The psychology behind price tells us that the way we present price can have a huge impact on the success of a sale.
Deborah O’Malley, founder of GuesstheTest.com, explains the most important principles of price in the conversation below. Watch to learn how you can potentially increase your sales from a few small changes.
A/B testing pricing is a valuable way to optimize profits.
But it’s hard to know exactly what to test or where to start.
In the video we cover:
- What the 3 main principles of price are and how to apply them
- Case studies of companies who have had huge success implementing these principles
- How you can run the same tests for yourself and optimize your sales!
Watch the full conversation below!
View the slides below ↓
Transcription
Pricing 101: Increasing Your Sales by Testing Price
Kathleen Davis: 0:05 Hi everybody. Welcome to our Pricing 101 webinar. I’m Kathleen Davis And today we’re going to be talking about just how much your products pricing can be affecting your sales, plus some tips on how you can begin running A/B test for price. Joining us today, to share with you everything that you need to know about pricing is Deborah O’Malley, founder of guessthetest.com. So Deborah has over a decade of experience in A/B testing and conversion rate optimization space, where she gets to work directly with digital marketers of all kinds. So welcome, Deborah.
Also joining us as our original research expert is Todd Lebo. He’s the CEO and partner of Ascend2. Ascend2 is a research based marketing company that works with marketing tech and data companies and conducting original research. So thanks Todd, for joining today.
Todd Lebo: 1:10 You’re quite welcome.
Kathleen Davis: 1:12 And then our third panelist for today is Eric Stockton. And he’s known for being able to really grow businesses. So while overseeing a variety of sales organizations over the years, he’s personally managed some ad budgets of over $3 million. So thanks for joining everybody.
Eric Stockton: 1:34 It’s great to be here.
Kathleen Davis: And I’m gonna pass it over to Deborah to get us started on why you need to test your pricing?
Deborah O’Malley: So thanks everyone for joining us. So why do I need to test my pricing? What is it about pricing that’s so important. There’s a couple really fundamental answers to that. And Kathleen if you wanted to… Thank you. First of all, pricing is absolutely key to your business’ success. So whether you’re an e-commerce or you’re doing online donations or even if you’re just doing lead generation and you want to bring those leads in and then hit them with the offer after, you need to get your pricing right. And how do you get your pricing right? Well, there’s several strategies that we’re going to be discussing today to help you kind of hone in on how to masterfully position your pricing. Now, why you should test your pricing is because it’s often really easy to do a pricing test. Some tests, it’s super complicated. You need to change this and change that. With the pricing test, if you do it right, you can just change a small little element and see a huge gain in revenue or average order value whatever that key KPI or metric that you’re going for is. So pricing can be easy, it can be effective and it can really make or break your sales. What we’re going to be emphasizing today and what you’re going to learn is that the way you display your price and the price tag itself can totally affect the way that your customers and your users understand the products and the effect that it has on them in terms of wanting to buy. And we’re going to be using some powerful persuasive pricing strategies to help gear you to test exactly what you should be in an easy, simple and effective way. So we’re going to help you nowhere to start. So tell me, “Where should I start?” Well, my answer to you with testing whether it’s pricing or anything, it is always start where the opportunity is highest. Well, great. So you’re telling me start where the opportunity is highest. What does that mean for my business [or] for my website? There’s a number of really important ways that you can look at that. You can ask yourself and assess using analytics metrics, “What is your highest performing page right now?” Let’s just say arbitrarily, you have a 2% conversion rate on your highest performing page. Now, that’s not bad but you want to increase it. If you can eke out another 2% gain on that highest performing page. Boom! You have a 4% cumulative lift and your average order value or your revenue has just doubled. If you do it on a low performing page, let’s say it has a 0.5% conversion rate right now and you still get that 2% lift. Well, you’ve only made a 2.5% lift instead of a 4% lift overall. So which are you going to go for the 2.5% lift or the 4% lift? Obviously, the 4% lift. So that’s where the opportunity can be highest for you. Another way to look at it is by assessing again in your analytics data. What has the highest traffic but low conversion rate ratio? And if you have a very high traffic page but a low conversion rate page, you can say, “That’s a great starting point for me. I’m going to test that page and try and optimize it.” And then of course, with the pricing pages, you want to go to your pricing tables, your pricing charts, and the way that you display your prices, because simply adding a zero, for example, or adding a $ sign or taking away a $ sign can have a huge impact on conversions and [Inaudible 05:38]. So those are some of the places where opportunity is highest. And you can use that to your advantage to optimize your pricing structure.
