Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How Price Gaps Change What You Buy
Transcript
- Lucas: There is a specific moment in almost every purchasing journey where the buyer stops looking at features and starts looking at the distance between numbers. It is not about whether the product is good. It is about whether the leap from what they are used to paying to what you are asking feels like a stumble or a step. Luna: So you are talking about the psychological friction caused by large jumps in price points rather than the absolute cost itself. Lucas: Exactly. Most marketers obsess over setting the right absolute number. But I want to talk about the shape of the staircase. If you have a product at ten dollars and your next option is fifty dollars, you lose people who wanted to spend twenty-five dollars. They do not feel like a bargain at fifty, but they cannot justify ten for the full experience. So they leave. Luna: That sounds like a classic problem for subscription services that try to move everyone to annual plans immediately. Lucas: It happens everywhere. Retail, SaaS, even physical goods. Let us look at a concrete example from last quarter involving a mid-sized project management software company. They had a basic plan at nine dollars per month and an enterprise plan at ninety-nine dollars per month. Their conversion rate on the basic plan was steady, but their upsell rate to the higher tier was abysmal. Only three percent of users moved up. Luna: Ninety dollars is a massive gap for individual users. Why did they think that structure worked? Lucas: They thought they were protecting their margins. They assumed anyone serious would jump to the top tier. But the data showed that most users were in the middle. They needed more features than the basic plan offered, but they were not ready to commit to the enterprise dashboard. The gap was too wide. There was no bridge. Luna: So they effectively ignored the largest segment of their market because the pricing structure forced a binary choice. Lucas: Precisely. They created a vacuum. In behavioral economics, this is often called the 'lure effect' gone wrong. When the options are too far apart, the brain defaults to the status quo or exits entirely. The cost of evaluating the difference between nine and ninety-nine is higher than the perceived benefit of switching. Luna: It is interesting that you mention the cost of evaluation. Does that mean simpler pricing is always better? Lucas: Not necessarily simpler, but smoother. Think about how major coffee chains handle their menu. They rarely have just two options. They have a short, a medium, a tall, and a grande. Or at least three distinct price points that are close together. The jump from four dollars to twelve dollars does not happen. It happens in increments of two or three dollars. Luna: Because each increment feels manageable, so you keep climbing the ladder instead of jumping off it. Lucas: Right. And here is the key insight for today. The size of the gap matters more than the final price. A company can charge one hundred dollars total across four tiers and still convert well if the gaps are small. Or they can charge five dollars total across two tiers and fail if the gap is huge. We need to look at relative distance, not absolute value. Luna: Can you give us a real-world example of a company that fixed this? Or failed to fix it? Lucas: Let us go back to that software company. After realizing their upsell rate was stuck at three percent, they introduced a middle tier. They called it 'Pro'. It cost twenty-nine dollars per month. It included all the features of the basic plan plus some advanced analytics. Within two months, their upsell rate doubled. Not because the Pro plan was a steal, but because it was a logical next step. Luna: So they reduced the cognitive load by providing a clear intermediate option. Lucas: They removed the fear of the unknown. When a user sees nine, twenty-nine, and ninety-nine, the twenty-nine dollar option feels safe. It is not a gamble. It is a measured increase. The ninety-nine dollar option then becomes the premium target, but the twenty-nine dollar option captures the volume. This is the power of the 'good, better, best' framework, but specifically applied to gap reduction. Luna: I have seen this in streaming services too. They often have mobile-only plans that are cheap, standard plans in the middle, and premium plans at the top. The mobile plan is a loss leader, but it gets you in the door. Lucas: Yes, and the mobile plan is usually designed to be slightly annoying. It has limitations. That makes the standard plan feel like a relief. The gap between mobile and standard is filled with convenience. The gap between standard and premium is filled with quality. Each step solves a specific pain point. Luna: But what if you are a small business? You might not have the resources to create three distinct products. Can you still apply this? Lucas: You absolutely can. You do not need three products. You need three price points. Many service providers make the mistake of offering only a custom quote and a fixed package. The custom quote is scary. The fixed package might not fit. Add a third option: a semi-custom bundle. Something that sits in the middle. It shows you are flexible without being overwhelming. Luna: So it is about giving the buyer control over the granularity of their purchase. Lucas: