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Psychological pricing is a powerful strategy that can significantly impact consumer behavior and drive sales for SaaS companies.
💡 By understanding the psychological factors that influence customer decision-making, businesses can optimize their pricing models and create a perception of value, urgency, and exclusivity.
In this article, we will explore the different psychological pricing tactics and how to implement them within the SaaS industry in order to boost sales and enhance customer perception.
The Psychology Behind Pricing
Before diving into the specific tactics, it's crucial to understand the psychology behind pricing. Customers often rely on heuristic decision-making processes, where they use mental shortcuts to make purchasing decisions.
These mental shortcuts are influenced by various psychological factors, such as perception, emotion, and cognitive biases. By leveraging these factors, businesses can shape customer behavior and increase the likelihood of a purchase.
Psychological Pricing Tactics for SaaS Companies
It is essential for SaaS startups to constantly fine-tune and optimize their pricing strategies, even after settling on a pricing model. Psychological pricing strategies can play a crucial role in this process. These strategies are not aimed at coercing customers but rather at reducing friction and making the sales process more effective.
By understanding and working alongside the innate processes of the human brain, SaaS startups can enhance their pricing approach, ultimately leading to improved sales and customer satisfaction.
1. Price Anchoring: A Strategy for Perceived Value
What is Price Anchoring?
Price anchoring is a tactic used to shape the perceived value of a product or service. By introducing customers to a reference price, known as an "anchor," businesses can influence them to perceive a higher or lower value for the offering.
In the realm of software as a service (SaaS), this method can aid in closing deals and boosting revenue.
In SaaS, price anchoring can be implemented in two primary ways:
Feature-Based Pricing, which involves presenting customers with a list of features and corresponding prices
Loss Leader Strategy, which introduces a lower-priced option to underscore the value of the offering. It is essential to note that price anchoring should be used ethically and transparently, as misleading customers can damage a business's reputation and result in legal consequences.
Let’s look at the pricing structure for Monday.com, a project management tool designed to aid businesses in organizing, monitoring, and enhancing productivity. The standard plan is likely to be the preferred choice for users, as it is more attractive and offers significantly enhanced features compared to the basic plan.
From a general standpoint, many individuals view the additional cost of $2 for extra features as minimal when compared to the $6 fee for the pro plan. This pricing strategy capitalizes on the inherent anxiety associated with decision-making, particularly when faced with multiple options. The standard package has been designated as the "most popular" choice among users, which may influence new or indecisive users to opt for the recommended package.
How to Implement Price Anchoring in SaaS
The most straightforward and effective approach to implementing price anchoring is to establish a tiered pricing strategy, regardless of whether you're in the software industry or not. This involves offering various versions of a core product at different price points, automatically establishing anchor prices and leveraging the multi-price mindset.
Alternatively, if you prefer not to pursue this method, another potential strategy is to display your competitors' prices on your pricing page. While this provides customers with a point of comparison, it also poses the risk of directing them towards competitive alternatives. Ideally, however, your offering will stand out as best value among these options.
2. Decoy Pricing
What is Decoy Pricing?
Decoy pricing is a strategy that involves presenting an unappealing or inferior option alongside the desired option to make the latter more attractive. The decoy option is usually priced similarly or slightly lower than the preferred option but with fewer features or benefits. This creates a contrast effect, emphasizing the preferred option as a better value proposition. The objective of decoy pricing is to steer customers towards choosing the preferred option over other alternatives like competitors' products or taking no action at all.
Shopify uses the decoy pricing tactic by setting the initial two pricing levels just below $100, while the third alternative is notably higher at $399. Even a feature-to-feature comparison doesn't fully explain the big cost difference, so it’s pretty clear that the advanced plan serves as a decoy in this case.
How to Implement Decoy Pricing in SaaS
Here are the recommended steps for using decoy pricing for your SaaS product:
Define your primary option: This is the choice you aim for most customers to select, as it maximizes revenue and customer satisfaction.
