A meal delivery service in the US was able to increase sales by 77%. How? By changing the pricing model.
Periodic versus aggregate pricing
Researchers Atlas and Bartels (2018) recently delved into the issue of how to best structure pricing terms. They were concerned with whether customers respond better to smaller, periodic payments, or a larger lump-sum — $16 per-day or $99 per-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, the pricing model used was a $16 per-day payment (periodic pricing). In the second, the pricing model was a $99 per-week payment (aggregate pricing). Across the 12,648 first-time (unique) visitors to the site over five weeks, ‘per-day’ pricing model 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 $US5,200. This is despite the cost-per-day being more expensive for customers than the 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 researchers’ 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 focused on getting their order processed, first-timers will be seeking this key costing information.
Pennies-a-day pricing model
This ‘pennies-a-day’, periodic pricing concept is not new, and has been used to make the cost of something seem more manageable. It’s not without caveats, however; as the researchers note, in 1998 study, John T Gourville found ‘pennies-a-day’ can backfire once the daily amount reaches a ‘non-trivial’ threshold. Further, in 2003 he found consumers would prefer to pay a monthly, rather than daily, sum 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, at regular intervals. People expressed a greater intent to lease a luxury car, for example, when it was represented as $20 per-day rather than $7,250 per-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 which pricing model to use, 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 AdWords 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.