Exactly. Control reduces anxiety. When buyers feel they have fine-grained control, they are more likely to pull out their wallet. When they feel forced into a binary choice, they freeze. This is true for B2B contracts as much as B2C subscriptions. Luna: Are there any pitfalls to watch out for when adding these middle tiers? Lucas: The biggest pitfall is cannibalization. If your middle tier is too close to your top tier in features, people will never upgrade. You must ensure that the top tier offers something distinctly different, something that justifies the larger gap. The middle tier should feel like a solid upgrade from the bottom, but the top tier should feel like a different class of service. Luna: So the gaps should be wider at the top. Is that right? Lucas: Often, yes. The bottom gap needs to be small to encourage movement. The top gap can be larger because the buyers there are less price-sensitive and more value-driven. They are looking for exclusivity, support, or scale. Those things command a premium. But the entry path must be easy. Luna: This reminds me of the concept of 'frictionless commerce'. We usually think about checkout speed, but pricing structure is also part of the friction. Lucas: Spot on. Friction is not just technical. It is psychological. If my brain has to work hard to understand why I am paying this much more, I find reasons not to pay. Ambiguity creates friction. Clarity creates flow. Small, logical steps create flow. Luna: How do you test for this? How do you know if your gaps are too wide? Lucas: You run a simple A-B test. Take your current pricing page. Create a version with an additional middle tier. See if your overall conversion rate increases. You might see a dip in average order value initially, but your total revenue often goes up because you capture more customers. Volume beats margin in this scenario. Luna: So you trade higher per-unit profit for higher volume and lower churn. Lucas: Correct. And you reduce the risk of losing customers to competitors who offer a more granular pricing structure. If your competitor has a ten-dollar, twenty-dollar, and thirty-dollar option, and you only have ten and thirty, you are fighting an uphill battle. They capture the twenty-dollar spenders. Luna: It is a defensive move as much as an offensive one. Lucas: It is both. You defend your market share by filling the holes in your boat. And you attack by capturing segments you were previously ignoring. It is a low-hanging fruit strategy. You do not need to invent new products. You just need to rearrange the boxes. Luna: If these marketing conversations have sparked something you've actually used, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: It really helps keep the research deep and the insights sharp. Thanks for keeping the show running. Luna: And thanks for listening. Now, back to the pricing gaps. Lucas: Let us talk about dynamic pricing for a moment. Some companies use algorithms to adjust prices in real-time. Does that create price gaps? Luna: It definitely can. If the price fluctuates wildly, the gaps become unpredictable. That destroys trust. Lucas: Right. Predictability is a feature. If I know that your price moves between ten and twelve dollars based on demand, I can plan. If it moves between ten and fifty dollars randomly, I feel exploited. The gap becomes a source of anger, not curiosity. Luna: So transparency in how the gap is formed is critical. You have to explain the variable. Lucas: Yes. Airlines do this well. They show you the fare classes. Economy, Premium Economy, Business. The gaps are clear. The reasons are clear. Seat comfort, priority boarding, flexibility. You pay for the specific benefit. You do not feel like you are guessing. Luna: But many e-commerce sites just change the number without explanation. That is risky. Lucas: It is very risky. It feels like a trap. And today's consumers are savvy. They know when they are being played. If you want them to accept a higher price, you must provide a clearer reason. A better tier, not just a higher number. Luna: So the solution is not to hide the price, but to justify the jump with tangible value. Lucas: Always. Value justification closes the gap. Without it, the gap is just a wall. With it, the gap is a staircase. Luna: What about bundles? Do they help bridge those gaps? Lucas: Bundles are excellent tools. They allow you to combine high-margin and low-margin items to create a middle option. If you sell a software tool and a consulting service, bundling them creates a new price point that sits between the standalone software and the standalone consulting. It captures both audiences. Luna: It expands the addressable market by creating hybrid offerings. Lucas: Exactly. It turns a vertical decision into a horizontal one. Instead of choosing software OR consulting, you choose a solution. The price gap disappears because the value proposition changes completely. Luna: That is a powerful way to reframe the conversation. From cost to solution. Lucas: And that is the ultimate goal. We are not just selling products. We are selling clarity. When the pricing is clear, the decision is easy. When the decision is easy, the sale happens. Luna: So the next time you look at your pricing page, ask yourself if the stairs are too steep. Lucas: Or if there are missing steps entirely. Fill those gaps, and you might be surprised by how much easier it is to climb.