Your Definitive Guide To The Perfect Pricing Plan Formula

By: Deborah O’Malley | January, 2019

Did you know there’s a formula for optimizing your pricing plan and table?

The formula is rooted in consumer and marketing psychology. And, it’s been verified through research studies, and lab experiments, and A/B tests.

Yet, this formula has never before been stated.

That is, until now.

Through in-depth research, a bit of mind boggling bending, and hours of toil, this formula has now coalesced into three easy, actionable steps.

Want to know it?

You can skip ahead to the very bottom to get the final formula, or read this comprehensive guide to learn about each formula element, the psychological basis behind it, and how you can apply each idea to optimize your own digital marketing success.

Formula Element #1: The Anchoring Effect

Definition

The Anchoring Effect is a psychological phenomenon in which people tend to use the first piece of information they get as the reference point for making comparisons and judgments about related items.

Background

Renowned researchers Tversky & Kahneman were some of the first to study this cognitive bias. Later work by Dan Ariely, author of the formative book Predictably Irrational, confirmed people tend to make judgments and compare items based on the “anchor,” or first piece of information they’re exposed to.

Real-Life Examples You Can Apply

T-Mobile

As we saw in this Featured Test, the Anchoring Effect can be used to get people to purchase higher priced items.

For T-Mobile, simply by placing the highest priced option first — instead of last — prompted more people purchased the most expensive, fastest Internet plan.

Reordering the pricing table in descending order from Fastest/Most expensive to lowest/cheapest resulted in a 14.9% increase in overall orders.

That’s because putting the most expensive option first anchored the perception of value. In comparison, the other options seemed less desirable because the Internet speed was so much slower.

OptinMonster

A similar effect occurs when we’re first shown a price that’s crossed out and, followed by a sale price. Take this example on the pricing chart of the popular pop-up provider, OptinMonster.

Here, you can see their Growth plan normally goes for $99/month. But, customers can take advantage of a special sale price of only $49/month.

If the product is going for $49, why bother showing the sale price?

The answer is because the $99/month anchors of our perception of value. It plants the idea in our mind of how much the item should cost.

Now, when we see the $49 “sale” price, it looks like a comparatively great deal. And, we may spring for it.

Application to Your Digital Marketing Work

Extracting the anchoring effect from the research lab and applying it to real-life can be incredibly valuable for optimizing conversions.

The Tangible Takeaway

In a pricing list or table, test the effect of putting your most expensive items first.

By doing so, you anchor the perception of value.

Even if customers don’t go for your most expensive option, putting the highest-priced item first makes everything else look comparatively cheaper – and like a better deal. Who doesn’t like a great deal?

Where feasible, also test the effect of putting the “actual” price, followed by the “sale” price to anchor the perception of value, as OptinMonster has done with their pricing chart.

Formula Element #2: The Decoy Effect

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Definition

The Decoy Effect is a close cousin to Anchoring Effect and can be used in tandem with the Anchoring Effect.

The Decoy Effect is a psychological phenomenon in which customers tend to choose two options, when presented with a third choice that is “asymmetrically dominated,” or, simply stated, not as good as the other options.

When the asymmetrically dominated option is shown, it acts as a “decoy,” pushing customers to choose the between the better two options.

The Decoy Effect can best be visualized by looking at this example of data storage pricing.

In example #1, it may be hard to make a choice between products A or B. The first offers more data storage, but is more expensive. The other is cheaper, but offer less data.

Pricing Table: Example #1

 AB
Price$50$40
Storage40 GB30GB

Now, look what happens when we add a decoy, Product C.

Pricing Table: Example #2 – With Decoy

AABC
Price$50$40$45
Storage40 GB30GB25 GB

Yes, Product C is slightly cheaper than the most expensive option, but it offers less storage than both options.

It’s not appealing. A decision is made. Product C is not option. Now that the choices have been narrowed down, it’s easier to select Product A or B.

Background

Huber, Payne, and Puto first discussed the Decoy effect and asymmetrically dominated alternatives in their formative research in 1982.

Later work, again, by Dan Ariely, published in his book Predictably Irrational, popularized the idea of the Decoy Effect where he described a real study by The Economist magazine, looking subscription options.

Real-Life Examples You Can Apply

The Economist Magazine

In a real-life study, the Economist magazine presented three subscription options that resembled this pricing chart:

(Note, this pricing chart has been PhotoShopped by GuessTheTest to make the example current)

Looking at these options, which would you choose?

  • In the actual experiment, 16% of people chose the $59 digital plan.
  • Nobody chose the print subscription for $125.
  • 84% of people selected the print and digital subscription option for the same $125 price tag.

