As marketers, we all know that pricing strategy is important. Pricing, along with Product, Promotion, and Place are the cornerstone four Ps of the marketing mix. Getting your product or service pricing right is essential to maximizing revenue. Sometimes, the path to this goal is not as obvious as it may first appear.A recent study done for The Economist magazine provides an object lesson of this point.

The Economist was offering three different types of subscriptions:

#1  Web only subscription for $59

#2  Print only subscription for $125

#3  Web + Print subscription for $125

From a consumers’ standpoint offer #2 doesn’t make any sense.  Why not opt for subscription #3 and add a web subscription for no additional cost?  Subscription #2 represents a lousy value.  Indeed, as one might expect, no customers chose #2 and the mix of subscription sales between #1 and #3 was skewed heavily to #3 as shown in the chart below.

Sales Mix Percentages:

#1  Web only subscription for $59 : 16%

#2  Print only subscription for $125 : 0%

#3  Web + Print subscription for $125 : 84%

Here’s where it gets interesting.  Professor Dan Ariely of Duke University decided to conduct an experiment with the Economist’s pricing structure.  He eliminated the supposedly meaningless #2 web only subscription.   Makes sense, if you’re not selling any of a subscription type why not eliminate it from the lineup?  But, an unexpected change in consumer behavior occurred.  Customers began to shift their buying preferences dramatically away from the more expensive #3 Web + Print subscription to the cheaper #1 Web only subscription.

Sales Mix w/ 3 Options compared to Sales Mix w/ 2 Options:

#1  Web only subscription for $59 :           16%    /   68%

#2  Print only subscription for $125 :         0%

#3   Web + Print subscription for $125 :     84%    /   32%

The #2 Web only subscription turned out to be quite meaningful after all.  Consumers were originally looking over the three Economist subscription options, comparing #2 versus #3 and choosing #3 often because it clearly seemed to represent the best value among all the options.  Once #2 was eliminated from the mix the #3 Web + Print subscription was perceived to be much more expensive by comparison and customers shifted their choice to the cheaper alternative.  Eliminating of the seemingly meaningless #2 price point had the psychological impact of transforming many customers from value shoppers to bargain shoppers.  This shift negatively impacted the Economist’s revenue.

Moving Your Company’s Pricing Strategies Forward

As you are developing your own product/service price it’s not enough simply to evaluate item price levels in isolation.  It’s also important to consider the interaction between prices for the items/services you sell.

At Ascension Strategy, we are proponents of testing significant changes in pricing strategy for existing products, and pricing strategies for new products, in either a controlled or small test market environment before they are rolled out broadly to avoid the kind of problems The Economist experienced.

If your company is considering any major pricing analysis or program changes you may want to get some outside perspective. At Ascension our analytics team can process massive amounts of product, category, or aggregated data to help clients identify the optimal pricing structure.

At Ascension we believe driving consistent top line revenue growth depends on having an informed and analytically supported pricing model.

Additionally we help clients conduct thorough and objective competitive analysis to include pricing to insure our client’s product mix is optimized in the market for maximum ROI.

If pricing is a top-of-mind issue in your company and you’d like some help… contact us at info@ascensionstrategy.com.