Tiered Offers

How Multiple Price Points Can Maximize Customer Value

Imagine you're at a candy store, and you see three different sizes of candy bags. One is small, one is medium, and one is large. The small bag costs $5, the medium one is $8, and the large one costs $12. At first, you might think the small bag is a good deal, but as you see the large bag only costs a little more and gives you much more candy, you might decide to go for the larger one. This is an example of a "tiered offer" — when a business offers different versions of a product at various price points, helping customers choose the option that gives them the most value for their money. By creating multiple price points, companies can increase the chances of customers choosing a higher-priced item, boosting both customer satisfaction and business revenue.

Background

The concept of tiered pricing is rooted in behavioral economics and was popularized by research into consumer decision-making. It builds on the principle of "anchoring" — the idea that the presence of a higher-priced option makes other options appear more reasonable. Behavioral economists, such as Dan Ariely, have explored how consumers often make decisions based on relative comparisons rather than absolute values. By offering tiered options, companies leverage this tendency to influence customers' choices and maximize revenue from the range of options available.

Historical Experimentation

One of the most notable experiments that showcased the power of tiered pricing was conducted by economist Richard Thaler in 1980. Known as the "Decoy Effect" or "Asymmetric Dominance Effect," Thaler's study examined how adding a less attractive, more expensive option could make other options seem more appealing.

In his experiment, Thaler presented participants with two choices for a subscription to The Economist magazine: a digital subscription for $59 and a print subscription for $125. However, when a third option was introduced — a combined print-and-digital subscription for $125 (the same price as the print-only option) — more participants chose the combined subscription. The addition of the "decoy" subscription led to a higher sales volume for the more expensive offer.

The experiment was published in The Journal of Economic Psychology and demonstrated how tiered offers could nudge consumers toward higher-value purchases by making the middle or higher-priced options seem like better deals in comparison.

Connection to Human Evolution/Biology/Neuroscience

The success of tiered pricing can be linked to fundamental aspects of human decision-making, deeply rooted in our evolutionary biology. As humans, we’ve evolved to seek value in the resources available to us. This behavior likely stemmed from survival instincts, where our ancestors had to make decisions that maximized resource acquisition, often by comparing options to select the most beneficial choice.

From a neuroscience perspective, this process involves the brain's reward system, particularly the ventral striatum, which is activated when we perceive value or make choices that provide us with greater rewards. The brain constantly evaluates options based on perceived value, and tiered pricing taps into this mental shortcut. The introduction of a higher-priced option triggers a cognitive evaluation, making the mid-tier or high-end product seem more rewarding than it might have in isolation.

Recent Research & Experimentation

A more recent study by economists, including George Loewenstein from Carnegie Mellon University, built on Thaler’s work by examining how the context in which an option is presented can dramatically influence decision-making. In their research, they explored how the introduction of a higher-tier product influences customers’ willingness to pay for the mid-range option, especially when the higher-tier option is framed as offering an "exceptional" value relative to the others.

This study, published in The Journal of Marketing Research in 2017, found that tiered pricing structures were particularly effective when customers felt they were getting a deal that made the higher-priced options seem disproportionately valuable. The presence of a "luxury" or "exclusive" option encouraged customers to spend more on what they perceived as an enhanced or superior offering.

Conclusion

For businesses, incorporating tiered pricing can be an effective strategy to not only boost revenue but also improve customer satisfaction. By presenting multiple options, businesses can cater to different customer needs and preferences, encouraging them to choose higher-priced options by making them feel like they are getting more value for their money. For entrepreneurs and marketers, understanding the psychology behind tiered offers and applying these principles in pricing strategies can help drive sales and maximize the perceived value of their products.

Incorporating tiered pricing involves:

• Clearly defining the features that differentiate each tier.

• Ensuring that the price difference reflects the value customers expect from each upgrade.

• Using the "decoy effect" wisely, by introducing a higher-priced option that makes the mid-tier option appear like a better deal.

By using tiered offers strategically, businesses can not only increase revenue but also enhance the overall customer experience.

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