The print subscription was the decoy. Nobody chose it. And, unless you’re an old Grandpa, you probably don’t care about reading a paper copy.

But, the option is there for a good reason: to focus your attention on deciding between the two more attractive options, print+digital or digital-only.

Now, look what happens when we take the decoy away:

Which option would you choose now?

The decision becomes a lot harder. Do you pay more to get both print and digital? Or pay less, but only get digital?

When this experiment was conducted, 68% of people choose the digital subscription.

Just 32% selected the more expensive print+digital option.

Notice how the results are inverse to the first experiment with the decoy? The end result translates to a lot less subscription dollars.

Nothing has changed in the value or offer – except the decoy isn’t there. And, this is exactly the value of the decoy.

Communo

As described in this Featured Test, the Decoy Effect goes hand-in-hand with the Anchoring Effect.

Take a look at this pricing table from the networking website Communo:

The table is aptly structured so the most expensive option is shown first, anchoring theperception of value.

But, there’s another savvy strategy employed here: two Agency options.

At first glance, it’s difficult to tell the difference between “Agency+” for $850 and the plain old “Agnecy” for $299 – except for the steep price difference.

When combined with the visual prominence of the larger box, the decision to go with the cheaper “Agency” option seems like a no-brainer.

But, take away the “Agency+” option and the decision becomes harder.

Do you spend $100 more to get multiple team member accounts? Or fly solo and pay a lot less? These are the kind of decisions that create hesitation.

And, hesitant users tend not to convert.

Having the decoy there makes the decision to not choose it easy. And, once the decision-making juices have started, it’s a lot easier to continue to make a final purchase decision.

Application to Your Digital Marketing Work

Adding a decoy – an option that isn’t desirable and you don’t expect to get selected — makes your other choices look better.

A decoy can be a useful tactic to push uncertain customers to make a choice between similar products.

The Tangible Takeaway

It’s in your best interest to make the decision-making process as easy as possible.

One valuable way to do so is to empower your users with a couple select choices, including a decoy option that can be immediately eliminated.

Formula Element #3: The Paradox of Choice

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Definition

The Paradox of Choice is a psychological effect in which reducing consumer choices can decrease shopping anxiety, helping prompt conversions.

Background

The concept that fewer choice diminishes shopping anxiety was popularized by psychologist Barry Schwartz in his book The Paradox of Choice – Why More is Less.

But, research looking at this idea was formalized as early as the 1950s by psychologist Herbert A. Simon.

You likely won’t be surprised to hear that Tversky and Kahneman also delved into this topic, as have many other researchers over the years.

Real-Life Examples You Can Apply

The Famous Jam Study

In what’s been dubbed the “Famous Jam Study” researchers at Columbia and Stanford University set-up a real-life experiment in a grocery store.

In their study, supermarket shoppers were given jam at one of two sampling stations. The first station featured 24 jam flavors. The other offered only six selections.

Source: https://www.cartstack.com/blog/comparison-killing-online-business-paradox-of-choice/

At the station with 24 flavors, more people stopped to sample, but just 3% of shoppers made a purchase.

Conversely, at the station with six flavors, fewer people stopped, but of those who did, an incredible 30% purchased at least one jar of jam!

Clearly, the smaller selection generated more sales. Likely because the larger selection overwhelmed shoppers to the point they weren’t able to decide — so made no decision at all.

Less choice reduced purchase anxiety and made the decision to buy easier.

World Wildlife Fund

A similar outcome can be seen with this real-life donation study by the World Wildlife Fund.

In it, the testing team wanted to determine whether donations would increase if people were given a “blank canvas” to select their donation amount. Or, if given pre-determined donation amounts to select.

Go ahead and take your best guess: which version do you think won? The blank box? Or the pre-selected amount?

If you guessed version B, the pre-selected amount, you’re right!

Providing donors with structured, limited choices markedly increased donations.

Compared to the losing “blank slate” version, the winning clickable button format lifted

  • Transactions 30.7%
  • Total revenue 15.6%
  • Revenue per visitor 14.7%

All results achieved 95% confidence.

Application to Your Digital Marketing Work

Reducing choice can lower consumer anxiety, helping shoppers make the decision to purchase your product or service.

The Tangible Takeaway

Provide some choice to your customers, but not so much they get “analysis paralysis,” getting so caught up in thinking about the decision they choose nothing at all.

It’s, therefore, best not to present too many options.

But, how much choice is too much? Check out the answer below.

