Raise Prices AND Conversions: Here`s How
I came across this story when I read Robert Cialdini’s book, Influence. If you haven’t read it, you should drop everything and go get the book. It’s a fantastic marketing resource.
Anyway, the book starts off with a case study of a Native American jewelry store in Arizona. The owner of the store was getting frustrated with her slow-moving turquoise jewelry. She had tried everything to sell them, including moving them to more prominent locations in her store, but nothing was working.
Eventually she decided to sell them off at a big discount. She was going on a business trip so she left a hand-written note for her employee to sell them at ½ price.
However, the employee misread the number, and doubled the prices instead of halving them. By the time the owner returned from her business trip, all the jewelry had been sold!
What just happened? Why did the product sell after prices were raised? Don’t discounts usually bring in the sales? Why are there so many questions in this paragraph?
Let’s find out!
Price = Quality
We are terrible at valuing things. When we shop, we usually judge the value of a product by its price and the price of similar items.
In general, we tend to associate price with quality. The higher the price of a product, the better quality it must be.
Think about your own daily expenditures. Is the $5 latte at Starbucks really 5 times better than the $1 coffee at 7/11? Probably not, yet we see more people walking around with a Starbucks cup.
When the jewelry store doubled the price of the turquoise, shoppers immediately perceived the product to be of higher quality and higher value. Instead of thinking of it as cheap jewelry, they now thought of it as high-end fancy jewelry that they wanted to buy as a status symbol.
Here’s another example of doubling price to increase conversions, this time from the online world. An anonymous developer created a productivity app and sold it for $9.99 on his site. He did a lot of outreach and got over 50,000 daily hits but the conversion rate was poor.
He made changes to the software and re-designed the site, but sales were still terrible. Eventually he decided to double the price. He figured if he still sold the same number he’d at least make twice as much.
Surprisingly, conversions increased ten times! The product was the same, there was no extra press or marketing traffic, and yet more people were buying.
Because the market is rife with cheap, buggy apps people just assumed his $9.99 product was no different. When he raised the price to $19.99, it suddenly became a premium app of higher quality.
Now you might be wondering if this applies to your business. Maybe you sell to a price-sensitive market. In that case doubling prices would decrease sales, wouldn’t it?
Well, let’s go to a case study that happened back in 1978. There was a young couple, Mel and Patricia Ziegler, who wanted to make some quick money to fund their travels. They bought some old clothes from a thrift shop for $1.75 each, patched them up, and sold them at a flea market for $6.75.
That’s a healthy $5 profit per piece for so little work, but they only sold four. It’s natural to think that the poor sales might have been because of the price-sensitive audience at a flea market. Besides, this took place almost 40 years ago and $6.75 wasn’t a small amount back then.
However, instead of lowering prices, the Zieglers decided to double it to $13.50. And, guess what, they sold out! In fact, they made enough to open up their own little clothes shop.
Today that shop is known as Banana Republic.
So, should you suddenly double your prices? It’s worth a test! If you’re a freelanceror you sell services, double your rates. If you have a SaaS business, double the monthly fee and see what happens.
End with 9
When you see prices ending with 9 you probably think there’s no way that trick still works. Sure, $9.99 looks a lot cheaper than $10, but it’s only a cent.
Turns out that prices ending with 9 convert better than any other price, including, you guessed it, lower prices!
The University of Chicago and MIT experimented with price variations on women’s clothing. They tested three prices, $34, $39 and $44, for the same item.
They found that the $39 item converted the best, and 30% higher than the cheaper $34 item.
This is attributed to something known as the ‘left digit effect.’ Basically, because we read numbers from the left, we tend to ignore that last few digits. So $34 and $39 are both essentially $30 to us.
You can push it even further and go all the way up to $39.99. That’s $40 for all purposes but we still don’t see it that way.
Maybe you can’t stomach the thought of suddenly doubling prices. Instead, try raising your prices in small increments to the next number ending with 9.
In his book, Priceless: The Myth of Fair Value, William Poundstone mentions three pricing experiments using beer.
In the first experiment, consumers were offered a regular beer at $1.80 and a premium beer at $2.50. 80% of them bought the premium beer.
However, in the second experiment, when a cheap beer for $1.60 was added to the mix, the distribution flipped. This time, 80% bought the regular and 20% bought the premium. No one bought the cheap one.
Finally, in the third experiment, the cheap beer was removed and a super premium $3.40 beer was introduced. This time 85% bought the $2.50 beer, 10% the $3.40 beer and 5% the $1.80 beer.
Offering multiple price tiers for a product can help you capture consumers who are willing to pay higher prices for more features or premium products. That’s why so many SaaS companies offer three levels of pricing with the middle level being the most popular.
The beer case study is in part due to an effect called anchoring. Because we can’t judge fair value on our own, we tend to compare the price of one object to prices of similar objects. When that happens, we anchor ourselves to the other price.
In fact, this technique is so powerful that thinking about a random number anchors us to that. In Predictably Irrational, Dan Ariely mentions an experiment where he asked students to write down the last two digits of their social security numbers.
He then pulled out a bottle of wine and asked the students to guess its price after describing it to them. The students with social security numbers ending with 11-20 guessed the lowest prices, while the students with numbers ending with 80-99 guessed the highest.
So how do you use this when selling your products online? Well, you actually see it happening all the time! It’s called a sale.
If you’ve ever wondered why stores are always having sales, in-store or online, it’s because of the anchoring technique. They put the ‘original’ price on the tag, then strike it out and put the ‘discounted’ price near it.
The original price actually serves as an anchor, making the discounted price next to it look much smaller that it is. In fact, the original price can be completely fake and the product needn’t actually be on sale for this to work.
Think it’s underhanded? Well, so did Rob Johnson when he took over as CEO of JC Penney. He started a “Fair and Square” campaign and eliminated the practice of showing fake, higher prices and calling it a sale.
Within a year, sales had fallen 28% and their stock prices by 55%. Without a higher price to compare items to, shoppers thought the regular prices were too high. Even when JC Penney ran a legitimate sale, shoppers didn’t buy because they had no original price to compare to.
Ultimately, Rob lost his job and JC Penney went back to fake sales, even apologizing to customers for their honesty. A table priced at $150 while Rob was CEO didn’t sell, but when the price was raised to $245 and then dropped to $150 in a fake sale, it sold out.
Now, there’s nothing wrong with increasing prices and then putting them on sale at a later date. However, raising prices just for the purposes of a fake sale is definitely a grey area, even though many retailers do it.
Instead, try this alternative strategy used at Williams-Sonoma. Their bread maker, priced at $279, wasn’t doing too well. Instead of creating a fake sale, they built a slightly larger bread maker and bumped up its price to $429.
The new bread maker was effectively a decoy. Its only purpose was to anchor customers so that the regular bread maker looked like a steal. Sure enough, conversions for the regular one immediately doubled, and any sales of the larger one were just a bonus.
It just doesn’t make sense. Raise prices and more people will buy? Raise prices and discount them back down to the original price and they’ll still buy? It goes against everything you’ve studied about supply and demand.
The economics you studied in school is based on the assumption that we’re rational. However, real life shows us, time and again, that we’re far from it. As Dan Ariely puts it, we’re predictably irrational and, as businesses or marketers, we can play along.
So try something new today and raise your prices to increase conversions. Worst case scenario, you can always ‘discount’ it back down ;)!