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Pricing a Product or Service: How to Make Your Prices Irrationally Attractive

What’s the price of your product or service?

Be honest.

Is it $97 like most guru marketers advice?

Or maybe some other amount that ends with a 7? Also, did you spend a fair amount of time figuring out this (presumably) perfect price point?

Now, what if I told you that you may be leaving TONS of money on the table without even realizing it… ?

First of all, I’m not going to try to sell you anything here. This isn’t the beginning of an elaborate sales pitch with a buy button at the end. This is just one simple piece of advice that’s been confirmed by an actual scientific study.

It has also been confirmed by me. 😉

Back when I was running a web design business (with a friend), the issue of pricing was one of the most difficult ones we had to tackle.

One of the standards in any industry or niche is to showcase a number (usually three) alternative plans that your customer/client can choose from. The traditional way of making this happen is to position your main offer as the middle one.

Now, this works quite fine for everybody. However, what we found out is that you can be just as successful convincing people to pick the top – most expensive – product you have in store, instead of the middle one.

What might that mean for you? Well do a little armchair math with me.

What is the difference between your most expensive product or service, and the one below it?

Now, how many people buy the lower priced item?

Multiply that number by the difference in price, and just look at how much extra money you could be making!

This is something I learned from Dan Ariely (the author of Predictably Irrational), and if you read on, I’ll teach you exactly how it works.

The Predictably Irrational Spending Habits

The book – Predictably Irrational – calls out the popular belief that we always act rationally and that our decisions are mostly based on reason and common sense. While this sounds nice, it’s simply not true.

Take a look at the following, for example. Near the beginning of the book, Dan shares an interesting case study – the Economist.com subscription options.

Back when Dan was writing his book the subscription options looked like this:

  • Online-only subscription – $59.
  • Print-only subscription – $125.
  • Print and online subscription – $125.

This is correct, no typo here. You could get print for $125 or online + print for the same price. So why would anyone take the print option if they can take the last option and have the online subscription for free, right?

There’s no surprise here … this third option ended up being the top pick for most subscribers, and here’s how and why it works.

(By the way, Economist.com still uses a similar pricing model. Check for yourself – Subscribe to The Economist.)

Irrational Buying

As Dan proves, people don’t really have an idea of what they want to buy until they see it in context.

We don’t know which cappuccino is better until we try two different ones in two different cafés. We don’t know which of two guitars sounds better until we play both of them one after the other.

We simply don’t know what we don’t know, and we can’t base our decisions on a reference we don’t yet have. This is why the Economist’s subscription model works so stunningly well. It provides the customer with a reference point.

In this case this reference point is the second, print-only subscription. Let’s look a little more closely at the study.

Here are the results Dan observed in his experiment. When he asked 100 students to decide which subscription they’d go for, 16 students chose the first option, zero students the second option, and 84 students the last option.

The fact that no one selected the print-only subscription is not surprising because the third option is clearly more attractive. However, in the next step Dan proved that the sole presence of the second option had a huge influence on the decision process.

Without the second option being available, another group of students made a completely different decision. The online-only subscription was selected by 68 people, and the print + online by 32 people.

So what’s the takeaway?

People need to have a way of easily comparing your offers against each other – it’s an element in most good decision making models.

The online-only subscription of The Economist isn’t really that comparable to the online + print. I mean, you don’t know if the price difference is honest. But when you see that the price of print-only is the same as print + online then this option clearly becomes the most attractive … quite frankly, a no-brainer.

How to Set Irrationally Attractive Pricing

Since we’re talking online business it’s probably a good moment to explain how to use this approach when pricing a product or service.

Dan teaches us a few important things:

1. Provide three options whenever possible

Three is the perfect number of options for your customer to choose from.

Remember, if there’s too much choice people get overwhelmed and tend not to choose anything at all.

If you offer only one option, on the other hand, people can simply say that they’re not interested in it. When there’s more than one they can always wonder which option is more sensible even if nothing seems 100% perfect.

2. Put a price tag on your main offer

The option you want to sell the most should also be the priciest one available.

This may seem counterintuitive because a common way is to set the one you really want to sell in the middle. That is a standard stereo-salesman approach.

In this irrational approach, however, we’re shaking things up a bit, so the option you really want to sell should be the most expensive one.

3. Put a price tag on your middle offer

The middle option should be only slightly cheaper than the main offer, yet a LOT less attractive.

Just like The Economist’s example. The print-only option was the same price as print + online. So it wasn’t even cheaper, but it was clearly less attractive, and therefore easily comparable.

Actually, you can go for the same price model too, here are some examples:

  • Offer an hour long consultation over Skype + an e-book on {whatever your expertise is} as your target option (the one you really want to sell), and just the Skype consultation as the middle option. Use the same price for both.
  • Offer a one year subscription to your service as the target option, and a 6 month subscription as the middle one. Make the price different by a tiny margin.
  • Offer a stripped-down version of your product as your middle option, and a fully-packed version as the target option. Make the price only 5% different.

