Whoop whoop! This is part three of my three-part series, taking a deep-dive into SaaS pricing strategy. I’ve covered key pricing models, strategies for hitting your growth goals, and psychological hacks for optimising revenue.
Even after you’ve decided on your SaaS startup’s pricing model, and settled on your strategy, there’s still room to dramatically improve your price.
That’s where psychological pricing strategies come in. Think of these like the icing on the cake: smaller experiments that can be used to fine-tune and optimise your pricing.
There’s a degree of stigma associated with pricing psychology, perhaps rightly so: I’ve seen companies use the power of psychology to exploit and mislead customers.
Thankfully, the strategies deployed here aren’t designed to coerce unwitting customers into buying more than they want: we’re simply working alongside the brain’s innate processes to reduce friction, and make the sales process as effective and efficient as possible.
1) PRICE ANCHORING
Price is a relative concept, and when we assess the price of something, we use a reference point to work out its value. If we were buying a car, we’d compare its price to the price of other cars on the lot, or on eBay; an item of jewellery, and we’d turn to similar pieces in the jewellery shop next door. Price anchoring is a way to leverage this heuristic to increase your customer’s willingness to spend.
Before entering the store, you had a price of $50 in mind, and spending $100 was a huge price increase. But after the salesman’s slick manoeuvring, your subconscious price reference became a massive $2,000 — and that $100 seems much smaller in comparison.
PRICE ANCHORING EXAMPLE
CRO SaaS Convert use price anchoring to great effect on their pricing page.
Their lowest priced package is a hefty $499, but by positioning their most expensive package on the left of the page (and therefore the first package would-be customers come across), both their Pro and Lite packages seem like relatively good value in comparison.
HOW TO USE PRICE ANCHORING IN SAAS
- On your pricing page, draw attention to your most expensive package, even if most people don’t buy it. Your top tier package becomes the visitor’s price “anchor”, making your other packages look more affordable in comparison.
- When up-selling or cross-selling, start by pitching your most expensive upgrade or add-on, before working down to your more “reasonably” priced options.
2) CHARM PRICING
Charm pricing refers to the use of prices ending in the number nine.
It’s suggested that this psychological pricing strategy works because of the “Left Digit Effect”. Our brains process numbers extremely quickly, making snap judgments about prices and values without any conscious awareness. When we see a $400 product, our brain latches on to the first number — the left digit — and creates an accurate, subconscious reference point of $400. But when we see a $399 product, that same Left Digit Effect creates an inaccurate reference point of $300.
Though we don’t consciously believe we’re buying a $300 product, charm pricing has been show to significantly increase sales and conversion rates, as this experiment from online marketplace Gumroad demonstrates:
CHARM PRICING EXAMPLE
In Priceless: The Myth of Fair Value, William Poundstone’s famous meta-study found that charm pricing (like $399) outsold rounded price points ($400) by 24%. Though the difference could be accounted for by virtue of lower price, MIT’s famous study found that clothing priced at $39 outsold identical items priced at $44 and, unbelievably, $34.
With that in mind, it’s not surprising that so many SaaS companies use charm pricing, like this example from IFTTT:
HOW TO USE CHARM PRICING IN SAAS
- Run an A/B test to monitor conversion rates for a round figure monthly subscription (like $60), and a price ending in nine ($59). If you’re feeling really adventurous, you could even test a higher charm price (like $69).
3) ODD-EVEN PRICING
Odd-even pricing works on a similar principle to charm pricing: prices are reduced by a few dollars to bring them just under the nearest “rounded” price point. Whereas charm pricing exclusively uses prices ending in nine, odd pricing uses, you guessed it, odd numbers — think $7.47, $97 or $493.
Charm pricing is an extremely common pricing strategy — so common that it’s even possible that we’re developing new heuristics to overcome its psychological impact, and correctly associate a $399 product with a $400 price tag.
But odd-even pricing is less commonly used, and that novelty value can be enough to trigger the Left Digit Effect: when customers are growing blind to charm pricing, offering something for $37 a month might be enough to increase your conversion rates.
