Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The One-Dollar Difference That Changed Everything in Pricing
Transcript
- Lucas: So, there's a coffee shop around the corner from my apartment—nothing fancy, just a counter with a few pastries—and for months they had an espresso for two fifty. Luna: Two fifty—okay, that's pretty standard. Lucas: Right, and it sold fine. But then the owner told me he dropped it to two dollars even—just a one-dollar cut—and something strange happened. The latte, which is four dollars, started selling a lot more. Luna: Wait—so the espresso got cheaper, and that made the latte more popular? That's counterintuitive. Lucas: It is, until you think about price anchoring. The espresso at two fifty was the cheapest thing on the menu—a reference point. When it dropped to two dollars, the distance between that anchor and the four-dollar latte got bigger. Suddenly, the latte didn't feel like it was just a dollar fifty more than the cheapest option—it felt like twice the price. But also, the two-dollar espresso felt like such a bargain that the latte, in comparison, seemed more like a splurge—and some customers actually upgraded. Luna: So the one-dollar difference changed the whole value landscape. And honestly, if today's conversation is worth a coffee to you, that's the link—buy me a coffee dot com slash fexingo. Keeps the show ad-free. Lucas: Yeah, exactly. No pressure, but if these pricing chats have ever helped you rethink a menu or a price sheet, that's the spot. We're back to that coffee shop. Luna: So—this is the price-distance anchoring effect. It's not just about having a cheap option; it's about how far that cheap option is from your target product. Lucas: Right. And there's research from 2025—a study out of the University of Chicago's Booth School—that looked at this specifically. They set up an experiment with three-tier pricing for a subscription service: basic at five dollars, standard at ten, premium at twenty. When they moved basic from five to four dollars, standard's uptake actually increased by twelve percent. Even though standard's price didn't budge. Luna: So the cheaper anchor made the mid-tier look more reasonable—because the distance from basic to standard increased, making standard seem like a better value step. Lucas: Exactly. The researchers called it 'anchor stretching.' The wider the gap between the lowest and middle option, the more the middle option benefits—as long as it's not too wide that it feels like a rip-off. Luna: But there's a limit, right? If you make basic too cheap, it might look suspicious—like the quality is terrible. I remember a case from a big-box retailer—I think it was Target, maybe?—where they had a generic brand at one dollar, a mid-tier at three, and a premium at five. They dropped the generic to fifty cents, and suddenly the mid-tier tanked. Customers just grabbed the fifty-cent option or jumped to the premium. Lucas: That's a perfect counterexample. The distance from fifty cents to three dollars is huge—six times the price—so the mid-tier no longer feels like a reasonable step. It feels like a bad deal. So the key is calibrating that distance. Too small and nobody notices the anchor; too large and you break the ladder. Luna: So what's the sweet spot? Is there a rule of thumb? Lucas: The research suggests the mid-tier should be about one and a half to two times the price of the lowest tier. For the premium, three to four times. That keeps the distance meaningful but not shocking. Luna: Interesting. So if basic is two dollars, standard should be around three to four dollars, and premium around six to eight. Lucas: Right. And the one-dollar shift I mentioned fits that—the espresso went from two fifty to two dollars, so the ratio with the four-dollar latte went from one point six times to exactly two times. That small move actually put it right in the sweet spot. Luna: But does this work in every industry? I'm thinking of software subscriptions where the tiers are more about features than price anchoring. Lucas: It works best when the core product is similar across tiers—like coffee, where it's essentially the same drink in different sizes or with milk. With software, you have feature differentiation, so the anchor is more about the number of features than the price itself. But the psychology still applies: if your basic plan is too cheap, the pro plan looks expensive. If you adjust basic up a bit, pro might seem more reasonable. Luna: So there's a balancing act between the price of the anchor and the perceived value of the higher tiers. And a one-dollar change can swing that perception significantly. Lucas: Exactly. And that's why pricing isn't just about cost-plus or competitor matching—it's about the story the numbers tell. A one-dollar difference can be the difference between a customer feeling smart for choosing the mid-tier or feeling cheated. Luna: So what would you recommend to a business owner listening? Should they experiment with small price changes on their lowest tier? Lucas: Absolutely. But do it methodically. Change one price at a time—preferably the anchor—and watch the sales mix. If the mid-tier gains share, you're onto something. If the low tier steals too much share, you've stretched too far. Luna: And don't forget to consider your margins. If the low tier is already thin, cutting it further might hurt overall profit even if it boosts mid-tier sales. Lucas: Good point. The goal isn't just to sell more mid-tier—it's to maximize total profit. So you need to model the trade-off. But in many cases, a small anchor reduction can lift the basket enough to more than compensate. Luna: I'm thinking about that coffee shop—the owner probably lost a bit on every espresso but made it up on the lattes. Did he track the overall numbers? Lucas: He told me his average ticket went up by about seventy cents per customer. The espresso sales actually dropped in volume, but latte sales increased enough that total revenue rose. So the math worked. Luna: That's a great real-world case. And it shows that sometimes the smallest change—one dollar—can have an outsized impact. Lucas: Yeah, and that's the takeaway: don't underestimate the power of your anchor price. A tiny adjustment can reshape your entire pricing story. Luna: So next time you're looking at your menu or pricing page, ask yourself: is my anchor doing its job, or is it just sitting there? Lucas: And if you're not sure, run the experiment. Change one number and see what happens. You might be surprised at what a dollar can do.