Whatever you do, you need to make sure that your target and middle options are easily comparable. When they are put next to each other your ideal sell needs to be clearly more attractive than your middle.

This makes great sense to you as a marketer, because you can influence people to buy not only the Skype consultation you want to offer – but also the e-book that your customer can refer back to again and again – and easily share with their friends and family and networks – getting more people into your funnel.

It’s also a better deal. Your customer will feel like they’ve chosen well, and you get that extra means by which to over-deliver on your promises. Wins all around!

4. Price the simplified offer

Set the simplest version of your product as the first option.

Your first option needs to make sense too. Like it does in The Economist’s model. The fact that you can get the online-only subscription for $59 makes sense, but it isn’t comparable to the other options and that’s the whole point.

When coming up with this first option try to take one essential function/feature of your product and offer only that. This will make sense to your customers and it won’t make this first offer seem like a filler.

For example, when you offer a subscription based product that provides certain content on a monthly basis (maybe templates for something, or articles, reports, whatever) then you can set your first option to be a kind of a beginner’s package of resources. Something that contains everything the subscription does, but is going to run out pretty quickly, and it costs like half the price.

It may take you a little while to figure out how to set prices and create offers work best for your audience. Split-test different options, and then stick like glue to the one that performs best.

This is just one thing I’ve learned from Dan’s book. There’s much more interesting and useful stuff in there. I highly encourage you to get your own copy if you haven’t already.

What do you think about this? Have you tried pricing a products or service like this? What has worked well for you in the past?

About Karol K

Karol K. (@carlosinho) is a freelance blogger and writer, published author, and online business figure-outer. His work has been featured all over the web, on sites like: NewInternetOrder.com, MarketingProfs.com, Smashing Magazine. Feel free to contact him to find out how he can help your business grow by writing unique and engaging content for your blog or website.

30 thoughts on “Pricing a Product or Service: How to Make Your Prices Irrationally Attractive

  1. Karol,

    Great post. I wish services like Clickbank allowed multiple prices because having the different price points can be really powerful. If you have any tips on applying this with one price point, let me know. Thanks for the post and the great examples too!

    • Hi Tom,

      As far as I know you can launch multiple kinds of a single product on clickbank. At least I stumbled upon such products a couple of times (ones where you could select a specific option package and then your final price would change).

    • I’m wondering about this too. I have called my competition and figured out that my pricing is right in the middle of all of them (the average). But the thing is, our service is A LOT better. Right now I’m working on slowly raising that price so I don’t have a backlash with existing customers. But advice on how to set the price of one product or service that can only be offered with one price point would be nice.

  2. Thanks so much for the great, informative post! I’ve never really learned how to price for services before and this was a great start! I would have never thought about making 3 offers where the middle and top were barely different. Thanks again!

  3. Great advice! In the past we had four levels, which may have been too many, and we also noticed that most customers bought the second level package. It made sense, as they felt like they weren’t getting the cheapest one but it was still affordable. The problem with our structure, as is clear through this post, is that our prices went up in a pretty linear fashion through the four levels. This made it hard for a customer to see an obvious choice (and when they made a choice it was rarely the one we’d have preferred).

    • This is what TV salesmen usually do – show 3 different TV sets where the middle one is what they actually want you to buy. I don’t know why, but in such a situation people usually go for the middle one.

  4. Karol,

    Great advice. I am in the process of determining price structure for my coaching services and your article was really helpful in breaking down the psychology of prospective clients. This will help them receive the greatest benefit AND feel like they made a great deal. Win/Win!

    Trent

  5. There are so many opinions on this topic out there. I like the power of 3 – and agree that if the person gets confused by the choice then they probably would not buy anyway.
    Thanks for sharing

  6. This makes a LOT of sense and is quite timely as I am just getting ready to sit down with my J.V. partners and set the pricing for our Abundance-in-Business offering, #CakeinHawai’i.

    @Brian Watkins – I hear you there. Now I know why another offering we’ve had didn’t do so well. Going to be restructuring it for the New Year as well. Good Fortune to you on your future pricing! 🙂 :>

    • Thank you, Piers! 🙂 :>
      That hashtag is a reminder of what we are going for. Whether literal or figurative, #CakeinHawai’i represents our Huge Reward that we are giving ourselves for putting our butts in the chair, our fears on hold, and going for the gusto with our businesses. :>

      Congratulations! 🙂 :> What a beautiful place to meet your beloved! May I ask how long?

        • Very kyool! And I hear you there – my hubby & I recently celebrated our 16th, after knowing each other for a year and you’re right! It certainly doesn’t feel that long.

