Price Tier Anchoring Benchmarks
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: May 2nd, 2018
Main Takeaways:
- Simplicity doesn't always win - more tiers correlates with higher ARPU
- Companies with more than 5 plans are seeing 40-50% higher ARPU
- Anchoring works: companies with two tiers vs one see around 15% higher ARPU
There's a deep debate about price anchoring and its effectiveness. The traditional approach suggests offering high, medium, and low-priced items to steer customers towards the middle option. However, some SaaS companies argue that providing fewer choices on the pricing page can lead to higher conversions. To explore this, we analyzed data from over 1,500 subscription companies and nearly three million transactions. Here's what we discovered.
But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.
How Conversion Rates Correlate
First up, let's look at how conversion rates correlate with the number of pricing tiers. Interestingly, there's no clear pattern of increase or decrease in conversion rates when you add more tiers. Whether a company offers two tiers or seven, the conversion rates appear remarkably similar. This suggests that simply adding more pricing options doesn’t necessarily impact conversion rates in a significant way.
Notably, this relationship looks nearly identical when comparing B2B and B2C companies, challenging the idea that B2C companies need to keep it simple.
Number of Tiers and ARPU Correlation
Less isn't always more. Instead, more is actually more—more tiers correlate with higher Average Revenue Per User (ARPU).
In both B2B and B2C sectors, increasing the number of plans within a company correlates with higher ARPU. Companies with more than five plans see a 40-50% higher ARPU compared to those with fewer than five plans. Does this mean companies should simply add more tiers and expect better results? Well, not exactly.
The Lurking Variable
The lurking variable here is the entry and upgrade path for these customers. Having seven tiers on your pricing page is definitely more complicated than just one. However, bringing customers in with one to four tiers and then allowing them to grow into seven tiers is a different story.
In fact, companies that simplify their initial conversion with one to three tiers on the pricing page and then offer an upgrade path see conversion rates similar to those with just one to three tiers. Yet, their ARPU is nearly double. These companies understand pricing persona fit and use their monetization strategy to guide the buyer journey effectively. So, should companies just start with one tier and figure out the upgrade path later? Well, not exactly either.
Anchoring is Real
Anchoring is definitely something that's real. Remember, the conversion rates of a two-tier company versus a one-tier company are essentially the same. However, if the two-tier company sees a fifteen percent higher ARPU, it's primarily due to anchoring. For instance, placing a ten-dollar product next to a twenty-dollar product results in just over sixteen percent of individuals choosing the twenty-dollar product, thereby increasing the ARPU. This demonstrates how effective anchoring can drive higher revenue even when conversion rates remain unchanged.
Understanding the Buyer Journey
To summarize, the number of pricing tiers is less about creating confusion and complexity and more about understanding your persona pricing fit and buyer journey. Furthermore, anchoring doesn't necessarily increase overall conversion rates but rather drives conversions to specific tiers.
Ultimately, pricing strategy involves a significant psychological component, but it isn't just guesswork or an artful exercise. It's a scientific understanding of who your buyer is, how they make purchasing decisions, and strategically guiding them from one stage of the journey to the next as efficiently as possible.
Want to learn more? Check out our recent episode: The Rising Impact of Brand and subscribe to the show to get new episodes.
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You've got the questions
and we have the data.
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Each week, we dive deep on benchmarks
of the subscription economy that
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you just can't get anywhere
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else.
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This is the ProfitWell Report.
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Hey, Patrick. It's Adam
at Haiku Deck here.
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I'm hoping you can settle
a debate we've been having
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internally with regards
to price anchoring.
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So I know that best practice is you
should have a high price, a medium price,
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and a low priced item and try
and drive people to the middle.
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We've also heard from other SaaS
companies that less is more.
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Offering customers less choice on
the pricing page results in
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higher conversion.
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I'm wondering if you guys
have an opinion on this.
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Well, it may not seem like it.
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Adam just asked an extremely
multi layered question that's
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gonna make me work a
little bit more than usual.
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To answer Adam's questions,
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we looked at just
over fifteen hundred subscription companies
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and nearly three million
different transactions,
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and here's what we found.
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First up, let's look at how conversion
rates correlate with your number of tiers.
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What you'll notice is that
there actually isn't a clear
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decrease or increase in
conversion rate when you
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increase the number of tiers
from one which is the simplest
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pricing you could have.
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Essentially, companies with seven tiers
look similar to companies with two.
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Note that this relationship
looks nearly identical when
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looking at b to b and b to c
bucking the notion that b to c
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companies need to
keep it simple.
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Less isn't always more.
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Instead, more is actually more.
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More tiers correlates
with higher ARPU.
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You'll notice that in both b
to b and b to c that as you
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increase the number of
plans within a company,
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you actually ARPU.
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Those companies with more than
five plans are seeing forty to
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fifty percent higher ARPU on
a relative basis than those
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companies with less
than five plans.
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Does this mean Adam should just
throw three tiers on Haiku Deck
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and call it a day?
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Well, not exactly.
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The lurking variable here is the entry
and upgrade path of these customers.
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Putting seven tiers in your
pricing page is definitely more
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complicated than one tier.
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Yet bringing that customer in
under one to four tiers and
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then allowing them to grow into
seven tiers is a different story.
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In fact, those companies who simplify
their initial conversion with
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one to three tiers on a pricing
page and then have an upgrade
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path are basically seeing
the same conversion as those
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companies who simply put one
to three tiers on their pricing
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page, but their ARPU
is nearly double.
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Essentially, we're seeing these
companies understand pricing persona fit
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and allowing their monetization
strategy to guide their buyer journey.
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So should Adam just put one
tier on his pricing page and
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then figure out his
upgrade path from there?
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Well, not exactly either.
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Anchoring is definitely
something that's real.
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As you'll remember from before,
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the conversion rates of a two
tier company versus a one tier
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company are
essentially the same.
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If the two tier company sees
a fifteen percent higher ARPU,
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this is primarily
because of anchoring.
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So for example, if you take a ten
dollar product and put it next to a
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twenty dollar product,
in a generalized study,
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just over sixteen percent of
individuals are going to choose
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that twenty dollar product,
thereby increasing that ARPU.
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To summarize, your number of tiers is
less about confusion and complexity.
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Is more about understanding
your persona pricing fit as
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well as your buyer journey.
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Further, anchoring is not a
mechanism of increasing conversion.
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It's a mechanism of increasing
conversion on particular tiers.
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Ultimately, pricing strategy has
a lot to do with psychology but it
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doesn't mean it's voodoo or
some artful exercise of guess
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and check tactics.
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Instead, it's a scientific
understanding of who your buyer
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is, how they purchase,
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and a strategic game of how you
can move them from one journey
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to another journey as
efficiently as possible.
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Well, that's all for now.
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If you have a question,
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shoot me an email or video to
p c at proper well dot com.
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And let's also thank Adam
for sparking this research by
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clicking the link below to give
him a nice little shout out.
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We'll see you next week.
