Goldilocks effect: How to price different options for a product
Businesses should price products using asymmetrical anchors, drawing a customer’s attention to the option you want them to buy.
When it comes to pricing options, how different should the prices be? Should your most expensive option be a little bit pricier than the middle option, or a lot? Should your cheapest option be super low, or closer to the middle? The answer is to price using asymmetrical anchors, drawing your customer’s attention to the option you want them to buy.
Anchors the way
The behavioural principle of ‘anchoring’ is central to how your customer perceives price.
A jacket that was $500 will seem like a great deal when it is marked down to $350, for example, or a meeting that was booked for 60 minutes but wrapped up in fifty will seem like a win.
That is because the first information received becomes the ‘anchor’ – a contextual set point, against which value can be judged. If you want to make an option look like the best choice, that means it is best to communicate from most expensive to least.
So with anchoring in mind, how should you price the different options you want to forward to a customer?
Let’s say you have three options, large, medium, and small.
Your aim is to sell the medium package because it has the best margin.
You’ve deliberately placed it in the middle because of the ‘Goldilocks effect’, where people tend to stay away from extremes and be drawn to the middle option.
You price the medium package at $1500 because that’s what you believe customers will pay.
Now, how can you position your other two options, large and small, to improve the odds they’ll choose medium?
Let’s look at large first.
Large’s key role is to be more expensive than medium because this establishes your anchor point. We’ll come back to what the price should be, but for now, the important thing is it’s just more than $1500.
Small’s role is to make upgrading to medium a no-brainer. Remember, it’s medium you want them to buy.
Because small is the baseline, or entry-level, to buy one of your offers, if your customer wants to do business with you they have already psychologically spent whatever the price of small is.
Let’s say it’s $1350. Once they’ve committed themselves to spending at least $1350, that amount now recedes in their mind. It’s a sunk cost.
That means their focus shifts away from $1350 and moves to the decision about whether to spend just a little more to get medium.
That’s why you want to have small priced relatively close to medium, say within 10-20%. It has to entice them to upgrade without being too big a leap.
Now, back to large.
We have medium at $1500 and small at $1350. What should large be?
At least $1950. Why? The gap between medium and small is $150, so I want the next jump up from medium to large to be more significant. In this case, $450.
Having a large gap here makes the upgrade from small to medium look relatively small, reiterating the message that it’s a smart move.
But what about other pricing levels? How does this look for less expensive products?
Let’s say your medium is $49.95. To make upgrading a no-brainer, small should be around $45 and large $65.
Asymmetrical anchoring
We’re using what I call ‘asymmetrical anchoring’, making the gap between large and medium greater than the gap between medium and small.
Source: Supplied
If our medium price is $1500, our small price is in the range of $1350 to $1200. That’s 10 to 20% cheaper than medium. For large, our price is in the range of $1950 up to $2175, so between 30 and 45% more expensive than medium.
Of course, these prices are only suggestions. Your pricing needs to be set with reference to your competitive positioning and customer appetite. And most importantly, your prices need to be substantiated by the value differentiation between each of your options.
Just like Goldilocks, by having options that are too hot and too cold, you help your customer find the option that is just right.
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