A meal delivery service in the US was able to increase sales by 77%. How? By changing the way it represented its pricing.
Periodic vs. aggregate pricing
Researchers Atlas and Bartels (2018) (PDF) recently delved into the issue of how to best structure pricing terms. Should you break the price into smaller, periodic payments, or hit them with a lump-sum? $16 a day or $99 a week?
Taking insights they gained in the lab, the researchers worked with a million-dollar prepared food delivery business on two versions of their website banner ad.
In the first ad, pricing for meals was represented as $16 a day (periodic pricing). In the second, the price was instead represented as $99 a week (aggregate pricing). Across the 12,648 first-time (unique) visitors to the site over five weeks, the price expressed as “per day” resulted in 81 transactions at a conversion rate of 1.3% compared with only 47 transactions at 0.7% for the “per week” ad, generating an additional US$5,200. This is despite the cost per day being more expensive for customers than price per week offer!
When the analysis was expanded to include repeat customers as well as first-timers, similar, though slightly diluted, results were found. Price per day garnered 19% more orders than per week, with 185 transactions compared with 159.
This supported the researcher’s contention that periodic pricing encourages customers to focus more on the frequency of benefits they receive. In other words, they conceptualise receiving multiple benefits (i.e. meals taken care of every day of the week) rather than a single, aggregated benefit (i.e. one delivery of meals per week).
It also supported the contention that first time visitors are more sensitive to how pricing is communicated. Where repeat customers understand your pricing and are more focussed on getting their order processed, first-timers will be seeking this key costing information.
This “pennies-a-day”, periodic pricing concept is not new, and has been used to make the cost of something seem manageable. It’s not without it’s caveats, however. As the researchers note, Gourville 1998 found pennies-a-day can backfire once the daily amount reaches a ‘non-trivial’ threshold. Further, Gourville 2003 found consumers would rather pay a monthly sum than daily on property taxes, mortgages and income tax, suggesting the type of product may have a bearing on when it is most applicable.
This latest research contends that periodic pricing is most effective when the product (or cause in the case of charities) is highly affecting. In short, it’s best when people can imagine themselves enjoying the benefits, and seeing those benefits at a greater frequency is a positive. People expressed a greater intent to lease a luxury car, for example, when it was represented as $20/day rather than $7250/year not because the cost was a smaller unit, but because the benefits were more salient.
There’s a lot of nuance when it comes to pricing, so to work out whether periodic pricing is right for you, I’d encourage you to run some tests of your own. Set up some A/B testing with a banner ad on a landing page, or, if that’s too difficult, run some low cost ad-word campaigns that promote your prices using either periodic or aggregate amounts. See what people click on, and then make changes on your site and in your collateral to represent your pricing in a way that best resonates with your customer.
This article also appeared in Smartcompany.