Kathleen Davis: Awesome. And so with that here are the top three pricing principles. And then with each, we’re also going to be sharing a case study test example that Deborah has done in the past and also some tests that you guys can share and do for your own business.
Eric Stockton: That’s right.
Deborah O’Malley: Alright. So we’re gonna play a fun little game here. This was a case study submitted by a Dutch digital marketing agency for their client T-Mobile. If you’re not familiar with T-Mobile. It’s a huge brand in Europe. They do mobile phones, Telecom. And they were trying to sell internet packages and they wanted to sell the more expensive, higher priced and faster internet package. And they sat there and they said, “Well, we could fool around with price. We could change different things.” And somebody said, “Well, what if we change the order of the way that we present the internet packages?” Let’s test it and see what happens. So in this first example, the red box here, the pink box, you can see. It’s a 50Mb internet package. It’s offered for free. No price at all. Then it has 100Mb, €7.50 and the fastest and most expensive goes 500Mb at €17.50. The version B is flipped. So we have the most expensive internet at the top, fastest and most expensive and the cheapest at the very bottom. Now, not only did flipping the order make a huge difference, but it completely drove revenue and convergence. So, which do you think won? The one with the cheapest at the top or the cheapest at the bottom? Only one of you is right. Let’s go ahead and see who it is? Drumroll! So it’s not actually so much about the cheapest option at the top or bottom, it’s about the most expensive option at the top.It sets the reference point. It anchors everything else. So everything below it looks comparatively cheaper. And by placing the most expensive option at the top, they actually were able to increase subscription plans by 34.4%. Now, that is huge if you’re a telecom company, and you’re getting monthly recurring revenue by increasing your subscriptions, 34%. That translated… Sorry?
Eric Stockton: So 34% improvement is Option B and nothing else changed on the page. That’s pretty amazing.
Deborah O’Malley: Nothing else changed on the page.
Eric Stockton: That’s amazing.
Deborah O’Malley: This is one of the most powerful and effective pricing strategies that I highly suggest every single company out there test. And we’ll go over the theory behind it. But huge, huge increase, and it translated to enormous revenue for them. So what’s the psychological basis behind this? Well, it’s called the anchoring effect. And if you’ve done any kind of psychology courses, Kathleen and I were talking earlier, she did an undergrad in psychology. This is a very well researched cognitive bias. So basically, what it says is that people tend to use the first piece of information that they get as the reference point for making any subsequent decisions or judgments about the item. So they see, “Okay, it’s $34. Well, the next one looks a lot cheaper, it only $17. $17 is not so bad. Oh, this one’s free. Well, $34 for a faster internet. Yeah, that’s not so bad.” When it’s flipped the other way. And the lowest priced item is first, you go down the list, and you go, “Oh, my God, I’m not shelling out $34. I can get this thing for free.” So it really truly makes good sense to at the very least test the effect of putting your highest price item first. You’re not going to give them shell shock or sticker shock, but by putting it first you’re going to reference everything else. So it looks comparatively cheaper.
Todd Lebo: Because I think a lot of times too, I’ve tested from the standpoint of you know, we have free first and you have to overcome that. You know, you have to overcome what’s better than free.
Deborah O’Malley: Exactly.
Todd Lebo: So the decision process that they have to go through.
Kathleen Davis: Here is a little bit more on the same principle.
Deborah O’Malley: With the anchoring effect. It doesn’t stop there. It gets keep going. So not only can you frame and reference your price by putting the higher priced item first, but you can also influence the perception of that price by having a kind of fake price or a sale price that is striked out or crossed out in some way, and then the “real price” is presented in a different way. And what this does is, it also anchors our perception of the price, because we’re very quickly processing and we’re going, “Okay, this yesterday $80, I can get it as a special deal for $49. I’m gonna grab that $49 deal.” It makes you feel good about this exclusive offer that you’re getting. So it really does plant the idea of this should cost this much, but I’m getting it for this comparatively great deal. And so I really urge marketers to test the effect of using this strategy. It’s sort of a subset of the anchoring theory. So in addition to pricing your items from highest to lowest, having a “sale price” that you offer, to really anchor in position, that price is valuable for the user.
