AMA: Hims & Hers Former Sr. Director, Product Marketing & Development, Alex Chahin on The Psychology of Pricing

Many things should play a role in shaping the product roadmap. That might include customer insights, market opportunities, current customer satisfaction, and beyond. Willingness to pay (WTP) should absolutely be among those considerations. In order to determine how much it should play a role for your particular product, you need to first reflect on what the product strategy is. Are you more of an engagement-based product trying to get customers to interact (e.g., TikTok, Nextdoor, Instagram). In those cases, I wouldn’t get hung up on WTP because you don’t need customers to make a buying decision every time (or perhaps ever). If, however, you’re trying to achieve something like accelerate customer acquisition or improve retention, then WTP should be used to shape the roadmap. Going after WTP here will help acquire and retain more people because they’ll find the product more valuable. I’ve also used WTP research when building out a brand new category. When you’re defining your product offering for the very first time, it’s helpful data to make a decision on where to invest when there are many things you could do. Lastly, I’ll point out that you want to balance WTP with total addressable market (TAM) for a given product or feature. If people are willing to pay gobs of money for something but it’s ultimately only a niche group, the revenue potential might not be worth it.

The best time to prepare a change in pricing strategy is when you have actionable data. Perhaps you would have guessed something more related to the product or portfolio lifecycle, like when another product is getting added into the mix. These moments can certainly make internal conversations a little smoother, but ultimately you’re going to want your case to be built on a strong foundation rather than anchoring yourself to internal processes. In that case, the question then becomes “What data?” You could use data from any of these sources to inform a business case for making a pricing change: * Insights: You could run research, either qualitative or quantitative depending on what types of answers you’re looking for, to determine if customers would be open to another pricing approach or would even find it better. For instance, maybe they would actually appreciate a membership model because they find a la carte purchases frustrating. * Behavioral data: Are you noticing any concerning trends in key metrics? Perhaps you’re finding you can’t get conversion rate up to the place you think it can get to, or maybe it’s been eroding over time. Maybe you’re noticing that you have a consistent retention problem after the first quarter of product usage. Identify where these gaps are, and you can make a case for how a different pricing approach could solve them. * Market trends: Is there a corner you can see around? Is there a way it seems the world is going to change that you should get ahead of? A great example of this is the music industry. If you think back to the early 2000s, CD sales were waning and online music purchases were on the rise. Despite the success of online sales, though, people still had to buy individual songs (remember those iTunes songs for $0.99?) or whole albums. The problem is that it’s annoying to buy all those individual songs or expensive to buy whole albums with a bunch of songs you might not really want. Enter streaming products like Pandora and Spotify to solve that pain point. Take a look at your industry to see if there are unsolved pain points in the customer experience that could be solved by a different pricing model. * Competitive moves: Though you shouldn’t make every decision based on what a competitor does, you may want to use it as an input here. If there’s a change happening in your competitive set, you need to think about how you’ll be perceived or be able to stand up to that change from an economic perspective. You should keep in mind things like market share: If you’re the market leader, you should keep a pulse on competitive changes but don’t have to jump on every competitive move. If you’re a follower, a move by the leader might quickly change the tone and you might have to react faster. * Experiments: Of course, you can always make your own hyper-relevant data by running experiments before fully committing to a pricing strategy change. When I was at Lyft, we did years or testing and many rounds of various subscription models in a more quiet beta mode before we ultimately rolled out our broadscale membership product, Lyft Pink. This data is hard to beat because you’ll get the most direct sense of conversion, usage, retention, and the overall economics. The tradeoff is that it takes more buy in, resourcing, and coordination to run these kinds of experiments. Ultimately, the heart of your question seems to be “Hey, how can I play an influential role and be seen as a leader on the team rather than just get handed stuff to execute?” And that’s the dream, right!? We want to be seen as indispensable thought partners. If you show up with a data-backed pitch that solves a customer problem and/or unlocks a revenue opportunity, you’ll set yourself up well.

I would encourage you to make sure you’re putting the customer first whenever you encounter this. In my experience, it’s really tempting to bolt on the next product with slightly different pricing that solves for that particular new product but doesn’t account for the existing one. Then you can end up with a bit of a frankenstein experience that makes it hard for customers to evaluate what’s right for them, having downstream effects on conversion. So make sure that whenever you’re going from one product to multiple, it’s hyper clear to the customer how they are either different or work together. You can achieve this clarity through design exercises, prototyping, customer research — or even bouncing it off different people at your company who aren’t thinking about the same problem day in and day out for fresh eyes.

