If you have an online business with a subscription based revenue model, would it help sales if you set an artificially high price point for one level (high, medium, low, free)?
Anyone have experience charging just one level to multiples?
Actually, that does work! I forget the precise names (this is studied in Behavioral Economics), but there are a number of cognitive biases which cause people to wrongly evaluate their decisions.
For example, say you have two choices A and B. Imagine they have different characteristics along 2 dimensions X and Y.
Imagine A is higher along dimension X, while B is higher along dimension Y. Now, suppose that looking at A and B, you would choose A.
Add a third choice C which is more strongly along dimension Y than A or B. Now, you have a choice A which is strongly along X, choice C which is strongly along Y, and choice B which is a little X and a little Y. Also, you don't really like or care about C. These results were shown with numerous experiments: presented with choices A, B, and C, you will often choose B. Notice that before, without the irrelevant alternative C, you chose A. But add in a choice that you don't even care about, you prefer B. Rationally, that shouldn't happen, and economists try their best to explain that but fail.
As for having a super-high priced item, that makes sense for a number of reasons. For example, one reason may be the halo effect (http://en.wikipedia.org/wiki/Halo_effect). Just the existence of a very high-priced, very high-value item can make people perceive your brand to generally be of a higher quality.
Also, some behavioral economists (e.g. Benabou) postulate that people have "identities" for themselves which they refer to when making consumption decisions. So, someone might think of themselves as the frugal buyer, and so they will always go for the cheapest alternative which gets the job done. A lot of people probably think of themselves as the middle-of-the-road average person. So if you make an super-double-over-priced option, then more people will buy the over-priced option because they perceive it to be more average. Plus, some of the people who consider themselves to be big spenders will buy the super-double-over-priced option anyway!
Awesome, thank you. I've been looking for more information on this stuff. I'm helping a friend with his service's pricing matrix (trying to simplify and increase conversions).
I'm not sure, but I think this effect was mentioned in 'Persuasion' by Robert Cialdini. It's worth reading if you haven't already. His example was a wine list - the waiter first suggests the cheapest wine, which the customer dismisses out of hand, not wanting to look a cheapskate. The waiter then suggests a very expensive wine, and the customer nervously asks if he can recommend anything else. Finally the waiter suggests another wine which is priced between the other two (but perhaps costs more than the customer would originally have wanted to pay) and it seems like a bargain compared with the expensive wine.
He also mentions a jewellery store in a tourist resort which started selling more items when they put their prices up. When the jewellery was cheap, it sent the signal 'this is cheap tat' - when the price was higher, customers started thinking 'this is a quality item' even though the product was the same.
Joel Spolsky has also covered this topic, again it's worth reading if you're not already familiar with it:
Anyone have experience charging just one level to multiples?