Mercedes in cool showroom

So, you have your product and now you need to come up with a price.

Product pricing is perhaps one of the hardest endeavors out there for the small online business.

If the price is too much, you risk losing a customer but if it is too little, the perceived value could hurt sales as well. One option is to use decision field theory to give what appears to be options when, in actuality, you are driving the majority of sales through the price point you want them to pay.

The benefit of this is that you are essentially testing price point with 3 prices- one that is low with limited features, priced just below your target price; a second that is priced at your target price with more features and a third that is priced much higher.

If you price the first two points close enough together, you will find most consumers gravitating to your original price point.

Decision field theory focuses around 3 concept effects.

  1. Similarity.
  2. Compromise.
  3. Attraction.

The key to understanding this is based more on psychology; when we make purchasing decisions, we don't think in absolute terms but relative advantages to us. A practical example (although now much maligned) would be deciding to purchase fries and a burger at McDonald's for $4.00 or making it a "meal deal" with a coke for .40 more. From the consumer's point of view, the meal deal is a better value although in all likelihood, from the business's perspective, the price was set to influence the consumer make that choice.

In short, the lower price may very well be appealing to the consumer but compared to the meal deal, it pales in comparison. More bang for your buck, anyone?

A illustrative example of decision field theory can be found in a study that Dan Arielly, writer of predictably irrational, did with ad copy that he found curious from the economist magazine.

In the original copy, the economist offered up 3 choices for the subscriber-

  1. They could purchase online access for $59.
  2. They could purchase a magazine subscription for $125.
  3. They could get both the magazine and online access for $125.

The question Dan asked was why on earth would anyone want to purchase a magazine only subscription when they could get both the magazine and online access for the same price?

The answer was in understanding relative advantages. In all likelihood, the magazine produced the most revenues from magazine subscriptions and therefore ultimately wanted people to subscribe to their magazine rather than simply pay for online content only. Relatively speaking, when given the choice between the three options above, choice #3 offered the most advantageous price point for both the consumer and the economist.

Dan wanted to test this though.

In the first test, Dan took 100 of his students and gave them 2 choices-

  1. They could purchase online access for $59.
  2. They could could purchase the magazine for $125.

In the first test, his students overwhelming chose the first, cheaper option.

In the second test, he gave them an additional option; they could purchase the magazine and have access to online content for $125.

The second test was the complete opposite of the first; 84% of the students picked the third option, while only 16% chose online access only.

By adding the third option, his students overwhelmingly chose the third option which increased revenue by 42%.

Relatively speaking, the students found that when given a choice between the 3 options, the third new option was the one that had the most value, relatively speaking that is.

Relative is the keyword here....

* Image by Stuck in Customs