There's no hard and fast rule here (ugh the "it depends" answer).
In truth it's a function of your product maturity, your buyer's sophistication, and use case differentiation.
When in doubt, keep. it. simple.
The research is pretty clear that good-better-best works, well, best.
It focuses a buyer's mind.
The most common mistake I see are packages that are invented to solve a use case for a handful of customers.
That's how you get SKU-creep.
The order I like to start with is:
There is no one correct answer to this, unfortunately. There isn't a perfect number of pricing tiers that will unlock growth, but some research has been done that you can use as a starting point.
Many people reference the power of three, and the popular good, better, best pricing strategy. This school of thought proposes that having any more than three options overwhelms the buyer and introduces increased cognitive load.
While Good, Better, Best is a common package structure, it’s not the only one. Some argue that having more than three package options could lead to higher revenue. A 2019 price anchoring study by Price Intelligently showed that companies with more than 5 plans see 40-50% higher average revenue per customer.
At the end of the day, I always suggest that you first focus on identifying the number of customer segments you want to price for. That should help guide the number of tiers you have.
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!