Psychology Says: Make Your Pricing Fair (or at least appear that way)
Most of us want to feel that we are both being treated fairly and treating others in kind. And sure, some people are always looking for an edge, but humans by nature prefer deals that seem reasonably equitable. And it’s this preference that can have a huge impact on your pricing and how you present it.
In behavioral economics, this desire for equity is demonstrated in an experiment where people pair off and one person is given say $10. The first person has to offer to share some of that money with the second person. The second person can then accept the first person’s offer or reject the whole situation and return the $10 bill so that both parties get nothing.
Try this with your team and see what happens.
Most people will offer between $3 and $5. Almost everyone accepts this offer (a few people will reject $3 or even $4). A few people will offer just $1. This does not seem fair does it? But according to conventional economic theory, a rational actor will take the $1. Most of us though (myself included and I know the game) will reject the offer as it is clearly unfair and we don’t want to reward bad behavior.
Perceived fairness is critical in pricing. People will look at your pricing model and your competitor’s and will often choose the one that seems fair, not the one that seems best for them. Make sure your pricing page seems fair to your customers.
I ran into this recently. I’ve been reading the Washington Post more often recently and generally run through my free access articles in the first week of each month. So I am considering a subscription. But a few weeks ago, when I clicked to subscribe I got the following page. Look closely.
The highest value offer, the digital subscriptions plus the paper delivered to your door is cheaper than the digital only subscription!! Why is this?
I suspect that people who live outside of Washington, DC and want to subscribe to the Washington Post have a higher willingness to pay. They are willing to pay more than people who live in the Washington DC area perhaps because they see it as a necessary source of information on what is happening in politics. People in the DC area see it as just one alternative among many as a local paper. Another possibility is that the Washington, DC readers are a more valuable market to advertisers, so the newspaper finds them more attractive and is willing to sell to them at a lower price.
Willingness to pay or WTP is a key concept in pricing and pricing experts spend a lot of time trying to figure this out. I would have subscribed to the Washington Post – the pricing for the digital edition is within my ‘willingness to pay’ threshold – if I could have overcome my “Hey, this isn’t fair” reaction.
The Washington Post figured this out recently. When I most recently went to check out their subscription offerings rather than getting the above page I was asked to provide my zip code. I entered a Washington, DC zip code to see what I would get. Indeed, pricing is still cheaper for people who live in Washington than for the rest of us. But it’s now more difficult to discover the fairness disparity.
So, what is the general lesson here?
Make sure that your pricing appears to be fair to your customer. Fair means that you are not charging arbitrarily different prices to different users and that you are not exploiting a user’s momentary weakness or moment of desperation to force them to pay a higher price (Uber has gotten into trouble for this). Smart pricing respects social norms.
But wait a moment; segmenting markets to reflect differences in willingness to pay is pretty central to best practices in pricing. Are you saying we should not do that? Well, no. If the difference in willingness to pay reflects a difference in value received of course you should try to take advantage of this. And in fact the Washington Post is on the right track, even if its execution is a bit clumsy. There is no reason you should not have different pricing pages for different value offers for different segments. Today most SaaS companies have one pricing page with a tiered offer (usually three to five tiers). In the future though, as offer configuration (sometimes referred to as packaging) improves and we move away from one-size-fits-all pricing models, we will see more and more companies with multiple pricing pages. I am currently working with a company in a rapidly commoditizing market that is shifting from offering a software application to business solutions. It makes sense for each of these solutions to have its own pricing page.
Be fair. Deliver value. Capture enough of that value to continue to invest in innovation and provide a return to shareholders. That is the essence of good pricing.
Steven Forth is a co-founder of the skill management platform TeamFit. He also provides consulting on revenue models and pricing strategies to companies in the B2B SaaS and Industrial Internet of Things space as part of the Ibbaka collective.
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