Remember your last negotiation situation? You bid low, they bid higher. You ask for a larger sum, they try to talk you down by throwing a lowball offer. Fun fun!

Why do people do this, when both parties know they are playing a game?

We do this because despite each party knowing that this is a game, a cognitive bias is playing itself out in the form of an "anchoring effect".

All that really means is that your judgement will hinge on the initial number presented, and there's little you can do about it. In a negotiation, one party presents the lowest or highest number possible so that the conversation is anchored around that price.

Let's look at an example in a context of salary negotiations:

  1. Company lists salary range of 120-150k
  2. The person browsing the job ads automatically thinks 150k is the ceiling. In this scenario, the 120k is the anchor price because it pulls down on the range, making you think that 150k is very generous when compared to 120k.
  3. Now, let's take away the range and just leave it at 150k. You go to levels.fyi and notice that this type of position regularly pays out 175k. Now it is not unreasonable for you, the applicant, to ask north of 175k, or at the very minimum 150k. With the anchor absent, it feels a lot easier to ask for more.
  4. Now, plug that 120k range back in there and all of a sudden it feels a bit bold to ask for 175k. That lower salary point is having a significant pull on the "upper" range. Never mind that 175k is the average in this situation and people in the same position could be making as much as 200k. Try asking for that on a 120k lower bounds listing!

These examples are plentiful in real life: MSRP vehicle pricing, sale discounts, home appraisals, contractor bids, and SaaS pricing!

How to apply price anchoring in your SaaS.

A big disclaimer:

While price anchoring has some magical properties and can make you (A LOT) of money, it is not a magic bullet. Price - the actual numbers you display matter in people's considerations beyond how you frame it. There is no substitute for a well-priced product (whatever that means at the time - a topic for another discussion). Most importantly, the topics in this post are very nuanced and may apply to some types of businesses more so than others. It is up to you to test and find out what actually works FOR YOU.

If you only have one or two price tiers, consider adding more.

First things first - if you only have one price point, considering adding a few more.

Don't take my word for it - Stock Alarm went from a single price point of $4.99 to three tiers 5, 10, and $20. 50% of all new customers chose the $20 plan just because it was there!

In this scenario, the lower price is anchored in reverse to the higher, making it feel subpar and inadequate. People do not want to be limited and someone inevitably chooses the "better" package.

The path of least resistance - recommend a pricing tier.

The path of least resistance is a metaphorical expression that states: given alternative paths, an object will take the path of least resistance. In other words, it'll go with the flow.

It turns out, in life, most people also go with the flow.

Think about your own shopping experience. Do you narrow down your product searches based on top reviews only? I know I do. This is us taking the path of least resistance, the sure thing, whatever you want to call it - just go with the flow.

We do this to save time, to reduce cognitive load (ie. we're lazy). Giving people an option that is clearly presented as the path of least resistance will automatically default some percentage of them to take that path. I know, wizardry level stuff!

Knowing this, you can apply this principle by recommending a specific price tier. Doing so, also anchors any surrounding objects to that price by visually guiding our attention to that object first.

Pintura, a javascript image editor does this well by emphasizing the ideal license for their preferred type of customer.

Pintura also does something else well, which brings me to my next point:

Show highest tiers first.

There are two paths to analyzing the page above. Most people will fall into one or the other:

  1. A person will look at the highlighted tier first, then at Enterprise (left to right) and back to Small business, before finally resting their attention on Hobby.
  2. In this situation, the middle Small Business tier acts as a reverse anchor - it looks considerably cheaper than the Enterprise tier so the person's attention is drawn back to the recommended tier. Since they had a quick glance to notice the much higher Enterprise tier, the Small Business license seems much more affordable. You can almost feel a sense of relief if you are a small team.
  3. A person will visit this page and notice the Enterprise tier first, thus anchoring themselves to this number. Any subsequent option looks considerably cheaper. With this insight, you quickly realize that it doesn't matter if the mid tier is $649 or $849 because they are both being compared to $2,499. The exception being another product with very similar features and value but one that is considerably cheaper.

An exception to the above is when you have tiers that increase based on some value metric, in which case it makes sense to show them in the order of increasing metrics. But, if you have an enterprise plan with a fixed charge, you could display it first.

Display prices annually, but per month by default.

Make your product feel more accessible by displaying the monthly price, even on the annual pricing tab. Go ahead and add the "billed annually as $X" part, but de-emphasize it.

The idea is not to trick anyone into any unexpected charges, but to anchor them to that lower price instead of thinking actively about the larger annual charge.

Here is an example of Copy.ai that does it well:

Why have the annual tab selected by default?

Because your annual numbers will be lower than the monthly (when displayed as monthly) and when the user switches back to monthly, it'll feel as though they are paying more and "missing" that deal they just saw.

This is commonly referred to as loss aversion. Once a person established a reference point ($35 in our example image above), they are more sensitive to losses relative to that number (in our case, a loss in savings is when your price increases when switching over to monthly), than to gains. In other words, the loss of the discount is felt more deeply than when the discount is gained.

Divide your SaaS price tiers into smaller units (if applicable).

If your product pricing scales by some value metric, consider showing the price per that metric. For example, HotJar Business plans start at $99 (and you see $99 on the pricing page), but there is also a dropdown to choose how many daily sessions you might use up, and the price increases as more sessions are selected.