This is a guest post by Gregory Ciotti from Help Scout.
When we last examined some research on pricing and behavioral economics the topic was very well received, but apparently I raised as many questions as I answered, because I got a ton of emails that day!
Perhaps that is somewhat my fault — in addressing topics like 'bundling,' I definitely left out a large majority of online store owners who will never deal with that issue.
This time around, I compiled a list of five pricing experiments that I believe will have every ecommerce entrepreneur taking notes for a future A/B test.
Should you compare your prices to competitors? Are similarly priced products on your store cannibalizing sales? Does the number '9' really work that well?
Keep reading!
Is Similarity Costing You Sales?
By now, you've likely heard about how excessive choices can be demotivating. The classic example is the jam study from Columbia professor Sheena Iyengar.
You would expect that since too many options can reduce consumer commitment, it might make sense to have identical price points for similar items... right?
Perhaps not: according to new research from Yale, if two similar items are priced the same, consumers are much less likely to buy one than if their prices are even slightly different.
In one experiment, researchers asked participants to choose or 'pass' (keep their money) on two different packs of gum. When the packs of gum were priced exactly the same at 63 cents, only 46% made a purchase.
Conversely, when the packs of gum were priced differently—at 62 cents and 64 cents—more than 77% of consumers chose to buy a pack. That’s a huge increase over the first group!
Neuromarketing expert Roger Dooley notes that customers may be less likely to delay their decision thanks to the differing prices:
...a tiny price difference seems to make the similar products more alike, and increases the probability that a decision will be made and not deferred.
Strange indeed. Before you head to your store and wildly change prices on random items, remember to take a scientific approach.
If, for example, you have certain items that are similarly priced but have different features (crew-neck shirts & V-neck shirts), you should consider testing how sales are affected when you subtly adjust their prices to be different.
The #1 Rule When Comparing Prices
Although we'd like to think that a superior product backed with great service will continually win the day, the truth is that people will always care about low prices:
A study from eMarketer.com suggests that 38% of people shop online because of lower prices. Forrester also found that 27% of consumers will sacrifice their shopping cart in the name of a better deal.
Promoting your fair prices makes sense, but if you go about it the wrong way, your chest thumping about low prices may scare people off.
According to research from Stanford, the act of comparative pricing can cause unintended effects in consumer evaluations if there is no context for why prices should be compared.
In other words, inviting 'explicit' price comparisons--when a company outright asks you to compare--may cause customers to lose trust in your business. According to the lead researcher from the study:
The mere fact that we had asked them to make a comparison caused them to fear that they were being tricked in some way.
So what should you do?
Esurance offers a great example. First, they explain why bottom dollar insurance isn’t always the answer, and also create a marketing message that gives customers information on why they can charge less: they were "born online" and raised by efficiency, and the money they save by operating with a lean online setup allows them pass the savings on to you.
Focus on why prices are cheaper, not just that they are.
An ecommerce company like NFNT might focus on why their watches are significantly cheaper than many of the entry level 'big brands' (Seiko, Citizen, etc.) because they are made from all natural bamboo.
With the right context, you can make price comparisons work to your benefit.
Test Different Levels of Pricing
According to William Poundstone, psychologist and author of the book Priceless: The Myth of Fair Value, human beings have practically no understanding of intrinsic value--we determine the 'correctness' of price by utilizing exterior information.
In one example that highlights this truth of human behavior, Poundstone discusses a study where a few varieties of beer--cheap, regular, premium, and ultra premium--were offered to participants.
Below, I'll relay the findings from his tests, and show you how different offerings (and levels of pricing) can effect consumer purchasing patterns.
(The following images courtesy of Nathan Barry)
Test #1
In this initial test with the regular beer and a premium beer, 4/5ths of participants opted for the premium offering. This would be excellent news for any store owner, but that doesn't mean it shouldn't be put to the test. What would happen if a third offering was introduced?
