Say “costs $x more” for premium options

Topics: Pricing
For: B2C. Can be tested for B2B
Research date: July 2019
Universities: Nanyang Technological University, University of British Columbia

📝 Intro

You run a bakery and are introducing new bran muffins targeted to health-conscious customers. 

All that’s left now is to decide the pricing. You want to encourage people to buy bigger quantities - how do you nudge them to buy more?

You narrow it down to a final price, and two options of how to frame it:

• 6 muffins for $10 and a dozen for $15

• 6 muffins for $10, make it a dozen +$5

Here’s why you should go for the second option.

📈 Recommendation

When displaying prices of different product options and upgrades (e.g. larger package, additional service, bigger size, or enhancements), focus on the price difference (e.g. $19 more for premium), not the total price (e.g. $30 standard vs $49 premium).

The more expensive options will seem cheaper, so people will be more likely to buy them.

🎓 Findings

• When the cost for a premium add-on is listed separately (e.g. $10 extra), instead of as part of a total price, people are more likely to choose the add-on.

• As part of a series of 4 experiments, when the price for a premium product was mentioned as “for $ more” people:

  • Were 38% more likely to say they would buy a 27-inch computer monitor ($60 more vs $259.99) rather than a 23-inch monitor ($199.99)

  • Doubled their choice of a larger subscription plan for the New York Times ($16.99 + $ 7 more)

  • Were 40% more likely to buy a premium bicycle ($150 + $60 more).

• The effect holds for quick and effortless decisions. When people take their time to look at and calculate prices, the effect disappears. 

🧠 Why it works

• We think of prices as they’re shown to us. For example, “a dollar a day” promotions make us focus on the daily amount, considering the total cost as cheaper.

• Similarly, when we see the price difference for a premium option, we focus on that number more than the total cost and consider it less expensive.

• Since the perceived cost for the premium option seems less, we’re more willing to upgrade to this option.

• When we take more time to think about the purchase, we consider the price more carefully, and systematically compare the standard and premium price, so the effect disappears.

✋ Limitations

• The research asked people to choose between two options (standard and premium). It did not test more options or situations with various stages of decisions (e.g. when choosing all the accessories and options of a new car). Those situations might modify the effect.

• While the study looked at different price differences between the premium and standard options, it’s unclear if there’s an ideal ratio between the price difference and total to maximize this effect.

🏢 Companies using this

• Car rental companies and airlines use this practice extensively, with additional prices for various services, extras, or benefits (e.g. cancellation possibility, road service, baby seat installation).

• Restaurants often display prices for add-ons incrementally next to the main price (e.g. garden salad for $7.00, add chicken for $2.50).

• SaaS companies and digital subscriptions (e.g. standard, advanced, pro packages) rarely use this technique, instead opting to show total prices - and likely missing out on revenue.

Etihad Airways shows fare options as incremental add-ons.

⚡ Steps to implement

• If you have options or add-ons to your product or service, showcase the price in incremental (e.g. $5 for a burger + $2.50 with fries and a drink) - not absolute - terms (e.g. $5 for a burger or $7.50 for a meal) to make people more likely to choose the more expensive option.

• This works best if your customers make their decision to purchase quickly (usually low-stakes or impulse purchases).

• You can also break up your price into components (tax, shipping, or your production costs) to shift attention away from the total price to the core price (e.g. $125 + $5 sales tax + $3.99 delivery). 

• Be careful when setting up your options and extras - keep your pricing options simpler than your competitors to seem fairer and cheaper, even if you do charge more.

🔍 Study type

Lab and online experiments

📖 Research

When “More” Seems Like Less: Differential Price Framing Increases the Choice Share of Higher-Priced Options. Journal of Marketing Research (July 2019)

🏫 Researchers

• Thomas Allard. Singapore Management University

• David J. Hardisty. University of British Columbia

• Dale Griffin. University of British Columbia

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.