Kathleen Davis: Yes. Awesome! So with that, I’ll just jump right into our next test or principle two.
Deborah O’Malley: Alright. So this is a fun one. Again, I can’t take credit for this one. This was conducted by Dan O’Reilly from the book “Predictably irrational”, fantastic book with a lot of really important insights. And this was done for the Economist magazine. And I’ll just kind of explain version A and version B to you, and then I’d love to have you vote again. So in this version, version A, we have a three-choice subscription plan. As a user, you can decide to purchase the print plan, the print and digital plan, which is clearly labeled as best value, or the digital plan. Now the prices are a bit hard to see. But the print plan is going for $125, the print and digital for $125 as well. And I believe that says $59 for just the digital. So you have three options there, [for] version A. Version B, you have two choices. You can get the print and digital, again, for $125, or the digital just for $59. Now, this is all about choice and the amount of choice that is really going to be valuable to your user. So Todd, this one, I’m gonna let you go first A (Three-choice) or B (Two-choice).
Todd Lebo: I was gonna defer again, but okay.
Eric Stockton: I’m going with [option] B.
Deborah O’Malley: Eric is going with [option] B. So Todd, you can go with what Eric says or you can…
Todd Lebo: I was gonna go with [option] A.
Deborah O’Malley: You have to go with [option] A.
Eric Stockton: You always go the opposite. It’s fine.
Deborah O’Malley: Fair enough.
Todd Lebo: I was gonna with Three-choice option. But…
Deborah O’Malley: And audience I’d love for you to vote in the chat if you’re able to do that. Kathleen, can you be the tiebreaker? A or B?
Kathleen Davis: Well, we have somebody writing in for B. Allen chooses B. So I will plead the 5th since I know the correct answer.
Deborah O’Malley: So Eric went with B. And Eric, can I hear your rationale?
Eric Stockton: A good friend of mine always said you don’t want to have too much unsupervised thinking from a reader or a potential customer. So limit their options as much as possible in the process. So giving them quick choice buttons is an easier. You know, it’s less decision making that you have to do.
Deborah O’Malley: Okay, fair enough. That’s a good point. And Todd, other than the fact that you’re going opposite of what Eric said, Can you give me your rationale for option [A]?
Todd Lebo: Well, you know, my…
Eric Stockton: Is that not enough rationale?
Todd Lebo: My background promotion and so, whenever we used to do this type of testing, I remember having that, the three pronged option with print, print digital, or digital, typically working pretty well. And so, and it’s more my history then this solid rationale that Eric provided.
Deborah O’Malley: All right. Okay. So both good arguments. Both you’re standing on solid ground here. Version A or B? Drumroll! Version A. Todd gets it again. All right. What’s happening here? What is going on? Well, first of all, let me tell you the numbers. 84% of people selected the highest priced print and digital, the one labeled as best value when there was three options. Now that’s important to keep in your mind when there was three options. Absolutely, nobody chose the $125 print subscription and honestly guys unless you’re an old grandpa’s still reading the newspaper. Nobody cares about print anymore. 16% of people chose the $59 Digital plan. So not bad. Now, if you advance to the next slide Kathleen.
Kathleen Davis: Yes.
Deborah O’Malley: What happens when we take away that third choice. Now there’s only two choices for this subscription plan? Well, interestingly, the numbers almost get inverted. So all of a sudden, only 32% compared to 84%, before with a third price, are selecting the highest priced $125, print and digital plan. In comparison, 68% are choosing the cheapest $59 Digital plan. Now that’s compared to 16% with the three option. So as I mentioned, the options are nearly inverse, yet, nothing has changed, except we’ve taken away one option. So what on earth is going on here? What is happening? We can attribute this all to what’s known as the Decoy Effect, another psychological principle that you can use to apply to your own pricing and your pricing tables in particular. So we’re gonna call this a close cousin to the anchoring effect. And I love to use it in tandem with the anchoring effect, especially in pricing tables. So basically, what it says is customers are going to choose between two options, when they’re presented with a third one that isn’t as attractive. We’re giving them a decoy. We’re throwing one in there that we know, they’re going to outright say, “I don’t want that one. Print in this day and age, I’m not choosing that.” But what we do is we get their decision making juices flowing. We have the make a choice, the choice is to not get print. Okay, now they’ve made that choice. So they can go on to the next micro conversion step of, “Do I want this one, or do I want this one? I’m gonna go for this one, the printing digital, that’s the most attractive option to me.” So we push them to choose and to make a decision by giving them a decoy they can easily eliminate. There’s not a lot of thinking and saying, “I know, I don’t want that one.” So that’s what we’ve done with a decoy. Now I’ve taken…
Kathleen Davis: Sorry.
