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Pricing Experiments You Might Not Know, But Can Learn From

The Economist
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Ashampoo Software
Panera Bread Co.
the University of California-San Diego
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Dan Ariely
Steve Jobs
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Neil Davidson
Richard Thaler
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It’s clear that the right price can make all the difference – too low and you miss out on profit; too high and you miss out on sales.Don’t ask, can’t tellAsking people what they’d pay for and how much rarely works. It’s much easier to spend hypothetical dollars than real ones.Also it’s worth remembering that people really don’t know how much things are worth, what’s a fair price (which is the reason TV-shows like “The Price is Right” can actually exist).William Poundstone, the author Priceless: The Myth of Fair Value says this:“People tend to be clueless about prices. Like why do shoppers moving in a counterclockwise direction spend on average $2.00 more at the supermarket?Why does removing dollar signs from prices (24 instead of $24) increase sales?What will work for you depends on your industry, product and customer. People have trouble comparing different options, but if 2 of the options given are similar (e.g. same price), it becomes much easier.The same principle was used with travel packages.When people were offered to choose a trip to Paris (option A) vs a trip to Rome (option B), they had a hard time choosing. The rationale is that it is easier to compare the two options for Paris than it is to compare Paris and Rome.A graph to describe this:So if you add a slightly worse option that is similar to A (call it A-), then it’s easy to see that A is better than A-, hence many people choose that.How you can use it:  Add a decoy package or plan to your offer page, next to the offer you really want them to take.Go to Wal-Mart and you see prices ending with 9 everywhere. All the test subjects were given the information a buyers would normally have, including a list of houses that recently sold, nearby houses currently for sale and so on + what the seller had listed the house for.The subjects were divided into 4 groups, each given a different listing price, and were then asked to estimate what the home was worth.These were the results:Anchoring worked even on real estate pros that had been selling properties in the area for 10+ years. If you’re competing on price, state how much others are charging before revealing your price.Ash Maurya, a startup entrepreneur, published an article on VentureHacks describing his pricing experiments with a photo sharing service.He tested a single, straightforward $49/yr offer vs 2 plans ($49/yr and $24/yr) vs 3 plans (added a freemium plan).The result? If you’re offering different plans right now, experiment with a single plan.Pay what you want is a pricing system where buyers pay any desired amount for a given product, or nothing at all. Also, the homeless tend to camp out there and stay all day if they aren’t shooed away, so Panera had to hire a bouncer.It’s important to have fair minded customers for this model to work (homeless and hungry people probably care more about being fed, than being fair).Combine “pay what you wish” with charityThere’s some research that pay what you wish pricing works best when combined with charity. Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo (almost 17 times more than before), but customers paid only $.92 on average.The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. It’s one thing to have the amount you choose observed and another thing to download stuff without being seen.The book Smart Pricing suggested that successful pay what you want programs are characterized by:The old truth about offering 3 pricing options holds water. Some people will always buy the most expensive option, no matter the price.You can influence people’s choice by offering different options. Old school sales people also say that offering different price point options will make people choose between your plans, instead of choosing whether to buy your product or not.How to test it: Try offering 3 packages, and if there is something you really want to sell, make it the middle option.I’m sure you know the classic “pennies-a-day” effect: “it costs less than $1 a day!”. Not just coffee, but Pike’s Place brew or Caramel Macchiato.If you’re creating a new category, there’s no price reference and people are much more likely to accept any price you name.How you can use it: If you want to charge more than the market average, look at the competition: how they package their offering; what’s the user experience like, and change that. Your friend offers to go for your favorite brand of beer, but asks what’s the most you’re ready to pay for the beer?This was the scenario for a pricing experiment conducted by Richard Thaler.Image creditThey tested two scenarios. Rather you should test two different products that essentially do the same thing, but just have a different price tag.Before deciding on your pricing strategy, it’s worthwhile to read Cindy Alvarez’s article where she makes the point that price is not the only cost to consider. Upgrade to Done For You option.What else could you value-add to price differentiate?Great article. CheersThanks much for such valuable information, i would add (maybe to the number 4) following also the contrast principle that your expensive package should be first on the list.(of the three)best and thanks again!I don’t believe i read this whole article in english (i’m french), but it was very interesting and make me think about my real estate business. The stand outs for me were “Can I split test the price?” and “They changed the experience of buying coffee, so the perception of what people were getting, changed.” it is all in the way of how you package it.Great article. Going to test some price strategies to increase my conversions.Great insights from this article. We also do our best to legitimately offer far greater value than the price, which is an option with digital products. I think I’m going to focus on the anchoring, your tip to offer a high price on ballpark estimates was gold!Great Article! Does anyone here has any experience in using service like to A/B split test their pricing?This was a great article, good insight, and interesting things to think about for perceived value, price anchoring, and the mysticism of the number 9…Love Predictably Irrational! I always like the wine menu technique of anchoring with a high-priced item even if people won’t buy it.I didnt read all comments but the origin of .99 and .95 price endings was when the merchant wanted to force cashiers to give change instead of slipping the note into their pocket. And what makes a “website look expensive”?Thank you!This has to be one of the best articles I have read on pricing! You can read the full write up at you write this article also? post has really made me to comment on it, the sheer value it gives, Peep Laja wish I knew you from the first day I started my own business!! I had a $3000 Model, a $2400 model and a $1800 model and all had the same benefits basically but as price increased the value did as well, so what I did was play with the name of each model…My middle model sold the best by far ($2400) Then I came up with an idea based on learning my customers and realizing they took great pride in being called “Professionals” so I thought I would test my product names based on this. I have offered my SEO services between $50 and $100 as low cost one time package, that’s cool na :) But its all about how to sell the best services by attracting customers just as i do!I have learned the hard way to get the right pricing in my business, your article is very informative and help me a lot, thanks.I liked this article, in fact i was practising it, but it gave me more motivation.

As said here by Peep Laja