SaaS Psychology Pricing Strategies
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- Price Anchoring
Price anchoring is a way to leverage the perception of cost by assessing a higher price compared with a lower price. This is a classic psychological heuristic that uses a reference point to assess value.
For example, let’s say you go shopping for a new pair of jeans and you have a budget of only $65.
When you enter a store, the sales clerk direct your attention to a high-end fashion which was just released today. It has a price tag of $1500 which you have no intention of buying. However, you entertain the clerk until you finally refuse then go in search of a new pair of jeans.
As you browse, you stumble across a pair of jeans that costs $105. Although it is outside your budget, when compared to the expensive fashion brand, spending $40 more for a decent pair of jeans seems reasonable.
You can see that their Enterprise package starts at $7,999 on the left-hand side (which is where most people tend to look first). Moving to the right are comparatively lower packages to get started on their platform (which seem far more reasonable than the Enterprise pricing).
How to Implement Price Anchoring
- Focus on drawing attention to your most expensive package or offer. Even though most people won’t buy it, use this as an anchor whenever a visitor compares your other packages to make them more attractive.
- If you are up-selling or cross-selling, always pitch your most expensive add-on or upgrade first. Follow up by working your way down to your reasonably priced options.
- Charm Pricing
Charm pricing uses a number that typically ends in a nine. The left digit is reduced from a round number by one cent or one dollar. Often, people don’t pay attention to the real prices when they make a purchase. For example, the value of $5.00 and $4.99 is perceived differently. To your brain, $4.99 is $4.00 which is cheaper than $5.00.
In some cases, people might believe that the rounded down prices are the merchant’s or seller’s dedication to reducing the price to the lowest point possible. Regardless of what people think, charm pricing has a better conversion rate. Take a look at this chart from Gumroad:
In every case, charm pricing had higher conversions than the whole number and in one case the conversions were twice as high. Now, this doesn’t mean that you should use charm pricing and expect to see higher conversions.
How to Implement Charm Pricing
- Perform an A/B split test to see whether or not charm prices produce higher conversions than whole numbers. For example, try selling subscriptions for $20 and a price at $19.
- Odd-Even Pricing
Odd-even pricing is similar to charm pricing and involves prices being reduced by a few dollars or cents. Odd pricing uses numbers that end in odd numbers, such as $3.47, $93, or $185.
At the moment, charm pricing is fairly popular and the “psychological effect” might be fading. It may be that people are now able to make the connection that $199 is actually $200. So, new tricks are needed to get the price you want.
That’s why odd-even pricing is a strategy less used and can be the key to acquiring more conversions.
Intercom seems to have random prices, however, they do include an explanation below the “try for free” call-to-action.
Here’s a great example of using even numbers in Zirtual’s pricing plans:
How to Implement Odd Even Pricing
- Analyze your competitor’s prices. If most of your competitors are using charm pricing, use odd even numbers to stand out. As always, split test your price choices to see which drive optimal conversions.
- Trial Pricing
Trial pricing is a tactic that introduces your SaaS product at a lower price for a limited time. Industry trends in the SaaS world almost always offer their product away for free, you can try introducing your product at a lower-than-expected price to introduce users to the habit of buying.
Trial pricing is meant to reduce the barrier to using your product. One of the smartest strategies to employ would be to give away your product for $1.
However, there’s a risk. You could devalue your customers when they start by paying $1 then automatically charged $50 for the same, regular subscription. In contrast, having the credit card information up-front, which you may not receive during a free trial, allows you to transition into regular payments more smoothly.
Lincoln Murphy advises staying away from the $1 trial which can have a negative kickback to SaaS companies. Instead of trying to squeeze some money out of your customers, the best approach is to build trust and give away everything for free.
How to Implement Trial Pricing
- Given the warning, if you are going to use trial pricing, make it free. You won’t have to worry about devaluing your customers and can focus on driving more conversions to those who signup to give it a try.
- Decoy Pricing
Decoy pricing is a method of using redundant pricing options (i.e. something much less desirable than other options) to influence the buying decision on remaining products.
A great example comes from the Economist, they use decoy pricing for their subscriptions. They sold their online subscription for $59 and a print subscription for $125. Or, you could buy a combination of both print and web subscription for $125. Even today, the Economist continues to use decoy pricing:
Dan Ariely tested decoy pricing and found that the effect generated 30% more revenue from the same number of sales.
How to Implement Decoy Pricing
- Subscription services have an advantage when creating pricing packages or pricing ranges that use the decoy effect. All you have to do is frame the effect based on the features you offer. For example, you could offer a “Basic” package for $35/mo which includes 50 credits and a “Pro” package for $65/mo which includes 100 credits. Then, you could offer “50 Additional Credits” as a standalone add-on for $65.
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