Upgrade Your Pricing Strategy to Match Consumer Behavior
How can marketing managers nudge consumers to purchase those higher quality goods and services that consumers say they want? Just as “life hacks” are small changes designed to make your life easier, we identify three “pricing hacks,” small tweaks in how retailers present prices to consumers that reduce sticker shock and increase the perceived value of their offerings. Recognizing these “hacks” enables retailers to guide consumers toward better, but more expensive options more effectively.
Hack 1: Frame higher prices as an upgrade.
Instead of offering a standard option for “$200” and a higher-quality alternative for “$250,” focus on the difference and offer the high-quality option for “$50 more.” In recent studies on how consumers perceive price-quality tradeoffs, we observed that focusing price communications on the upgrade premium itself (e.g., the superior option is available for $50 more) instead of the full price comparison (e.g., the superior option is available for $250) leads consumers to be more accepting of the cost of upgrade, increasing the likelihood of their choosing the higher quality item, and reducing their ratings of expensiveness. For instance, we found that when asking consumers to choose between a basic New York Times subscription, “$9.99/month New York Times web and app”, and an upgraded version, “$16.99/month New York Times web, app, print, podcast, and crossword,” 23% of consumers chose the upgraded option. However, when the price for the upgraded version was framed as “plus $7.00/month,” twice as many consumers (47%) chose the upgraded option. Furthermore, they rated the premium subscription as less expensive when they viewed it from the differential pricing viewpoint.
Anecdotal evidence suggests that seasoned salespersons are already aware of this pricing strategy, but a limited number of firms seem to make use of this easy-to-implement pricing hack. Importantly, this upgrade pricing approach does not use deception — all the information is presented — but rather serves to increase the perceived value of the higher-priced item by shifting consumers’ focus during the purchase decision-making. It leads consumers to perceive the higher priced option as relatively cheaper, even as they remain fully aware of the final price at the cash register.
An important caveat here: Upgrade pricing is also not to be confused with drip-pricing, which hides additional fees and surcharges from the consumer until after the completion of the transaction. While drip pricing can increase short-term sales, recent research has found evidence that this pricing strategy can hurt long-term customer satisfaction and profitability.