Formula Element #4: Three Charms; Four Alarms

Definition

Research looking at the optimal number of positive persuasive claims to present about a product or service indicates three is the best number to use.

Four, or more, starts to elicit skepticism in the shopper’s mind.

Background

To determine the optimal number of persuasive claims to use, researchers Shu & Carlson asked participants to read about five items: a breakfast cereal, a restaurant, a shampoo, an ice cream store, and a politician. 

With each item, participants read a description about the product with a range of 1-6 positive claims about it. For example, the shampoo might have claimed it makes hair (1) cleaner, (2) strong, (3)healthier, (4)softer, (5)shinier, and (6) fuller” or any combination of those attributes.

Participants’ attitudes towards the product where then measured, along with how positive or negative their impressions were. Level of scepticism about the claims was also assessed.

Results clearly demonstrated three claims was the optimal number to make participants feel most positive towards the product. Fewer wasn’t as convincing. And, more elicited scepticism.

While this study looked specifically at claims for a product, the findings can likely be brought into pricing tables as well.

Real-Life Examples You Can Apply

Make-A-Wish Foundation

In a study by Feiler, Tost, and Grant, participants received a request to donate to the Make-A-Wish Foundation charity.

Participants were given up to four reasons to give. They either saw two reason based on based on elements that made them feel good about giving (termed egoistic), two altruistic reasons, or all four reasons combined.

Giving intentions were then assessed.

Results showed participants who received all four reasons were much less likely to give than participants who received only two reasons. A follow-up survey revealed participants who received four reasons to give ended up giving less because they felt like they were being influenced — and didn’t like being knowingly persuaded.

This study supports the idea that four alarms, where as fewer persuasive points can charm.

Optin Monster

Beyond non-profit this idea can also be applied to eCommerce and SaaS platforms.

Take a look at this pricing table by OptinMonster. Given everything you’ve just read, anything jump out at you?

Source: https://optinmonster.com/pricing/

It features four plans.

As just described, showing four plans may be counter-productive because it could stifle decision-making on the user’s end.

Beyond that, there may be a few other ways to optimize this pricing table.

While it’s hard to know the extent to which OptinMonster has tested their pricing table, it could be benefcial to examine the effect of:

  1. Reducing the pricing plans to three, possibly combining “Plus” and “Pro” options into one. Although the “Plus” or “Pro” plan may be a decoy, it’s difficult to immediately tell the difference between the two — expect for the price tag.
  2. Put the prices in descending order so the most expensive plan anchors all the other plans and makes the subsequent plans seem less expensive.
  3. Keep the “sale” price, which makes the going rate look like a comparatively great deal.

Application to Your Digital Marketing Work

Three choices may be the optimal number to present so you audience feels they’ve been given options, but aren’t overwhelmed with too many possibilities.

Don’t give enough choice, psychological reactance can occur. This state happens when we feel like our choices or freedoms are being restricted or taken away from us.

And, if we’re told to “take it or leave it, research looking into the single-option aversion affect and Hobson’s Choice effect shows, we’re often prompted to go searching for more other, competitive offers. So, that’s not a great option either.

However, too much choice can create analysis paralysis – where we get so caught up thinking about a decision, we choose nothing at all.

The Tangible Takeaway

Choice is tricky. We need some options so we feel empowered and involved in the decision-making process. But, not so much choice we feel overwhelmed with the options.

Preliminary research indicates three may be the optimal number of choices to present to convert your audience.

 

The Final Formula

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Altogether, this research indicates, an optimal pricing table has three elements:

  1. The prices anchored from highest to lowest +
  2. A decoy option that makes the other choices seem most desirable +
  3. A limited number of product options — ideally three — with no more than three features, or benefits listed =

      The Perfect Pricing Table

Communo provides a good example of a pricing structure that matches these three criteria:

Notice how:

  • The prices descend from highest to lowest.
  • The Agency+ option acts as a decoy to draw your focus on the Agency or Solo options.
  • Three options are given, making it easier to select the perfect fit.

Hope you’ve found this formula helpful and can immediately apply the insight to optimize your own digital marketing success.

What Are Your Thoughts?

What do you think makes for a perfect pricing table? Share your thoughts in the comments section below.

 

The Perfect Pricing Plan Formula

Did you know there’s a formula for optimizing your pricing plan and table?

The formula is rooted in consumer and marketing psychology. And, it’s been verified through research studies, and lab experiments, and A/B tests.

Yet, this formula has never before been stated.

That is, until now.

Through in-depth research, a bit of mind boggling bending, and hours of toil, this formula has now coalesced into three easy, actionable steps.

Want to know it?

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