ODD-EVEN PRICING EXAMPLE
Zapier take this approach to extremes, with their seemingly random pricing strategy:
Like odd pricing, even pricing applies the same principle with even numbers, as demonstrated by virtual assistant SaaS Zirtual:
HOW TO USE ODD-EVEN PRICING IN SAAS
- Review your competitors’ pricing strategies. If charm pricing is the dominant approach, opt for odd-even pricing instead. As always, use A/B testing to monitor the impact the change has on conversion rates and sales revenue.
4) PRODUCT BUNDLE PRICING
Product bundle pricing is the practice of offering several products for a single price.
Typically, the bundle price would offer each component product for less than its individual price (assuming it’s even possible to buy the products individually), but because the bundle encourages the sale of products that might not otherwise be bought, can still represent an increase in overall profit.
Product bundle pricing is great for simplifying complex sales process, especially when a multitude of apps and add-ons are available. It’s also great for drawing focus away from the individual product prices, and encouraging outcome-oriented thinking: customers are encouraged to think about the value of a “productivity suite” or “design studio”, instead of individual SaaS products.
PRODUCT BUNDLE PRICING EXAMPLE
For an example of product bundle pricing, look no further than Microsoft’s Office 365 suite. Office products are now available exclusive through a monthly subscription service, and there’s no way to pick-and-choose which products you want to pay for, and which you don’t.
I use Word, Excel and Powerpoint on a daily basis, and would gladly pay for each application — but I wouldn’t touch Access, Outlook or Publisher with a barge pole. But because the products are bundled together, I pay a flat monthly fee, and I have all a whole host of Office products installed on my desktop.
HOW TO USE PRODUCT BUNDLE PRICING IN SAAS
- If you offer a range of standalone products, try offering them as a single bundle. This can be especially effective for encouraging the sale (and use) of more niche products, by selling them alongside more popular products.
5) HIGH-LOW PRICING
High-low pricing is most commonly used in the retail industry, but it does have some application in SaaS. In essence, high-low pricing is the act of alternating between a “high” price and a “low” price: a product is marketed at a premium price, before eventually being reduced to a lower, discounted price.
High-low pricing uses price anchoring to encourage sales: the product’s value is associated with the original “premium” price, so when a discount is applied, customers view the reduced price as a particularly great deal.
But a word of warning: high-low pricing will drive-up demand in the short-term, but long-term discounting is dangerous. If you regularly discount your product, you risk anchoring the product’s perceived value to that lower price, and create a culture of bargain hunting where customers will wait for a deal before ever purchasing your product.
HIGH-LOW PRICING EXAMPLES
Black Friday is the most blatant example of high-low pricing used in SaaS, with all-manner of typically restrained SaaS companies deciding to slash their prices in an attempt to capitalise on the consumer frenzy:
HOW TO USE HIGH-LOW PRICING IN SAAS
- If you’re going to use high-low pricing, use it very sparingly: discounts need to feel like truly exceptional, once-in-a-lifetime deals, so reserve them for serious promotion drives, or use them to solicit powerful social proof for your business.
6) TRIAL PRICING
Trial pricing is the tactic of offering your SaaS product at a reduced price for a limited time, usually as part of an introductory offer. Whereas the industry-standard free trial is, as the name suggests, free, trial pricing still charges the customer a lower-than-normal fee.
Trial pricing reduces the barriers to actually starting with your product, with the idea being that once a customer has seen how useful your product is, they’ll be more than happy to pay the increased rate after the trial expires.
The most common example of trial pricing I’ve come across is the (infamous) $1 trial: instead of offering customers a free trial, they’re asked to shell-out a dollar for the privilege.
This may seem more desirable on the surface, but a $1 trial requires a credit card, where a free trial doesn’t. This is a huge barrier to sign-ups: it inconveniences your would-be customer, and risks devaluing your product when the regular subscription kicks in (“$40 a month? I was paying $1 before!”)
TRIAL PRICING EXAMPLES
Most of the companies I’ve seen using trial pricing fall toward the shadier end of the business spectrum, often using the approach in combination with other less-than-savoury tactics, like auto-renewing for a higher price (as demonstrated by Digital Marketer).
HOW TO USE TRIAL PRICING IN SAAS
- If you’re going to offer a trial, make it free. Trial pricing carries with it the same risks as high-low pricing and discounting, with the added disadvantage of lowering signups and conversion rates.