Select your decoy option: This is the choice you prefer fewer customers to choose, as it offers fewer features or benefits than your primary option but at a similar or slightly lower price.
Ensure a noticeable difference between your options: The disparity between your options should be evident enough for customers to discern the value distinction between them.
Conduct pricing tests and adjustments: Experiment with varying feature combinations and prices for each option to determine the optimal balance between conversion rate and revenue per customer.
3. Charm Pricing
What is Charm Pricing?
Charm pricing is a widely used psychological pricing tactic that involves setting prices that end in odd numbers, particularly the number 9. Customers tend to perceive prices ending in 9 as lower than rounded prices, even if the difference is minimal. SaaS companies can leverage charm pricing by setting their prices just below a whole number, such as $9.99 or $19.95. This small adjustment can create a perception of a lower price and increase the likelihood of a purchase.
Evernote is an example of project management solutions utilizing this pricing strategy with unlimited plan pricing placed at $7.99 per month.
How to Implement Charm Pricing in SaaS
Conduct an A/B test to track conversion rates for a monthly subscription priced at a round figure (e.g., $20) versus a price ending in nine (e.g., $19). For those feeling bold, consider testing an even higher price point (e.g., $29).
Charm pricing, similar to all marketing tactics, requires thorough testing and analysis. Start with A/B testing by offering the same product at both a rounded price and a charm price, then assess their respective performance.
Utilize customer surveys or feedback to gauge whether customers perceive charm prices as more affordable. Continuously monitor your sales figures; a substantial increase in sales following the implementation of charm pricing indicates that you're moving in the right direction.
4. Product Bundle Pricing
What is Product Bundle Pricing?
Product bundle pricing is a strategy where businesses offer packages of products or services at a discounted or fixed price. This tactic is particularly effective in the SaaS industry, where companies can bundle complementary products or features together. By offering bundled packages, SaaS companies can increase the perceived value of their offerings and incentivize customers to purchase more comprehensive solutions.
Massive software products such as Photoshop, Illustrator, and After Effects are just a few examples of the range of offerings provided by the software powerhouse Adobe. Users have the option to subscribe to each of these individually, or they can opt to save money by subscribing to all of them through Adobe's Creative Cloud service.
How to Implement Product Bundle Pricing in SaaS
Bundle pricing is a simple concept, but implementing it can be a challenge. Understanding your customers' needs is essential in marketing your bundle effectively.
First, you’ll need to present the bundle with desirable products or services at the forefront. Feature a high-value component as the centerpiece to highlight the bundle's value. Next, you’ll want to complement the centerpiece with accessories to enhance its perceived value.
Finally, in order to maximize customers’ perceived savings while increasing your earnings per customer, include items with high perceived value and low production costs.
5. Trial Pricing
What is Trial Pricing?
Trial pricing involves offering a product or service at a significantly reduced price for a limited period. This strategy allows customers to experience the product's value before committing to the full price. SaaS companies can implement trial pricing by offering a discounted trial period, such as one month for a minimal fee. This approach reduces the perceived risk for customers and increases the likelihood of conversion.
If you're considering a trial offer, it's best to make it free. Offering a trial with a price attached carries similar risks to high-low pricing and discounting, but it also decreases signups and conversion rates.
6. Odd-Even Pricing
What is Odd-Even Pricing?
Odd-even pricing is a strategy that aims to influence customers' perception of a product's value by using a specific numeric value. This approach involves setting the price slightly lower than a whole number, such as $9.99 instead of $10. The goal is to create the impression of a lower price while still maintaining a relatively high-profit margin. By using odd-even pricing, businesses can drive sales and maximize their profits through small pricing adjustments that appeal to customers' subconscious desire for a perceived bargain.
Asana take this approach to the extreme, with their seemingly random pricing strategy:
How to Implement Odd-Even Pricing in SaaS
Review your competitors' pricing strategies. If charm pricing is the dominant approach, opt for odd-even pricing instead. As always, use A/B testing to monitor the impact it has on conversion rates and sales revenue.
