Why offering three pricing options to your customers can be wiser than offering two.
If you’ve studied sales or pricing — or cognitive biases — then you’re probably aware of a bias known as “the anchoring effect.” One of the best definitions we’ve seen comes from journalist David McRaney, who runs the You Are Not So Smart blog.
He writes, “The Misconception: You rationally analyze all factors before making a choice or determining value. The Truth: Your first perception lingers in your mind, affecting later perceptions and decisions.”
McRaney cites numerous academic experiments demonstrating the “anchoring effect” of first impressions on pricing. For example, in 2006, Dan Ariely, Drazen Prelec, and George Loewenstein asked students at MIT to bid on items in an arbitrary auction using social security numbers as their anchor.
“The researchers,” McRaney explains, “would hold up a bottle of wine, or a textbook, or a cordless trackball and describe in detail how awesome it was. Then, each student had to write down the last two digits of [his or her] social security number as if it was the price of the item. If the last two digits were 11, then the bottle of wine was priced at $11. If the two numbers were 88, the cordless trackball was $88. After they wrote down the pretend price, they bid.
“Sure enough, the anchoring effect scrambled their ability to judge the value of the items. People with high social security numbers paid up to 346 percent more than those with low numbers. People with numbers from 80 to 99 paid on average $26 for the trackball, while those with 00 to 19 paid around $9.”
Ariely’s conclusion, as stated in his book Predictably Irrational: “Social security numbers were the anchor in this experiment only because we requested them. We could have just as well asked for the current temperature or the manufacturer’s suggested retail price. Any question, in fact, would have created the anchor. Does that seem rational? Of course not.”
All of the above provides a helpful backdrop for another experiment with MIT students that demonstrates the anchoring effect. In one of Ariely’s many TED talks, “Are We in Control of Our Own Decisions?” — skip to the 12:30 mark — Ariely presents an old ad from the Economist that offers three pricing options for subscriptions.
When he surveyed 100 MIT students about those pricing options, Ariely got these results:
| Subcription type | Cost of a year | Percentage that chose it |
|---|---|---|
Web only |
$59 |
16% |
Print only |
$125 |
0% |
Print and web |
$125 |
84% |
You might ask: Why did the Economist even bother with that $125 “print only” option? Ariely conducted a second survey that shows why. In the second survey, Ariely removed the $125 “print only” option and asked a separate set of 100 MIT students what they would choose. Here’s what happened:
| Subcription type | Cost of a year | Percentage that chose it |
|---|---|---|
Web only |
$59 |
68% |
Print and web |
$125 |
32% |
The bottom line: The mere presence of the “print only” option — even though no one chose it — prompted a much higher percentage of people to choose the more expensive ($125) “print and web” option. The difference, when all the $125 and $59 sums are added up, would have amounted to 42.8 percent more hypothetical revenues for the Economist. “Print and web” for $125 seems like a much better value when it’s anchored by a $125 “print only” option and a $59 “web only” option.
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