Imagine you are selling a basic product or service that also comes with an upgrade option:
- Coffee that is served in an 8oz cup can be upgraded to 12oz,
- a ticket for a basic train service versus a highspeed, premium service, or
- a 24-inch monitor versus a larger 27-inch model.
Let us stay with the monitor example: the 24-inch version comes at $199.99, and the 27-inch premium model is priced at $259.99. The question is, how do you communicate the price of the premium version?
Do you state the absolute price ($259.99), or should you present the price difference ($60 more)?
What would you do?
Researchers found that framing the price of the premium version as the price difference is always superior to the absolute frame - the "differential price framing effect."
In all studies, consumers were more likely to buy the premium version when the price difference was presented.
In the "monitor study," 42% of consumers would choose the premium model when only the absolute price was present, but 58% – this means 38% more participants – decided on the premium model when the price difference was shown.
Presenting the price difference of the premium version improves up-selling probabilities (compared to absolute price only) even
- when the price difference is presented in addition to the absolute price of the premium version,
- the premium version is regarded as a bad deal (given the price/quality difference compared to the standard version) and
- when the price difference is higher than the price of the standard version (e.g., standard price $30, premium price $70: $40 more).
To promote upgrades, present the price difference between both options.
Now I have a bonus question: You decided to show absolute prices for the basic and the upgraded version. How should you design the prices?
When customers have to cross a price threshold moving from the basic to the upgraded version, they perceive the price difference as much larger and are less likely to choose the upgrade.
The researchers set up a real-life experiment with the small and large cup of coffee. They kept the price difference (25 Cents) the same and randomly changed the price of the smaller ($0.95/$1.00) and the larger cup ($1.20/$1.25).
When the customer had to cross the price threshold at $1, only 29% of customers bought the larger cup. But when the price increased by 5 Cents and customers did not have to cross the price threshold anymore, the share of upgrades rose by 93% to 56%.
When setting prices for basic and upgrade options, do not cross a price threshold.
References
Thomas Allard, Hardisty, David J., Griffin, Dale (2019). When 'More' Seems Like Less: Differential Price Framing Increases the Choice Share of Higher-Priced Option. Journal of Marketing Research, 56(5), 826-841.
Kim, J., Malkoc, S. A., & Goodman, J. K. (2022). The Threshold-Crossing Effect: Just-Below Pricing Discourages Consumers to Upgrade. Journal of Consumer Research, 48(6), 1096-1112.