Priceonomics

A common convention used when pricing a product is to offer 3 different prices - a premium option, a normal option, and a budget option. Even if you would prefer to offer just one product at one price, the three tier option is usually better.

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Why? Because when it comes to making decisions based on prices, people are easily manipulated. Here is a good example that summarizes an experiment from the book Priceless:

"People were offered 2 kinds of beer: a premium beer for $2.50 and a bargain beer for $1.80. Around 80% chose the more expensive beer.

"Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest the $2.50 beer. Nobody bought the cheapest option.

"Third time around, they removed the $1.60 beer and replaced it with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number the $1.80 beer and around 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price."

As the experiment shows, people often have a preference for the middle option, irrespective of quality or price. Although we tend to think of ourselves as making decisions by comparing the cost of a product to its quality (or our willingness to pay), we don’t always do so in practice. 

Instead, we often compare the options that are immediately available against each other. The type of person that always buys the premium option will go for the premium option, the person sticking to a budget will go for the cheapest option, and most people will see the middle option as the reasonable balance between quality and price.

As a result, a common sales tactic is to offer a budget and premium option around your product. If you just offer one price for one option, customers will only decide whether to purchase the product by comparing it to similar products or estimating how much they think it’s worth. But by offering three options, you can change the conversation and induce people to make their decision by comparing the three options.

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This principle can also be applied outside pricing to any area where you are trying to frame a decision for someone. It’s also a great way to manipulate your friends into making a decision you want.

Let’s imagine a completely hypothetical situation involving two roommates. The roommates decide to go out for dinner, but they can’t agree on a restaurant. So, one of them volunteers to research some options.

On Yelp, he finds a restaurant he wants to go to. But rather than suggest that one restaurant, he pitches his roommate on three different eateries: First a cheap Italian restaurant, next the moderately priced and conveniently located Cuban restaurant that he favors, and finally an expensive Chinese restaurant that is far away.

Now, instead of debating the merits of the Cuban restaurant in isolation (as the first roommate doubts that his roommate would want to go), the second roommate is comparing it to two other options. Comparatively, it seems great. It’s neither the overly cheap nor overly expensive option, and it is conveniently located. 

Of course, you probably shouldn’t suggest anything you’re not willing to actually do. In this author’s case, the plan backfired. Bucking the trend, his roommate chose the Chinese restaurant. Luckily, it was delicious.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google Plus.


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