Deborah O’Malley: This chart from OptinMonster. OptinMonster is a pop up provider. And we’re going to be looking at their chart a little bit more throughout the presentation. I’m not so sure if they’ve tested this chart or not. [But] based on what we’ve already talked about, can anyone see something that they would test? Give you a hint. It has to do with the order of the pricing.
Todd Lebo: Reversing them and starting out with $49
Deborah O’Malley: You got it. So now I’m gonna give them the benefit of the doubt and say they’ve tested it. But OptinMonster if you’re listening, make sure you do test it. I would strongly suggest they put the $49 first and then everything else in descending order from there. Right now when you’re hit with the $9, that’s probably going to be the one most people choose. Because $49 seems awfully expensive in comparison. The other interesting thing that they have going on here is they have four choices. And it makes it a lot harder to eliminate, you know one or two of those that you really don’t want. But I’m assuming again, giving them the benefit of the doubt that the Plus and the Pro for $19 and $29, which are pretty similar to each other. One of them is actually a decoy, and they don’t expect you to go for one of them. So it’s a decoy intentionally put there to try and get your decision making juices flowing. So you do choose either the cheaper or the more expensive plans that are out there.
Todd Lebo: Deborah, what’s your thought on their strategy of highlighting one of the four choices with most popular, they have the color background a little bit on that.
Deborah O’Malley: So I think it’s a great idea. It does draw your attention to it. And it kind of uses the idea of social proof that everybody else is doing it. So you should do it to get this plan. I also really love that they have the anchoring of the strike down or the crossed out, you know, quote, sale price there. So I think there are some really good elements on this chart. But there’s also some aspects that I think they want to be testing here as well.
Todd Lebo: I love the concept of just… Like there’s always little subtle things you can do that can’t test them. You know, your testing process is never finished.
Deborah O’Malley: No.
Todd Lebo: There is an ongoing optimization.
Deborah O’Malley: For sure. Continuous optimization really is the key to success and you can drive large gains off of. You know, you can get a 30% lift and still get another 30% lift if you are testing the right elements. So it can be a very exciting opportunity that can eke out of these types of things.
Kathleen Davis: Awesome. That’s so exciting. Okay, so now we have one last test.
Deborah O’Malley: All right. So this is…
Eric Stockton: I need to redeem myself.
Deborah O’Malley: All right. So here we have a real life A/B test from the World Wildlife Federation. And their goal, clearly, is to increase donations. And they wanted to know, “Should we use a blank box format (where you input the amount, whatever amount you want to put), or should we use a preset button format?” And basically highlight what we are suggesting the user [to] donate. Now, before we even get into guessing just based on this and what we’ve talked about so far, do any of you see anything that you would know immediately test?
Todd Lebo: Yeah, the pricing for sure. Starting out with the higher on the right side, starting out with the higher donation mark.
Deborah O’Malley: You got it. That’s exactly it. So I’d really suggest they test that because it could be really beneficial for them for increasing donation amounts. Given the screenshot and
Kathleen Davis:: Look at that!
