Pricing Strategies From the pros…
The Role that Cognitive Biases plays in E-commerce Pricing Strategies is bigger than you think…
Do you wonder why prices are climbing with no end in sight? What is the strategy big companies use to se those prices? Is it really based on competition and the cost of the item? (Spoiler Alert: No, it’s really not.) These are the secrets big companies don’t want small businesses to know.
Are you struggling to set prices for your Shopify or other E-commerce store? Wondering what customers will pay for your goods and why? No doubt by now you’ve done your research with competitors and similar products, but do you wonder what secret big successful business use to understand the limits of their pricing model? Well documented cognitive bias that influences the shopper journey greatly, of course.
As an e-commerce expert with years of experience working for large multinational corporations, I have seen firsthand how cognitive biases can play a crucial role in shaping pricing strategies for companies. In today's competitive market, setting the right price for products and services is more important than ever before. It can be the deciding factor in whether a business succeeds or fails. And as it turns out, human psychology plays a significant role in how prices are determined.
One of the most powerful cognitive biases used by companies to drive conversion rates is anchoring.
This bias refers to the human tendency to rely heavily on the first piece of information we receive when making a decision. In the context of pricing, this means that the first price a customer sees will act as an anchor and influence their perception of what the product or service is truly worth. Companies can use this bias to their advantage by strategically placing a higher-priced option first, making the other options seem more reasonable in comparison.
For example…
Let's say a company offers three subscription plans for their SaaS product: basic, standard, and premium. The basic plan is priced at $9.99 per month, the standard at $19.99 per month, and the premium at $29.99 per month. By placing the premium plan first, the company is anchoring the customer's perception of value. The $29.99 price tag may seem high, but when compared to the $19.99 standard plan, it appears more reasonable, and the $9.99 basic plan seems like a steal.
Another powerful cognitive bias that companies use for pricing is framing.
This refers to the idea that the way information is presented can significantly impact decision-making. Companies can frame their pricing in a way that makes a product or service seem more desirable or affordable. This is especially effective for SaaS products or services, where customers are looking for the best value for their money.
One way companies use framing in pricing is by offering a monthly or annual subscription option.
By framing the annual subscription as a discounted rate, customers are more likely to perceive it as a better deal. For example, a company may offer a monthly subscription for $10 per month or an annual subscription for $100, presenting the annual option as a 16% discount. This framing can make the annual subscription seem like a better value, even though the total price is the same.
The decoy effect is another cognitive bias that companies use to influence pricing decisions.
This bias involves presenting a third, less appealing option to make the other two options seem more attractive. This tactic is commonly used in pricing for products or services with tiered options. By introducing a "decoy" option, companies can push customers towards the more profitable options.
For instance, a company may offer a basic plan for $9.99, a standard plan for $19.99, and a premium plan for $29.99. However, they may also include a "pro" plan for $24.99, which includes similar features to the premium plan but with slightly fewer benefits. This decoy option makes the premium plan seem like a better value, and customers are more likely to choose it over the "pro" plan.
Charm pricing, also known as psychological pricing, is a tactic that involves using specific numbers to make prices seem more appealing to customers.
This bias is based on the idea that certain numbers have a more significant impact on our perception of prices than others. For example, prices that end in 9, such as $9.99 or $19.99, are perceived to be significantly lower than rounded prices. This is because our brains perceive the first digit in a price as the most important, and a 9 at the end makes it seem like a good deal.
Another psychological trick in charm pricing can be counting syllables.
Companies can use charm pricing in their pricing strategies by ending prices in 9 or 99. For example, a product priced at $19.99 may seem more appealing to customers than the same product priced at $20. This bias is especially effective for lower-priced products, where the difference between $19.99 and $20 may seem significant.
Lastly, the center stage bias…
This refers to the idea that we are more likely to choose the option placed in the middle when presented with multiple options.
This bias can be particularly useful for companies offering tiered pricing options. By placing the most profitable option in the middle, companies can increase the chances of customers choosing that option.
SaaS Products - The Bias
For example, a company may offer three subscription plans for their SaaS product: basic, standard, and premium. By placing the standard plan in the middle, customers are more likely to perceive it as the "goldilocks" option – not too expensive but not too basic. This positioning can significantly impact conversion rates and increase profits for the company.
Another bias called “The Compromise Effect” is a combination of all the previously discussed biases.
“In a well-documented 1992 study, participants were presented with a decision-making scenario involving two 35mm Minolta cameras: the Maxxum 3000i priced at $169.99, and the more expensive X-370, priced at $239.99.
Initially, when these were the only options available, participant preference was evenly split between the lower and higher-priced models.
The study then introduced a crucial variable: a third camera option. This "compromise" camera was strategically priced slightly above the Maxxum 3000i but remained more affordable than the X-370. Remarkably, this addition shifted consumer behavior significantly.
A majority of 57% opted for the middle-priced camera, illustrating the Compromise Effect's influence on decision-making.
What's particularly educational here is the impact on the other choices. Post-introduction of the compromise option, only 22% of participants chose the lowest-priced model, and 21% selected the highest-priced one.
This outcome highlights how the presence of a middle option can reduce extremes in consumer choices and potentially minimize buyer's remorse.
The study demonstrates a critical insight into consumer psychology, offering valuable lessons for marketers and decision-makers in understanding and influencing buyer behavior.” - Yelena Petic
In conclusion, cognitive biases play a crucial role in how big companies determine their pricing strategies to drive conversion rates. Anchoring, framing, decoy effect, charm pricing, and center stage are just a few of the many biases companies use to influence customer decision-making. By understanding and implementing these biases effectively, companies can set prices that not only attract customers but also lead to increased profits. As a small business owner, it is essential to be aware of these biases and use them to your advantage to stay competitive in the market.