Deeper insights into price tier anchoring
First up, let’s look at how conversion rates correlate with your number of tiers.
What you’ll notice is there actually isn’t a clear decrease or increase in conversion rate when you increase the number of tiers from one - which is the simplest pricing you could have. Essentially, companies with seven tiers look similar to companies with 2 tiers.
Note that this relationship looks nearly identical when comparing B2B and B2C, bucking the notion that B2C companies need to keep it simple.
Essentially this data suggests that the idea that complexity from a number of tiers perspective is worse than simplicity, is actually not correct. Less isn’t always more.
Instead more is actually more - more tiers correlates with higher ARPU - you’ll notice that in both B2B and B2C that as you increase the number of plans within a company, you actually see an increase in ARPU.
Those companies with more than 5 plans are seeing 40-50% higher ARPU on a relative basis than those companies with less than 5 plans.
Does this mean Adam should just add 3 more tiers to Haiku deck and call it a day? Not exactly.
The lurking variable here is the entry and upgrade path of these customers. Putting seven tiers on your pricing page is objectively more complicated than putting one tier.
Yet, bringing that customer in under 1-4 tiers and allowing them to grow into those seven tiers is entirely a different story. In fact, those companies who simplify the initial conversion with 1-3 tiers on their pricing page and then have customers upgrading to multiple tiers thereafter are seeing nearly the same conversion rate as those companies who simply put 1-3 tiers on their pricing page, but their ARPU is nearly double.
Essentially, we’re seeing these companies understand pricing persona fit, and allowing their monetization strategy to guide their buyer’s journey.
So should Adam just put one tier on his pricing page and then figure out how to upgrade customers after conversion? Well, not exactly.
Anchoring is definitely something that’s real. As you’ll remember from before, the conversion rates of a two tier company versus a one tier company are essentially the same, yet the 2 tier companies see roughly 15% higher ARPU. This is primary because of anchoring. For example, if we take a ten dollar product and put a 20 dollar product next to it, in our generalized study just over 16% of individuals chose the 20 dollar product, increasing ARPU.
In this manner, anchoring is not a function of increasing conversion necessarily, it’s a tool to increase APRU overall.
To summarize, your numbers of tiers is less about confusion and complexity and is more about understanding your persona pricing fit, as well as your buyer journey. Further, anchoring is not a mechanism to increase conversion, it’s a mechanism to increase conversion on particular plans.
Ultimately pricing strategy has a lot to do with psychology, but that doesn’t make it voodoo or some artful exercise of guess and check tactics. Instead, it’s a scientific understand of who your buyers are, how they purchase, and the strategic game of how you can move them along their journey as efficiently as possible.
Well, that's all for now. If you have a question, ship me an email or video to pc@profitwell.com and let's also thank Adam for sparking this research by clicking the link here to give him a shoutout. We’ll see you next week.
*** If you missed any of our previous episodes you can find them here: ***
Episode 4: Freemium Benchmarks
Episode 5: Integration Benchmarks
Episode 7: Expansion Benchmarks
Episode 8: Discounting Benchmarks
Episode 9: Value Metric Benchmarks
