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📝 Intro

Does it pay off to make prices of your product options and extras hard to calculate?

No, it doesn’t.

In fact, you can turn the simplicity of your pricing into a competitive advantage, and even boost your margins.

P.S.: Remember, if you want expert help to apply the latest evidence-based marketing techniques to your business, product, or upcoming launch, you can reach out to me here for personalized recommendations.

Previous insight: Use GIFs or emojis, not both (All insights here)

Make it simple for customers to calculate your price components

Impacted metrics: Customer acquisition | Customer spending
Channels: Pricing
For: Mostly B2C
Research date: June 2013

📈 Recommendation

If your price includes multiple components (e.g. because you offer extras or different options), make your price simpler than that of your competitors.

For example, use price components that are rounded (e.g. $2 vs $1.78) and easy to calculate (e.g. price after % discount, not before).

Customers will perceive your price as fairer and will be more likely to choose you, even if your overall price is higher.

If it’s suitable for your product, you can also offer a flat rate (e.g. $50). This is a great way to reduce complexity, even in B2B.

🎓 Effects

• Many products don’t have an all-inclusive price (e.g. as groceries do). Instead, they have multiple price components. Examples include:

  • Mobile plans (e.g. different prices for calls, SMSs, data)

  • Airline tickets (e.g. extra luggage, legroom)

  • Cars (e.g. premium seats, heated side mirrors)

  • Some SaaS (e.g. extra monthly bandwidth)

• This study finds that people prefer simple prices, even when they cost more than complex prices.

• Prices are complex when price components have many different odd numbers (e.g. $0.18/min mobile calls, $0.07/min landline calls) and require different calculation types (e.g. $6/month service fee plus $0.25/min calls with 40% discount).

• In experiments where people had to choose between different mobile plans:

  • People chose simple price options much more frequently than complex options

  • Even when the mobile plan was more expensive for their usage (€35 vs €30 per month), 65.9% still chose the simple option

(Some of the mobile plan options people had to rate and choose from in an experiment - Click to zoom in)

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🧠 Why it works

• When we’re faced with a complex price, we need to put in more mental effort to judge its true value. This leads to two possible negative consequences:

  • We decide to not put in the mental effort, and simply assume the price is higher than a simpler option (even if it actually isn’t)

  • We put in the effort to understand the price, but find it unfair that the company made it so hard for us to figure it out. Even worse if we suspect they did it on purpose.

• On the other hand, when the price is simple, we feel that the company is being more fair and transparent than competitors, so we are more likely to choose them.

✋ Limitations

• Remember that this study refers to products that have multiple price components. If you have an all-inclusive price (e.g. a candle) previous research still mostly suggests that you use ‘just-below’ prices (e.g. $9.90 vs $10), as they appear cheaper.

• We don’t know what is the exact threshold at which most people switch to choosing the more complex and cheaper option (e.g. a 10% premium? 30%?).

• This study focused only on testing different mobile plan options in a lab setting. This makes it riskier to generalize it, although the principles should hold.

• Results measured people’s willingness to buy and choices, rather than actual purchases. This weakens the results in a real-life setting.

🏢 Companies using this

• Complex prices are common in industries such as airlines, automotive, financial services, and telecom services.

• In recent years, telecom plans have tended to reduce in complexity around the world - with flat-rate plans now common. 

• On the other hand, airline prices have increasingly fragmented into highly complex options.

⚡ Steps to implement

• Review the price options your competitors offer and are therefore normally accepted by the market.

• Develop simpler pricing options than theirs. Consider also offering flat-rate prices if they’re suitable for your product.

• To simplify your pricing:

  • Reduce the variety of different price endings you use (e.g. $0.10/min calls, $0.10/sms vs $0.13/min calls, $0.07/sms). Try to stick to even endings

  • Make sure customers only need to make very simple calculations to understand their final price (e.g. use prices after % discounts)

• Say it. Highlight in your copy (e.g. on your website), that you are making an effort to offer a more fair and transparent price than your competitors.

• Avoid making price plans intentionally more complex than they have to be, customers see through that.

🔍 Study type

Lab experiments. Germany

📖 Research

Homburg, C., Totzek, D., & Krämer, M. (June 2013). How price complexity takes its toll: The neglected role of a simplicity bias and fairness in price evaluations. Journal of Business Research, 67(6), 1114-1122.

[Link to paper]

🏫 Affiliations

University of Melbourne, University of Mannheim, and University of Passau. Australia and Germany

Remember: This paper could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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