          Means you picked the right person if that many years fly by that fast. :>
          May many more happy, fun years be in your future together! 🙂 :>

  7. I have to consider this a little more. I am certain that this technique will work – and probably very well- with internet sales. It’s the conventional process for which I have some doubts.
    But, that should not stop anyone from using this concept for their web-based efforts. If I were active in that market, I certainly would.
    Thanks for sharing…

    • I think that it can be used for physical products as well.

      For instance, the middle option can be your main product, and the top option the product + an extended warranty. Both the same price.

  8. Useful and interesting article Karol, although looking at the Economist link didn’t really seem to show a significant difference between their top and middle options (save 64% vs save 60%). It *did* clearly show that they were pushing their top tier most strongly though (hilighted colour, “BEST offer” etc, placed at the top / first, not traditional left to right which would have it last etc.)

    Personally I would suggest that if using this method, to use a tiny margin of difference between middle and top levels, rather than no difference as in the example. Why? Because if it’s obvious that you’re trying to get them to choose the most expensive option, it feels like manipulation which creates resentment. This doesn’t surface in an academic study as people know that it’s a theoretical purchase and that the organizers of the study don’t profit differently from their different choices.

    Yes, you want it to be a no brainer of a decision, but it still needs to feel like it is *their* decision.

    I also wonder about using two options. You address logically why one option is undesirable, and why 4+ are, but what about 2? *If* you could get a similar context effect as mentioned in this article, while reducing paradox of choice by 33% that would seem to be a very powerful combination.

    • This is a good point about going with only 2 options. I will have to think about this one.

      However, when it comes to having a minimal price difference, I’m not really that convinced. I can be wrong, but there obviously are tricks out there that work despite the fact that someone knows about their existence, and I believe that this might just be one of those tricks.

      For instance, a great example is the trick of ending your price with a 7 (like $97). Even though everyone knows that it’s essentially $100, the trick still works.

      • It’s absolutely true that many tricks work, even when we consciously know better, agreed. I do think that when it’s not just irrational, but perceived as being manipulative as opposed to just irrelevant though, that mental roadblocks go up.

        Now a really interesting question (well, to me, but I’m biased), is how this would apply to Kickstarter campaigns.

        Most Kickstarter campaigns, use between 7 and 15 reward levels. I don’t think I’ve *ever* seen anyone go as low as 3 (one recent project had a mind boggling 105?!!). Do you think 3 would still be ideal there, or is there likely another dynamic at work?

        • I wonder if the element of supporting comes in there.

          With a regular product, you are primarily buying it for yourself, and only secondarily supporting the person selling it.

          With Kickstarter, etc. projects tho’, your first thing is to support the project being presented, and then after that you benefit yourself.

          This strikes me as a significant place-of-difference. With the crowdfunding structure, you want to give as many people as possible the chance to join in, so a wider range of price points makes sense than for a more traditional sales situation. :>

  9. I’m going to have to agree with the ‘enforced decision’ comment.

    While I can understand the no price difference in the examples, which makes me curious as to why both can be free as a cautious consumer, for those specific products, I wonder how it’ll help in other cases where you’re selling digital items that can also be tangible items (Selling 3D assets, selling them on CD, and doing both… unless selling asset access via website is a bad idea). This post has me rethinking quite a bit of what I had in mind.

  10. Great advice, Karol. As you say, it is a no brainer. I have read Dan’s book, plus his other book, “The Upside of Irrationality,” which further develops his ideas. This post is a timely reminder for me as I am currently developing a new product for launch in the new year. Your reminder gives me confidence that it will earn me a lot more for the same effort that I would have made anyway. Thank you.

  11. Just came across an interesting example that suggests that maybe Kickstarter projects do better with at least more than one option. A project I just found has over 1000 facebook fans (a strong predictor of success) and only one reward tier. It’s doing miserably, having raised only $110 of $2,500.

    Obviously there are likely other factors at play as well, but I do think it’s interesting that someone with that many facebook friends would have such a low turnout with no paradox of choice.

    Anyway, the project is over at:
    http://www.kickstarter.com/projects/gregcherone/kickstart-singer-greg-cherones-limited-edition-cd

    Decide for yourself!

    EDIT: Just watched his video, which reveals a bigger problem. He doesn’t share any of the reasons why getting this cd funded would be meaningful to him, he doesn’t let people hear any of his music and he doesn’t share any credibility beyond stating he’s a “vetran singer/songwriter”. It’s a shame because his music is nice enough and he’s not asking for much. *sigh*

  12. So, there’s nothing wrong with a price ending in 7?

    Really, this is an awesome post Karol and I’d like to find a way to share your insights with my audience as well – I speak (in person) to a lot of brand new business startups about social media from my biz launch program (OSEB 2009) and know that pricing remains one of the most challenging areas < even for me after a few years. Regardless of the prices I set on my website no one has ever bought off my site – they always want a custom package! I don't think that's necessarily a bad thing, but I also cannot tell what pricing would work for online sales!

    Thanks again & I look forward to seeing more fom you!
    Debbie
    Social Media Concierge

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