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?