7. Center Stage Effect
What is Center Stage Effect?
The center stage effect is a technique that capitalizes on the natural inclination of humans to concentrate on the center of a screen. SaaS companies can employ this approach to emphasize a particular pricing plan or package they wish to encourage customers to buy.
SaaS companies can leverage this trend by strategically placing their most sought-after option in the middle, just like Freshbooks has done in this example below:
How to Implement Center Stage Effect in SaaS
To emphasize the most popular or desired pricing package among the three options, consider utilizing visual callouts. This can be done by highlighting the chosen package with visual cues or by drawing attention to the package you intend to be the most popular.
8. High-Low Pricing
What is High-Low Pricing?
This pricing strategy, known as "hi-lo" or "skimming," is frequently employed in the retail sector. During promotional events, expensive products are offered at significant discounts. However, SaaS companies can also adopt this psychological tactic by initially introducing their SaaS at a higher price and subsequently reducing it to a discounted rate.
By employing a high-low pricing strategy, your product's price fluctuates between high and low levels during regular and promotional periods. The purpose of setting a high price during promotions is to create an anchor point that entices customers to make a purchase. As the value of the product is often linked to its premium price, the discounted rate appears to be a fantastic offer. Nevertheless, while this reduced price may generate short-term demand, it could potentially result in long-term losses.
Black Friday is a prime example of high-low pricing in the SaaS industry. SaaS companies that don’t typically offer discounts will often reduce their prices significantly to take full advantage of the Black Friday consumer frenzy.
How to Implement High-Low Pricing in SaaS
If you decide to employ high-low pricing, it must be done sparingly. Discounts should be perceived as extraordinary, one-of-a-kind opportunities, so it's best to save them for major promotional campaigns or to leverage them for strong social proof for your business.
Implementing Psychological Pricing Tactics
To effectively implement psychological pricing tactics, SaaS companies should consider the following steps:
Understand your target market: Analyze your target audience's preferences, behaviors, and price sensitivity to tailor your pricing strategy accordingly.
Test and analyze: Conduct A/B tests to evaluate the impact of different pricing tactics on customer behavior and conversion rates. Continuously monitor and analyze the results to optimize your pricing strategy.
Create value perception: Communicate the value of your products or services through effective marketing and messaging. Highlight unique features, benefits, and customer success stories to justify your pricing.
Use pricing psychology in conjunction with other strategies: Psychological pricing tactics work best when combined with other pricing strategies and marketing efforts. Consider factors such as competitive analysis, value-based pricing, and customer segmentation to create a comprehensive pricing strategy.
The Benefits and Considerations of Psychological Pricing
Psychological pricing tactics offer several benefits for SaaS companies, including:
Increased sales and conversion rates: By leveraging psychological factors, businesses can influence customer behavior and drive more sales.
Enhanced customer perception: Psychological pricing can create a perception of value, exclusivity, and urgency, leading to improved customer perception of your brand and offerings.
Competitive advantage: Implementing psychological pricing tactics can differentiate your business from competitors and attract more customers.
However, it's essential to consider potential drawbacks and limitations:
Ethical considerations: While psychological pricing can be an effective strategy, businesses should ensure transparency and avoid deceptive practices that may erode trust with customers.
Market and customer dynamics: Psychological pricing tactics may not be universally effective and can vary depending on market conditions, customer preferences, and cultural factors. Regular monitoring and adjustment of pricing strategies are necessary.
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Demand-based pricing is a strategic approach that involves setting the price of a product or service based on consumer demand. The objective is to maximize sales and profits by charging customers an amount they are willing to pay.
Skimming is a pricing strategy where you initially set your SaaS prices higher than usual, then gradually lower them over time. The idea is to attract a smaller target market first and generate initial revenue.
Captive pricing, also known as captive product pricing, is a pricing strategy where a "core" product is offered at a lower price, but additional products required to fully use the core product are charged separately.