One of the universal truths in business is that people like to have choices, but not too many choices. The human brain views “no choice” as dangerous and too many choices as confusing. What comes up time and again is to give buyers three choices and let them pick the one that is best for them. The same is true when pricing products.
Three levels of product
One reason to offer three prices is that it matches well with giving buyers product choices – high, medium, low or good, better, best. General Motors offers Cadillac for the high end, Buick for the middle, and Chevrolet for the low end of its product line. The Gap owns three levels of stores – Old Navy, Gap, and Banana Republic.
Anchor pricing
It turns out that the human brain has a hard time determining what the price of a product should be. Buyers need a reference point. If you start with a high number, people seem willing to pay more for the product they choose. If you start with a low reference number, buyers tend to choose a lower price. In so many cases, they seem to have an easier time choosing if they have a third option.
Middle option pricing
If you give buyers three choices, most will pick the one in the middle. This is true of most things. Prices are no exception. If you position products as Platinum, Gold, and Silver and price them accordingly, most will pick Gold. Some call this Goldilocks pricing. More will pick the middle option over the other two. Therefore, unless the middle option is an obvious loser, price the one you want to sell in the greatest quantity in the middle.
Decoy pricing
Since people love to get deals, you can help them to choose a more expensive option by using decoy pricing. If you give people two choices, more tend to choose the less expensive option. If you add a third choice that has less capability for the same price as the higher priced option, they tend to choose the higher priced product.
Behavioral Economist, Dan Ariely, did a number of experiments to prove this point. In one with 100 very smart students from MIT, he offered three choices of subscriptions to the Economist.
- Online subscription for $59
- Print subscription for $125
- Print and online for $125
Nobody chose option 2 because this middle option is the obvious loser. Because Option 3 appeared to be a good deal, (they were getting print and online for the same price as print only) 84% chose option 3. Only 16% chose option 1.
With another group of 100 MIT students, he performed a second experiment by taking away the middle option that nobody chose in the first experiment. The choices were as follows:
- Online subscription for $59
- Print and online for $125
In this case, 68% chose option 1 and only 32% chose option 2. The middle option that nobody wanted in the first experiment was necessary for smart students to choose the more expensive print and online option. In the first experiment, the bad deal was necessary to make the third option appear to be a good deal.
The power of three
Giving your customers three price points fits with the power of three in marketing. You can offer three brand levels at your three price points (Banana Republic, Gap, and Old Navy all owned by the Gap Inc. or Cadillac, Buick and Chevrolet offered from General Motors). You can offer products in three varieties (vanilla, chocolate, and strawberry). You can organize your prospects into three groups (hot, warm, and cool) and follow up to close sales accordingly. In your marketing communications, you can focus on three unique benefits of your products that anyone can pass on to others - creating a positive viral pyramid that will bring you more sales and profits. Finally, if you ever consult with competent PR experts, they will advise you to focus on three key points when you talk with the media. Beyond that, you will lose their attention and interest. If you understand the power of three and incorporate it in your pricing, you will increase your success rate significantly. Best of luck.