7) ANALYSIS PARALYSIS
The psychological pricing strategies covered here are designed to work alongside the brain’s decision-making framework. Analysis paralysis (also know as the paradox of choice) is an example of a heuristic your pricing strategy needs to avoid triggering.
Research suggests that the maximum number of objects a person can hold in working memory is 7±2. If a decision requires the assessment of a greater number of choices (say 10), it becomes much harder to remember the choices on offer, and accurately decide between them.
This means that, past a certain point, there’s an inverse relationship between number of choices and decisions made. The most famous example of this is Columbia University’s study into jam sales: when customers were offered a range of 24 jam flavours, 3% went on to make a purchase. But when the choices were restricted to just 3 flavours, 30% went on to buy.
ANALYSIS PARALYSIS EXAMPLES
Intercom offer a range of products, and a whole host of variables which can alter pricing: features, teammates, messages, people reached…
Though they’ve done an admirable job at bundling the packages together, there’s still a huge amount of choice available. Do I want Acquire Lite or Acquire Standard? What about Engage Lite or Engage Standard, or Resolve Lite, or Resolve Standard? What’s the Educate package?
HOW TO AVOID ANALYSIS PARALYSIS IN SAAS
- The biggest, most successful SaaS companies have an average of 3.5 packages available on their pricing pages. This relatively low number makes it easy to compare packages and find the best fit, without succumbing to the confusion and complexity of analysis paralysis.
8) DECOY PRICING
Decoy pricing is the use of a seemingly redundant pricing option (something that’s obviously less desirable than the other products on offer), in order to influence how customers choose between the remaining products.
This is how the Economist once priced subscriptions: an online subscription for $59, a print subscription for $125, or a combined print and web subscription for…. $125:
Crucially, the print option isn’t designed to sell subscriptions: it’s designed to make the combined subscription more appealing in comparison. Without the print-only option, online subscriptions are valued at $59, and the value of a print subscription is implied to be $66:
Introduce the print only option, and the implied “real” value of the combined subscription shoots up, from $125 to $184. By introducing a nonsensical price point, the most expensive package becomes the most desirable — offering an implied saving of $59 over its “true” value:
When Dan Ariely tested the impact of this psychological pricing strategy, he found that the decoy effect generated an additional 30% in revenue from the same number of sales.
DECOY PRICING EXAMPLES
Here’s a relevant example from a subscription-based company, Shutterstock.
On the left, their “Basic” package offers 25 images for €179, but their middle option offers 750 images per month, for a price between €159 and €199, depending on the package you choose. That’s thirty times as many images, for the same average price.
HOW TO USE DECOY PRICING IN SAAS
- Whether you offer different pricing packages or a range of add-on prices, you can use the decoy effect to frame particular offers. For example, you could offer a “Basic” package with 50 users for $100/m, a “Pro” package with 100 users for $150/m, and offer “50 Additional Users” as a standalone add-on for $150/m.
9) CENTER STAGE EFFECT
The center stage effect refers to the psychological preference people have for the middle item in a selection of three choices. The main theory behind the preferenceis that “Consumers believe that options placed in the center of a simultaneously presented array are the most popular”.
This might be because the “middle” option in a selection of three is usually perceived as the “average” choice: the middle choice is usually sandwiched between two extremes, Small and Large, or Cheap and Expensive. For the average customer, choosing the average option is probably a safer bet than taking a risk on something that might be too extreme across a particular dimension.
There’s also a bit of a chicken-and-egg situation here: middle options might be perceived as popular because the center stage effect is itself increasingly popular, and usually combined with strong elements of social proof, like “Most Popular” labels.
CENTER STAGE EFFECT EXAMPLES
The center stage effect is common in SaaS, and chances are, most pricing pages you’ll visit will leverage it in some form.
Gather Content have a clear, effective application on their pricing page: their “Plus” plan has a “Most Popular” label, a coloured CTA button where the others are white, and the column is even slightly offset from the others to further highlight it.
HOW TO USE THE CENTER STAGE EFFECT IN SAAS
- If you offer three pricing packages, use visual callouts to highlight the most popular package, or alternatively, to highlight the package you’d like to be most popular.
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