effect & much more!
Welcome to my last post on pricing in this series :) (Uff! Finally 😌)
In this post, I will cover 5 powerful pricing psychology hacks, I have seen in India’s consumer Internet space. Hope you enjoy reading these interesting hacks!
1. Decoy Pricing 🎈
Dan Ariely & the economist case study 🧧
To understand decoy pricing, let’s take a sneak peek into Dan Ariely's famous book on behavioral economics ‘Predictably Irrational’.
In the book, Dan argues that the human mind can only make sense of relationships and not facts by itself.
When we are confronted with a set of choices, the mind majorly draws a relationship between a set of choices & makes a decision. 😾
To debunk decoy pricing, let us see this economist subscription plan!
Absurd, right! Which one would you choose? Why the hell option 3 offers more value than 2 at the same price? 😐
Dan calls option 2 as decoy introduced to push customers to choose 3rd plan (print + web)! Option 2 is introduced to push more & more customers to buy option 3.
Dan Ariely also proved this empirically. In an experiment he conducted on 100 students at MIT Sloan School of Management — 84 opted for choice 3 (web + print plan) & only 16 opted for choice 1 (web only).
When he removed option 2 i.e. the decoy— only 32 opted for choice 3 (web + print plan) while 68 opted for choice 1 (web only).
Dan also didn’t stop here. He left a practical advise for all of us. 👊 When you are going for a hookup at a bar. Take an identical looking guy with you but make sure that he is a notch less attractive and smart than you. You will see the magic instantly and thank Dan later. 😾 The guy you took with you is the decoy.
Nat Geo’s famous popcorn experiment 🍿
In a famous popcorn experiment, when small and large popcorn was sold at $3 and $7, most customers opted for a small popcorn.
But when a medium popcorn was introduced at $6.5, most customers opted for the large popcorn. The $6.5 medium-sized popcorn (decoy) does the magic in this experiment.
2. Transparency (sucks)! 😜
You must have booked flight tickets on Paytm! Well, do you remember that they show the lowest price on the search results page and then add the convenience fee and other charges later on?
Well, it might seem on the surface that users love transparency but in the use case podcast with Ravish Bhatia, Dr. Sreelata Jonnalagedda (Associate Professor at IIM B) says that she has observed that the conversion rate of payments increases while the lowest price is shown first because users are really very lazy to cancel the transaction once they have initiated the transaction.
Humans coerce into an action when they fear losing out on something.
For the same reason, Groww shows digital gold price excluding GST upfront.
P.S:- You can run your own A/B test and verify if transparency in pricing works or sucks for you 😂
3. Price anchoring 🥇
Have you ever bargained in Sarojini Nagar? (Well! that depends 😭) If shopkeeper A tries to sell you a T-shirt at ₹ 450 and the other shop is willing to sell the same T-shirt at ₹300; you are instantly compelled into buying the T-shirt immediately! (without even thinking what the original price of the T-shirt is)
Thanks to our brain! Empirical evidence has shown that every decision our mind makes is based on the first piece of information.
Let’s take a masterclass from the legendary Steve Jobs on price anchoring! 🎉
Our mind is so used to anchoring bias; that many popular sites (Mailchimp, Tinder, etc.) shows price decreasing from left to right.
Our minds naturally starts comparing everything with the first piece of information (price) we are shown!
Pro-tip: On your pricing page, draw special attention to your most expensive package, even if most people don’t buy it. Your top tier package becomes the visitor’s price “anchor”, making your other packages look more affordable in comparison.
4. Reframe the price 💣
The other day, my uncle who is a banker in a Public Sector Bank (PSB), wanted to enroll her daughter in an IIT online coaching class and was asking me to evaluate different online platforms.
He asked me to find the price of courses online. When I mentioned that it would cost 56,000 for a 2-year program, he was taken aback by how commercialized education has become over the years.
Instantly, my aunt grabbed my phone and popped it into the screen. It isn’t too much! Just 2,333 rupees per month. Uncle’s mood changed suddenly (although they were paying the same 56,000 lump-sum) and he was elated enough to say — phir toh theek hai! 🙏
Using monthly estimates is an effective hack to show a higher ticket price offering as it encourages customers to make a buying decision faster for two reasons:-
1. We often get paid monthly. We pay our rent or loan monthly. It creates a familiarity in our cognitive space.
2. Since the monthly amount is smaller, it may feel more affordable. It seems manageable. Interestingly, a neuro-imaging study published by Human Brain Mapping found that higher prices actually activate neural circuits involved with anticipating loss.
Re-framing the price to a perceived lower denomination works well for selling a non luxury consumer products in countries like India where median household income is not high. It helps the customers to make guilt free decision faster. 👊
5. Scarcity effect ⏲️
Have you ever booked accommodation through booking.com? (You must have!) When you are browsing travel sites you aren’t just browsing; you are there to book the best deal and secure a spot for your lodging or secure a seat for your urgency!
Booking.com uses data to create a sense of urgency & pushes you to make the decision faster.
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Until next time!
Wait every Weekend morning to read this instead of newspapers :)
Which of these pricing models and methods do you find to be ethical vs something that seems like UX dark patterns?