Deborah O’Malley: You got it, well done. It is indeed version B with the preset buttons. So just as you said, just as your colleague told you that one time limit choice and structured, very preset choices will likely markedly increase your donations. And just by using this clickable button format rather than the open box format, it really had a huge effect. So transactions increased 30% total revenue, 15.6%, which is huge. And revenue point visitor 14.7%. So these are huge, important end of funnel metrics at strong confidence, 95% confidence. So what is going on here? Well, you’re definitely delving into it, Eric, when you talked about limiting the amount of thinking the user has to do and the amount of choice. So this is known as the Paradox of Choice. And it’s not a pricing principle, per se, but it really relates to basics, especially when we get into pricing tables and features and benefits that we want to offer our user with that price. So what it is, is a psychological phenomenon. And basically it says when we reduce choice, we reduce shopping anxiety, and we help prompt conversions. And there’s a really interesting study. It’s called the “Famous Jam Study”. And basically it was conducted by researchers at Harvard and Columbia University. They set up a real life A/B test experiment at a superstore, like a shopping store, grocery store, back before COVID, when you could still go to grocery stores without having to wear masks and do online checkouts. And they had a sampling station with fewer jams and the sampling station with more jams. The first station had 24 flavors, and the other one had only 6. Now, based on what we’ve talked about so far, Eric and Todd, what do you think happened at the one with 24 flavors? Just throw a guess out there.
Todd Lebo: I would imagine that most people looked at it and to make a decision and just moved on to the candy aisle.
Deborah O’Malley: To the candy aisle. Forget jam, I want candy anyway. So you’re absolutely right. So way more people stop to sample the jam. They said, “Oh 24 flavors of jam. This is amazing.” But markedly, only 3% of people actually made a purchase at sampling station with 24 jams. Now, Eric, what do you think happened at the station with just six flavors?
Eric Stockton: I would say something similar that still seems like a lot of flavors, like a lot of options but better than the larger group?
Deborah O’Malley: Yeah. And you’re definitely right. So fewer people actually stopped at the station. They only saw six flavors. Like, “That’s not quite as exciting.” But of those who did stop and incredible 30% purchased at least one jar of jam. So you can see we cut the choices of jam about by a quarter from 24 to 6, and we increased essentially conversions by 30%. So essentially, the takeaway here is the smaller selection generated more sales. And the theory behind it is that the smaller selection works because if you look at the larger selection, it just overwhelmed shoppers to the point where they weren’t able to decide. So they couldn’t make any decision at all. They just said, “Forget it. I’m not dealing with jam. Let’s go on to ice cream or candy”, as Todd said.
Eric Stockton: So that’s fascinating to me. I mean, of the tests that we’ve talked about so far, that’s fascinating, because you see, sort of marketing activities, and then you see conversion rate optimization in both of those scenarios.
Deborah O’Malley: Exactly.
Eric Stockton: So there’s marketing activities that gets you to stop and pay attention and raise your hand. So you think that like you’re ad. So it’s either disruption or somehow captures the prospect’s attention, and then when you lead them to a landing page, you’re focused exclusively on one thing, which is that call to action, and optimizing around the goal. And the goal is to get more conversions. So if you had something that had 24… I’m making this up, but an ad that had 24 options or like showing selection. That’s impressive. Let me click on that. And then you hit the landing page, but you limit down the number of options for somebody to be able to make a selection, knowing the psychological principle around SRO, that’s fascinating.
Deborah O’Malley: Yeah, definitely. And that’s the amazing thing about these things. They can all be applied to optimize your landing pages, or whatever it is that you’re trying to do. So as essential principle, you really want to think about how much choice I give my user and just like your colleagues said, “Don’t overwhelm them with too much choice.” Because limiting choice is going to reduce purchase anxiety and ultimately make the job easier for the buyer. They’re going to be able to make that choice a lot easier and a lot more simply by having less selection. So now we get to the question. Okay. So Deborah is telling me less selection. Eric is seconding that. Todd saying, “Yes, I agree.” But what is the ideal amount of choice? I need to know this give me something definitive? Well, there’s research that tells us that three is the ideal number. In fact, three charms where as four alarms. And this is sort of an idea that’s been tested. And that’s what I call the cognitive bias of choice. So you have too much choice, people get overwhelmed. On the other hand, you have too little choice, and you use what’s called the Hobson’s effect and you tell somebody, “Take it or leave it”, and they feel like they don’t have any choice at all. They’re unempowered or disempowered. And that loses the conversion because they haven’t been given the opportunity to make the choice. So we need to feel like we’re giving the user freedom, and not that their freedom is taken away. But if we go too much choice and too many options, we start to elicit skepticism. And there’s research that backs up that three seems to be the ideal number. Now, it’s looking specifically at persuasive claims. So we’re abstracting a little bit when we say that three is the ideal amount. But lucky number three seems to work really well from a pricing and a pricing table standpoint.