Test #2
Uh oh! When a cheap beer was introduced at $1.60, it not only didn't sell, but it made the premium beer seem much more expensive. Now participants were just fine purchasing the regular beer, overwhelmingly so. This is price anchoring gone wrong. If customers don’t want a cheaper beer, perhaps a more expensive beer might work?
Test #3
Now we're on to something.
As this last test revealed, these particular customers were receptive to an ultra-premium beer: 10% had no problem paying it's significantly higher price. But there was a bonus: with the ultra-premium beer now serving as an anchor for the other offerings, the premium beer was now looking even better.
The change in context had made $2.50 seem like a fine price, and this theoretical bartender would reap the benefits of not only selling a more expensive product to a select group of customers, but could also push the $2.50 beer to more customers than in Test #1.
To be fair, you can't just keep raising prices to infinity and beyond--at a certain point, context won't matter, you'll just be charging too much.
Yet this pricing experiment shows that you may be charging too little and not even know it. Are your premium products priced appropriately in relation to your flagship products? Do you need or even have an ultra-premium version?
This may require more substantial testing and a close look at the feedback you're getting before you make a decision, but you should recognize the potential that a premium product can bring to your existing lineup.
The KISS Method of Pricing
We've always been told to "keep it simple, stupid," but this next pricing experiment takes this mantra to the extreme.
In the Journal of Consumer Psychology, researchers found that prices that contained more syllables seemed drastically higher to consumers.
When these pricing structures were shown to subjects:
$1,499.00
$1,499
$1499
... the top two prices seemed far higher to consumers than the third price.
This effect occurs because of the way one would express the number verbally: “One thousand four hundred and ninety-nine,” vs. “fourteen ninety-nine.” This effect even occurs when the number is evaluated internally, or not spoken aloud.
Even more interesting, when CBS News covered research (featuring Poundstone) on 'sneaky retail tricks', they came to this conclusion:
Prices marked with dollar signs have been proven to reduce consumer spending. For example, a 2009 Cornell University study found that diners in upscale restaurants spent significantly less when menus contained the word "dollars" or the symbol "$." In a society where we're overloaded with information, consumers tend to follow the path of least resistance.
Last but not least, they mentioned that 'minimalist' pricing can often go hand-in-hand with selling premium products, because it nudges customers to focus on the value and not on the price:
Expensive restaurants usually have minimalistic prices like "24" -- meaning $24.00 -- because they want you to focus on the food and not the price.
This is a pretty easy test to run, and won't require any "real" change in prices. Perhaps minimalist pricing is just what your product pages need!
The Merits of the Number 9
It would be nice to sell your reasonably priced $40 product for exactly $40, but sometimes it pays to play the pricing game.
There is no better example of this then the classic '9' pricing scheme: we've all seen this one at one point or another and have wondered, "Does charging $39 really move more products than $40?'
According to one research study published in Quantitative Marketing and Economics, the answer is a yes. Prices ending in 9 were so effective they were able to outsell even lower prices for the exact same product.
Women's clothing was used in one test, with a $35 price and a $39 price. They found that the price ending in 9 outperformed the lower price point by 24%.
For a split second while reading the study, I thought the number 9 might have met its match. Sale prices—“Was $60, now only $45!”—were able to beat out the number 9.
However, when the number 9 was later included in the sales price comparisons, it again outperformed lower price points. So if the following options were compared:
Was $60, now only $45!
Was $60, now only $49!
...the bottom sale price would outsell the top one, even though the top price was actually less expensive. You can read more about this phenomenon in this great post by Peep Laja.
Apparently ecommerce store owners should ignore the power of '9' at their own risk!
What pricing strategies have you found to be effective for your business? Let us know in the comments!
About The Author
Gregory Ciotti is the marketing strategist at Help Scout, the email support software that's perfect for your ecommerce business. Find out why Help Scout is better than regular email for customer service by clicking here.
