Pricing Options – the power of relativity

By June 6, 2009blog

I just read Predictably Irrational by Dan Airely and was BLOWN AWAY by what he discoverd on pricing options. Pricing options have AS GREAT of an influence on purchasing as does the value vs. price comparison I talked about in the last post.

Here are THREE Relative-Pricing-Option Strategies I pulled from the book…

A few years back The Economist made the following offer to prospective subscribers:
Internet-only subscription for $59
Print-only subscription for $125
Print-and-Internet subscription for $125 (yes the same price as option 2)

When Airely offered to 100 MIT students in his study, here’s how they chose:
16 for Internet-only subscription for $59
0 for Print-only subscription for $125
84 for Print-and-Internet subscription for $125

When offered to 100 new students ONLY options #1 & #3 (eliminated the middle option):
68 for Internet-only subscription for $59
32 for Print-and-Internet subscription for $125

That’s a 42% increase in revenue ($11,444 vs. $8,012) by offering a “throw-away” similar middle option!

Airely goes on to prove that whenever people are offered 3 options. 75% of the time they will choose between the better of the two that are MOST SIMILAR. He ran the same experiment in two other COMPLETELY different scenarios, and had the similar results (vacation packages and dating options).

Why is that? I think it’s an unconscious clue that helps make the choice easier.

Menus that have a super-high priced option on the menu sell more higher priced entrees than those that don’t. For example:
$50 lobster
$30 entree
$20 pasta
…will sell more $30 entrees than a menu with NO $50 option.

The theory is that people feel better about NOT buying the $50 option and buying the $30 option then buying the $30 option when it’s the most expensive item on the menu.

Airely ran some studies to show that people will take something for free (like a Hersey’s kiss) over something that’s priced at a REALLY great value (a 5 cent high-end chocolate). People like free because it guarantees infinite value in comparison to price and also because it eliminates risk. I believe that FREE has many applications beyond “pay nothing” such as free bonuses for buying, free trials, and unconditional money-back guarantees.

What would it look like if we rolled all three of these together? I haven’t tested this, so at this point it’s just me thinking out loud…
1. Provide three pricing options
2. Make two of the options similar (but one of the two clearly better)
3. Offer FREE bonuses in the better of the two options.
4. Price the third option considerably higher

As a buyer, I would see the options laid out and… feel smart for picking the BEST one of the two similar ones… feel good that it’s NOT the highest priced option… and feel great that I get some FREE stuff as a result!

Most interesting line of the book: “We are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires – with how we want to view ourselves – than with reality.”

TedTalk video of Airely

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