Paradox of choice: how to make your pricing smarter

Every SaaS has several pricing tiers. But how to structure them properly? This article will help




Imagine this…

You’re in a restaurant ordering breakfast and a waitress asks you: what kind of jam would you like to have on your toast. You follow up with a question: — What kind of jams have you got?

— We have strawberry, blueberry and orange.

Replies the waitress.


This is an easy choice, as you hate orange flavor and have an allergy to strawberries. You place your order for a jam and carry on with your pleasant breakfast experience. You will probably come to visit this restaurant sometime again.


But what if instead of 3 options to choose from the waitress said:

— We have strawberry-vanilla, cookie-dough-chocolate, mango-pecan, watermelon-walnut, sweet raisin, sour raisin, sweet and sour raisin & blueberry, caramel candy with low sugar, caramel candy with regular sugar, plum and rosemary, and grates and grapefruit. —



assortment of jams

Wow! This sounds overwhelming! Which one do you really want? Sour or sweet? Low sugar or regular sugar? And how unsweet is the low sugar option? Suddenly, an easy choice and a pleasant breakfast experience turns into something very frustrating — because you don’t want to miss out on these amazing flavors but unsure which one to go with. The most probable response from your side: — Thank you I’ll pass.


And even if you choose one of the options blindly you will most probably end up being unhappy with it because — what if other options were better?! Your memory of the breakfast will be tainted and most likely you’ll never show up in this restaurant again.

When it comes down to choice, more doesn’t mean better! This is the Paradox of Choice.


 


What scientific proof does a Paradox of Choice has

The theory called Paradox of choice (when less options are considered to be better for actually making a choice than more option) was popularized by American psychologist Barry Schwartz when he published his book, The Paradox of Choice: Why More is Less, in 2004. The book, however, followed a study conducted first in 2001 by Sheena Iyengar and Mark Lepper.

In their experiment scientists tested how the number of jam flavours available on the shelf impacted customer’s desire to buy at least one. First they set out a display with 6 varieties of jams and offered everyone who entered the grocery store to taste them. Then they set out a display with 24 jams. The results: though more people stopped to taste jams when the variety was wider, 25% more purchases were made when people had a limited choice (6 jams). Following experiments proved the fact that when there are too many choices it only frustrates customers and doesn’t prompt them to buy.


However, if the choice is too limited, this is also not the best scenario. In 2003 another set of experiments proved that if customers have only 2 options they can’t form a strong opinion about which one is better. As soon as we introduce the third option customers are more likely to buy (the Decoy Effect).


 

Paradox of Choice and the Decoy Effect



Decoy is usually slightly less expensive but much less attractive that the “target” product. Competitive option to a target is less attractive than both decoy and target.


The best way to demonstrate it is to use airline ticket options:

  1. Flight A costs $600 and has a 1h layover in Newark Airport (target option)

  2. Flight B costs $530 and has a 2,5h layover in Newark Airport (competitive option)

  3. Flight C costs $530 and has a 3,5h layover in Newark Airport (decoy option)

A research conducted in 2020 proves that decoy effect is very strong in selling online products. Moreover, the reviews impact the decoy effect and customers’ desire to purchase target, competitor or decoy.

Unfortunately, I’ve never seen research conducted specifically for SaaS to figure out how many pricing tiers would be considered to be the best practice. But you’ve got the idea:


  • 3 is a perfect set to use as it allows you to leverage on the Decoy effect without overwhelming the customer

  • more than 6 is already too much as a human brain can comfortably memorize only 7 digits.


 

A case of removing the Paradox of Choice: Screenshotone

Screenshotone — a screenshot API service that allows developers to add screenshot making features to their apps.




I can definitely say that this pricing setup is too overwhelming and too complicated to make a fast choice.

Why?

  1. No clear “target” product. Which one is the target here? Which one is a decoy?

  2. There are 15 digits altogether which is x2 more that a human brain can comfortably process

  3. This setup only limits the customers to devs who ALREADY know what output they need per month. What about all those who are just starting their side project?

  4. The names are confusing. Suppose, I’m a dev with a side project that needs this functionality. I started 2 months ago. Am I a starter then? But I don’t have any traffic yet, so maybe I can get away with a free plan? Wait, it presumes some kind of integration? So, other plans don’t need an integration? ⇒ Page is closed, the customer is gone forever.

What setup do I suggest instead?


two screenshots for paradox of choice
Paradox of Choice Example

  1. Narrow down to 4 options, including a free plan

  2. Try to focus pricing on the end users of the apps that will be using screenshot API, if possible. If structure pricing around users is impossible, leave only 1 limitation — screenshots. The productivity can be covered in the comparison table on a sub page

  3. Identify clear decoy and competitive option. Based on the target audience (bootstrapped founders and indie-hackers), business pricing would be a decoy. But also the lowest tier. The goal is to create an impression of a very cheap choice but instead lead a customer to the best available option highlighting it visually but also with the pricing (charm pricing + low fees for extra usage)

  4. The goal is to prompt customers to consider a free plan vs growth plan and make this choice easy. If you don’t have customers and want to play around with the service — choose free. If you have at least some users — well, you can choose a $7/m plan but you don’t want to be considered not serious enough about your project, right? It’s not just experiments, you are already getting traction, right? So, choose a $19/month plan.


 

Check-list for your pricing

  • Go to your pricing page and count your pricing tiers. Less than 3? Add one more!

  • If you have more than 4 options — jump on a call with your friend who understands your product and ask them to pretend they have to buy your product. Ask them to think out loud — what do they consider when making a choice. You might find out they don’t think of screenshots and requests. They might be thinking of users. Or how far are they along their journey? Structure your pricing around items they consider to be important to make a choice, not around your monthly AWS bills!

  • Look at your pricing once again. Find the target price, the decoy and the competitive option. Recap: decoy is a less attractive and more expensive (for the amount of service per $) option. Competitive option — usually less expensive (or free) but less attractive as well. Target option — the one that is most lucrative for you (covers your AWS bills in any case) but also better for the customer in terms of the amount of service they buy for each $1.

  • Highlight target option visually. You’re all set!


 


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