It’s always really tempting to look for “answers” among what competitors are doing. I think you should absolutely keep competitive moves in mind, but I would urge you to start from a place from the value you deliver and only rely on competition if you don’t think you can articulate the value well enough. To understand why, here are some of the pitfalls of relying too heavily on competitive moves: * Information asymmetry: You might think they’re basing a choice on sound information, but there’s a decent chance they’re not. * Strategy: Relying too heavily on competitors ends up de facto creating your strategy vs controlling your own path. * Value erosion: If the competition tends to do price cuts, it’s a quick way to get the market to a place of commoditization and competing on hyper functional benefits rather than value delivered. * Perception: If you’re always changing in response to a competitor, people may start seeing you as a follower. In fact, there are many times when you want a competitor to move first and see how it does for a bit. Then you can use that information to decide if it’s also a choice you want to make.

Price acts as a huge quality signal. One of my favorite studies on the subject is one done by Professor Dan Ariely. He had a hypothetical painkiller he called Veladone Rx. In reality, in this experiment, it was nothing more than a sugar pill. There was no actual active medication in it. But the participants didn’t know that. It was paired with literature that said “clinical studies show over 92% of patients report relief in 10 minutes.” In the first variant, people were told that the drug cost $2.50 per pill. In the second variant, people were told each pill only cost 10 cents. Both groups were then subsequently given small electric shocks after taking the pill, in order to gauge the effectiveness of Veladone Rx. What do you think happened between these two groups? It was the same exact pill, and isn’t medicine...well...medicine — even though this is a sugar pill? It turned out 39% more people reported reduced pain from the higher priced pill! 85% reported reduced pain from the high priced pill, and only 61% from the 10-cent pills. Remember: It was the exact same pill! The only thing that differed was the price they were told it cost. Professor Ariely ran another experiment like this, but this time with a beverage called SoBe. This SoBe drink had ingredients that could purportedly help with mental acuity and performance, and students who were given the drink were told that at the time of consuming it. The experiment, though, was on the price they were told. Similar to the Veladone Rx example, one group of participants was told the drink normally cost $1.89. They were getting it for free as part of the experiment and didn’t have to pay, but that’s the reference price they were told. The second group, though, was told the exact same drink normally cost 89 cents. The students were told it was discounted from $1.89 to 89 cents per can because of a university discount. Again, they weren’t actually paying at all, they were just told different reference prices. For the exact same drink. Then the students were asked to do a series of different mental puzzles. The result? The people who were told the cheaper reference price ended up performing 30% fewer mental puzzles than the other group! They subconsciously inferred how effective the product must be if it was cheaper and discounted. This is quality signaling at play. This is when customers infer meaning about the product based on attributes of it or its environment. From these examples, we can see that just the number we choose to charge customers actually plays a huge role in whether or not they get value out of it. Higher prices can actually increase perceived effectiveness, regardless of product attributes. What’s the psychology that powers this? Oftentimes, when we have purchased really expensive things, they’re really good products! There can absolutely be a correlation between price paid and the actual quality of the product or service. So we’ve formed this mental shortcut over time that expensive things are likely better. For your marketing, this means you should sometimes actually raise prices to help people find your product even more valuable. On a related note, be wary of using too many promotions, because it could erode perceived value over time.

Picture this: You’re working on the merchandising team at Williams-Sonoma, a home goods store that sells things like upscale kitchen appliances, utensils, and cooking supplies. Your boss has just asked you to figure out how to sell more breadmakers, which are appliances that mix the ingredients, form the dough, and bake it all in one. Many people enjoy fresh-baked bread, but not many people have the time or patience to make it, so the convenience of it makes it interesting for the brand to push in store. Okay, you might first think about running a promotion. Adding a discount would surely drive more breadmaker sales. But it also could be a pretty expensive way to get those sales. And the impact probably doesn’t last forever. Revenue probably reverts right back down to where it was once you stop running the promotion. You might consider setting up a demonstration stand in the store so people can see this unfamiliar appliance in action, hear about it from in-store experts, and — most importantly — smell and taste that fresh-baked bread for themselves. Yum. This tactic could be pretty effective…but it’s probably a logistical headache. You’d have to figure out if you can free up real estate in the store for this new station, and is it worth the revenue you might lose from whatever was in that space before? It would take some work to figure out how staffing the station would work, how often bread needs to be made, and how to clean everything up at the end of the day. Here’s what Williams-Sonoma actually did instead. They put a $429 breadmaker on the shelf. I know, that’s a lot of dough just to make some dough! Did they sell very many of the $429 appliances? Not at all. But breadmakers started flying off the shelf nonetheless because that $429 one was next to a $279 model. When they added the expensive model next to the $279, sales of the cheaper one doubled. In consumer psychology, this is what we call anchoring. Anchoring is the tendency to use the first piece of information we process to inform our decision. That piece of information acts as a reference point in the equation. Generally speaking, this means that when we encounter a higher number first, the next numbers we see feel smaller than they would if we saw them in isolation. Conversely, when we encounter lower numbers first, the next numbers we see feel even higher than they otherwise would have felt. In this breadmaker example, if we walk into the store and see just the $279 price tag on an appliance we know virtually nothing about, we feel like we have no idea how to evaluate whether or not that’s a good deal. Is that price just right for the value? Are they overcharging me? Is this a rare find? We get stuck on this and it impacts our chance of converting. But when that exact same breadmaker is placed next to the expensive one, now we no longer feel unsure. That $429 price acts as an anchor that puts the other one in perspective, and $279 feels like a fairer deal. You’ve probably seen this tactic at play in your own life. A lot of us shop on Amazon, and you’ve probably seen products often have a strikethrough price that’s more expensive above it. That acts as an anchor to make the actual price more appealing. The placement of that number is intentional. It’s not below or to the right where you’d see it second. It’s on top, where you would see it before and get anchored. Now, of course, this strikethrough price has to be truthful, but it doesn’t always have to be a promotion. It could just be something like the manufacturer’s suggested retail price, or MSRP, to provide that reference point. As a marketer, keep in mind how you can use surrounding numbers to make what you really want customers to buy more appealing.

