Anchoring: Impact on SaaS Pricing Models
Anchoring is a cognitive bias that leads our minds to focus on an initial piece of information and analyse future information in the context of this initially received information. In the world of marketing and sales, this is an oft used tactic to hook the customers’ minds on a particular aspect of the product/service and build on to it to influence the decision making. For example, you might be presented with a certain high price and then told about the price you would be offered which seems to be at a significant discount thereby making you believe that you have received a bargain deal. In most cases, this trick seems to work well as the customer’s mind tends to get anchored at the initial price information and the price drop adds to our notion of receiving more bang for our buck.
There are various SaaS pricing models such as:
Per User Pricing: sometimes further differentiated into number of licenses and number of active users.
Usage-based Pricing:
Feature-based Pricing:
Tiered Pricing: can be a subset of feature-based pricing but usually considered separately as each tier caters to different user groups based on scale of operations.
Flat rate Pricing: that is a single price for everyone irrespective of number of users or scale of usage.
Freemium Pricing:
There are a few challenges when some of the models are looked at from an ‘anchoring’ perspective. Let’s look at some of these below:
Challenge 1: Freemium models tend to anchor the base product/service at a price of ‘0’ and then charge for additional features. Any future price will seem like a loss in value to the customers used to free usage unless there is a significantly meaningful value add for the additional price premium.
Challenge 2: The pricing information in case of feature-based or tiered pricing is usually published in an ascending order of price/features. With English and most globally used business languages are written/read from left to right, and the first price seen is the lowest one and tends to be the one that gets anchored. Like the case of freemium pricing, there needs to be a significant perceived value add for the premium pricing.
One way to mitigate both these challenges is to list the ‘Most Popular’ or the ‘Best Value’ or the ‘Recommended’ option as the first one to anchor the customers and then provide the remaining options highlighting the pros and cons.
To mitigate the challenge of charging the customers after offering certain features for free in a Freemium model is often mitigated by locking-in the customer into one of the paid subscriptions by taking billing information and then offering a free-trial period.
Disclaimers:
Source for all images: https://www.zoho.com/subscriptions/saas-pricing-models.html .
Images are used for showing examples of various pricing models and not to endorse any of the products mentioned.
