Executive Summary
Behavioralists are gaining insight into how price affects demand and willingness-to-pay. Just as “life hacks” are small changes designed to make your life easier, the authors identify three “pricing hacks” to reduce sticker shock and increase the perceived value of their offerings. 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.” Second, many quality and sustainability attributes are difficult for consumers to evaluate. If a new dishwasher saves 20kWh per cycle, how much value does that provide? The solution here is to translate intangible costs into metrics that resonate with consumers: in particular, dollar costs, which offer a way to reframe the total cost of ownership in a way that is more meaningful for consumers. Third, “stacked” discounts refer to cumulative discounts that are sequentially presented to consumers, for example, offering a 20% “first time buyer” discount, on top of a 15% “holiday weekend sale.” Research shows that stacking multiple discounts is more effective than providing one overall discount.
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.
Hack 2: Translate intangible costs into dollar costs.
Many quality and sustainability attributes of products are difficult for consumers to evaluate. If a new dishwasher saves 20 kilowatt-hours (kWh) per cycle, how much value does that provide? The solution here is to translate intangible costs into metrics that resonate with consumers: in particular, dollar costs, which offer a way to reframe the total cost of ownership in a way that is more meaningful for consumers. For example, showing the 10-year energy cost of appliance use increases the purchase rate of energy-efficient options, especially when they are more costly upfront. In one in-store study, shoppers purchased pricier but energy-efficient lightbulbs (vs. inefficient bulbs) only 12% of the time with standard price labels, but purchased them 48% of the time when the price labels included the 10-year energy cost. Critically, energy costs had to be translated to dollars — kWh labels had little effect — and were more effective when scaling up to the 10-year rather than the one-year or annual cost. This strategy could also be applied to other types of ownership, from ink for a home printer to the purchase versus running costs of electric cars, air conditioners, or solar panels.
Hack 3: Stack discounts in the right order.
From limited-time offers to the ubiquitous online promo code, discounts have always been one of marketers’ favorite tools for appealing to cost-conscious customers. “Stacked” discounts refer to cumulative discounts that are sequentially presented to consumers, for example, offering a 20% “first time buyer” discount, on top of a 15% “holiday weekend sale.” Research shows that stacking multiple discounts is more effective than providing one overall discount. For instance, taking “10% off, plus an additional 40% off” is more effective than taking “50% off,” even though the lump sum discount is larger.
Furthermore, stacking discounts from low to high (e.g., taking “10% off, plus an additional 40%) is more effective than the high-to-low order (e.g., taking “40% off, plus an additional 10%”). This asymmetric effect occurs because consumers treat the first discount they encounter as a standard and evaluate the size of the second discount with respect to this first one (40% off sounds great after 10% off sets the standard, whereas 10% off sounds measly after 40% sets the standard). This stacked pricing hack appears more effective in-store than online because online consumers see the total discounted amount before making their purchase decision, reducing its effectiveness. In our daily lives, we have observed that stacked discount strategies are widely used among retailers operating in Asia, but are relatively rare in the Western world. We think there might be a significant untapped opportunity here for retailers in Western markets.
With consumers feeling stretched and caught between minimizing price and maximizing quality for money, price formats and their effects on consumer purchase decisions matter more than ever. However, retailers should take the long view when choosing pricing strategies. Immediate increases in sales should be weighed against other measures of profitability, such as customer satisfaction and return rate to ensure the sustainability of the business in the long run. We have reviewed three “pricing hacks” that can be used to unlock value for the consumer, strategically nudging them towards higher-priced offerings that also offer higher quality and higher long-term satisfaction.
