For every 1% improvement in pricing, research has shown that companies can receive up to an 11% increase in profit. With stats like these, it’s understandable why so much effort is spent on refining pricing strategies.
Directly comparing prices with those of competitors to position your product in a favorable light, or comparative pricing, is a favorite technique of many companies to try to attract more customers. However, while success from this method is possible, simply showing that your product is cheaper is not always as effective as many think and can even have an adverse effect on sales.
When Comparative Pricing Can Be Detrimental
A study by professors at Stanford University explicitly demonstrated how comparative pricing does not necessarily result in more revenue. To test the effectiveness of comparative pricing, the researchers set up eBay auctions of top-selling CDs. If you are interested in the methodology used in this study, it can be found here.
The results showed that when explicitly asked to compare seemingly identical products that have different prices, shoppers became more anxious and more risk-averse. Customers placed fewer bids, they took longer to bid initially and were less likely to participate in multiple auctions at the same time.
Thus, directly asking customers to compare products or services can change the behavior of customers in unfavorable ways. The increased anxiety can cause many to not buy at all or they may instead opt for the more expensive option because it is perceived as less risky. This can be largely attributed to our tendency to put more weight on comparative disadvantages rather than advantages when choosing between products. So, the unintended consequence of showing your lower price can be that it makes your option seem less valuable and attractive.
In Defense of Comparative Pricing
This research seems to suggest comparative pricing may not be a good idea. Interestingly however, this same study outlined above found that when bidders are not explicitly asked to compare options, and the same auction was flanked with auctions for the same product but a higher opening bid, the final auction prices tended to be higher. Therefore, the perceived value of the product can increase when comparative pricing is more implicit.
How to Make Comparative Pricing Work
Especially with software, comparative pricing can be difficult. Feature lists are often differentiated and brand power must be taken into account. Focus your marketing efforts on highlighting your product’s unique strengths and, more importantly, placing emphasis on time saved over money saved. In fact, mentioning other attributes, such as time, triggers very different behaviors in comparison to mentioning money, which can make people feel more self sufficient and physically withdrawn. Simply put, consumers would rather compare the pleasure of consuming a product, over the cost of acquiring it.
Showing that you have the lowest price won’t always get you the most customers. Comparative pricing can have the opposite intended impact, creating anxiety for customers if they can’t see why the value of your product is lower. But if your price and product are presented in the right way, it can be an effective tool to show your prospective customers how exactly you stack up against competitors.