Kathleen Davis: That’s the rule of three. I guess that’s kind of like, a lot of people kind of fall into that, even without knowing it, just from that being kind of a well-known concept.
Deborah O’Malley: Exactly. And if we look at what we talked about with the decoy effect and the Economist magazine and the print and digital subscription, we can use three as a really valuable strategy to create one of those three choices as a decoy, and then the other two are actually what we’re getting the user to choose between. And then we have sort of an ideal situation, because the decoy says, “Okay, choice eliminated. I’m empowered. I’ve made that choice to eliminate it. My decision making juices are flowing. And now I just have to decide between A or B.”
Kathleen Davis: Yes, that’s awesome. That’s almost like Pricing 201. That’s like a combination of all the principles.
Deborah O’Malley: Exactly. Yeah. They build upon each other. So… in sum too many choices, stifles decision making, even if one of those choices is decoy. Now, this is not based on research. This is based on my opinion of what I’ve seen. What’s something now that jumps out at you, now that we’ve talked about all these things?
Todd Lebo: Lucky number three, right? You’re eliminating choices.
Deborah O’Malley: You got it. So I believe they probably have a decoy in there. I’m giving them the benefit of the doubt that that $19 is a decoy. However, wouldn’t that decision be so much easier for you, if that $19 just wasn’t there all together. And we could choose between the Basic the Pro and the Growth. And we were guided to choose the Pro, because it had that social proof, it had the most popular item there. I think it could really kind of optimize the structure of the pricing table. Of course, we also want to anchor the prices, so that the highest is presented first. And that sets the reference point for all the other prices to look comparatively cheaper. So when we do push that $29, most popular, people are on board. “Okay. I can shell out $29 because I’m not going to pay $49.”
Kathleen Davis: Awesome. So I will jump back here and do this. So we got a little preview.
Deborah O’Malley: So taken all together, this is from years of coalescing all this research and putting it together, I really do think that I’m able to share with you the ultimate formula for a high converting pricing table. And basically, it has three elements. And of course, it has to have three. You anchor the prices from highest to lowest. that’s First and most fundamental. Now always test these things before you implement them yourself. But test the effect of pricing highest to lowest. Second, include a decoy to ease the selection process. And third, make it so that three terms, there is no more than three. And one of those is a decoy. And I really truly believe if you can implement those three things, you have the formula for perfect pricing. So you can probably tell him pretty passionate about pricing and talking about pricing. I find it really fascinating. And it’s so powerful. And yet, it can be so simple. And that’s what I love about it. Other A/B tests can be really hard and complicated, and a lot of depth set up and that kind of thing, but it can be really simple to test your price or flip and anchor the pricing structure of your table, [and] these kinds of things. And so I’ve created a 79 page guide on these kinds of things where you’ll learn way more about the principles and the persuasive pricing psychology practices that go into it. With this guide, you get an extensive checklist of pricing ideas that you can test for yourself. And I think what’s the best piece of work I’ve ever done today, which is a synthesis of all the pricing principles that I’ve come across, and how you can apply them in terms of testing ideas and inspiration. So I think it’s a really valuable resource. And I’d like you to have access to it. So as a special exclusive offer for anyone who’s on this webinar today, you can grab it for $14.99. And I think Kathleen is going to send you the link now normally goes for $29.99, you can see that I have crossed out this anchor price, that anchor price is in red to draw your attention to it. And I have put $14.99 in small font. Why have I done that? Any thoughts on why I did?
Todd Lebo: Such a small price.
Deborah O’Malley: Exactly. You got it Todd. The visual presentation of the price is going to anchor or change your perception of the price. So when it’s visually presented smaller, it appears smaller.
Eric Stockton: Nice use of odd numbers, I like that: 79, $29.99.
Deborah O’Malley: Exactly. And I wanted to have a decoy that presents the sense of value, which it truly really is. It will be the best $14.99 you ever spent. And it truly does go for $29.99. So it’s not a fake sale price. It is a true sale price. But I put that in there to reference your perception of value, so that you can understand what a great deal you are indeed getting. And as well, if you’re interested in pricing tests and A/B studies looking specifically at pricing, there’s a link that Kathleen can share with you.
Kathleen Davis: So with that, I just want to say thank you to all of our panelists for taking the time today to come and share so much information.
Eric Stockton: Thank you Deborah.
