A short story, author unknown:
An experienced gentleman was selling watermelons. His pricelist read, 1 for $3 and 3 for $10.
A young man stopped by and bought 3 watermelons, in three separate, unique transactions, paying $3 each or a total of $9 dollars for $3 watermelons.
As the young man walked away, he turned around & said, “Hey old man, do you realize I just bought 3 watermelons for $9 instead of $10? Maybe business is not your thing.”
The melon seller smiled and mumbled to himself, ‘People are funny. Every time they buy three watermelons instead of one, yet they keep trying to teach me how to do business.”
The Rest of the Story, Author Known… it’s me.
Pricing isn’t a thing you do by throwing a dart at a pricing dartboard. There is a science behind affective pricing.
The Economist Example:
in 2007, The Economist magazine faced a pricing challenge. The magazine offered three subscription options: a one-year print subscription for $125, a one-year online subscription for $59, or a one-year subscription for both print and online for $125.
This pricing strategy seemed to defy economic logic. The print subscription was more expensive than the combined print and online subscription, which offered both formats for the same price. Additionally, the online-only subscription was priced significantly lower than the print subscription, even though it cost the magazine less to produce and distribute the online version.
However, The Economist was actually using a sophisticated pricing strategy known as price discrimination. Price discrimination involves charging different prices to different groups of consumers based on their willingness to pay. In this case, The Economist was trying to target different segments of its audience with different pricing options.
The print subscription was aimed at customers who highly valued the print format and were willing to pay a premium for it. The online-only subscription was aimed at customers who were more price-sensitive and preferred the convenience of digital access. The combined print and online subscription was aimed at customers who highly valued both formats and were willing to pay a premium for the convenience of having both.
The pricing strategy turned out to be very successful for The Economist. By offering different pricing options, the magazine was able to appeal to a wider range of customers and capture more revenue. Additionally, the pricing strategy helped the magazine segment its market, which allowed it to tailor its marketing and content strategies to different groups of customers.
Then, the prominent behavioral economist, Dan Ariely, conducted an experiment to test The Economist’s pricing strategy. In the experiment, Ariely presented three subscription options to a group of students at MIT: a one-year online subscription for $59, a one-year print subscription for $125, or a one-year subscription for both print and online for $125.
Ariely found that the majority of the students preferred the combined print and online subscription for $125, even though this option was not the best value for money. Only a small percentage of students opted for the online-only subscription for $59, and almost no one opted for the print-only subscription for $125.
Ariely then ran a second experiment with the same three subscription options, but this time he removed the combined print and online subscriptions. Now, the only options were the online-only subscription for $59 and the print-only subscription for $125.
Surprisingly, in this second experiment, the majority of students opted for the print-only subscription for $125, even though they could have purchased the online-only subscription for less than half the price.
This result suggested that the presence of a third, decoy option (the combined print and online subscription for $125) had influenced the students’ decision-making. The decoy option made the print-only subscription appear relatively more attractive, even though it was more expensive than the online-only subscription.
Overall, Ariely’s experiment showed that consumers’ decision-making can be influenced by the way that options are presented and that pricing strategies that appear illogical on the surface can actually be very effective in practice. The Economist’s pricing strategy succeeded, in part, because it offered different options that appealed to different segments of its audience, and it used a decoy option to influence consumers’ decision-making.
Summary
Pricing isn’t a random thing. Human behavior is complex and not only rational. The lesson here is to be strategic and test your pricing decisions. Sometimes people will purchase a more expensive option because they assume that more expensive means higher quality and lower priced means cut-rate quality. Pricing is an exercise in psychology. Want to talk about pricing strategy? Want to know what it’s like to have a partner who helps you think through important decisions? Schedule a complimentary coaching session below.