While there’s no perfect answer here, there can be too much of a good thing. Behavioral economics research has shown that we tend to have a hard time deciding from a large array of options. This phenomenon is known as choice overload. It’s also often referred to as the paradox of choice, being paradoxical, of course, because you’d think that more options would be better. In fact, not only is it harder to make a decision when there’s too much choice available, if we do end up making a decision, it can lead us to feel less satisfied with it than we otherwise would. Some experiments have asked people to select something from a small versus large catalog of options, and the people who choose from the catalog with far more options report higher levels of dissatisfaction. The thinking here is that when there are more choices, we’re left wondering if we really made the right call, and that if we had kept thinking about it, surely we would have been able to find something even better. Though choice can feel overwhelming, if we structure it in the right way, we’re more likely to get customers to convert. One study that we’ll look at first comes from an electronics store, where customers are deciding on buying different cameras. In the first variant, there were just two cameras available: a basic one for $169.99 and an upgraded one for $239.99. In this case, what do you think the split of customer purchases is? It turns out to be 50/50, with no lean toward one or the other. Now let’s add an even more premium camera into the portfolio, a premium camera priced at $469.99. In this variant of the experiment, what do you think happened? Well, only 22% bought the basic, 57% bought the upgraded camera, and 21% bought the new premium camera. That’s a 33% revenue increase, just by adding a third option! But it’s not just cameras and electronics. These researchers found that it applies across all sorts of different categories. On average, they found a 17.5% increase in the share of the middle option purchased in categories ranging from mouthwash to televisions to apartments. This pattern is known as the compromise effect. The compromise effect says that products whose attributes are not at the extremes tend to get chosen the most. Basically, people pick the middle option! This pattern especially holds when people don’t have a lot of information about the category they’re buying from, are inexperienced in the category, or don’t have particularly strong preferences about the good. Let’s look at another twist on crafting choice with prices. I want you to imagine that you’re on the website for the publication The Economist. You’re deciding between a couple different options for subscriptions. In the first scenario, you’re deciding between an online only subscription for $59 a year or a print and online subscription for $125 annually. In this case, what do you think most people end up buying? Well, in this configuration, 68% buy the online only version, and 32% end up with the combo online and print version. And this makes total sense. If I’m getting access to the same exact articles, why not go for the cheaper and more convenient option between these two? But what happens if we add another package into the mix? There’s still the online only version for $59 a year, a print only version for $125, and a combo online and print version for…huh…also $125! Wait…the last two are exactly the same price. Why would anyone ever want that middle option? Here’s why this works. It changes the focus of the decision. You’re telling me that I could get way more value — access to all of the articles online — and I don’t even have to pay more for it than I would for print alone? That combo option now looks like a steal! And the experiments bore this out. With this new configuration, only 16% of people purchased the online only option. Remember: that was 68% before! 0% bought the print only option, and a whopping 84% bought the combo option. This is a dramatic reversal of the previous consumer behavior and a great example of the decoy effect. The decoy effect happens when we add an option into the mix that we don’t actually intend to sell much of but changes the focus of the decision to be on the target product and the inferior one. The inferior one that we don’t really intend to sell is called a decoy. The psychology works here because it narrows the complexity of the choice you have to make. We call the complexity of a given decision we have to ask the consumer to make the cognitive load. Rather than think about a lot of attributes like the price, the different kinds of access you get, the value you’ll get from each, and so on, it zeros in on just one attribute and dramatically reduces the cognitive load. Now it’s a no-brainer decision. Of course I want more access for the same amount of money!